Payroll and Compensation Management: 17+ Benefits, Challenges and Tips

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Payroll And Compensation Management

Human Resouces (HR) Leaders are rethinking their value propositions in light of changed employee expectations post-pandemic. The focus shifts to building holistic compensation packages offering monetary, well-being, and developmental employee benefits. However, competitive financial compensation and performance incentives remain leading motivators for employees.

A well-defined, transparent salary structure with seamless payroll processing is a universal basic expected by employees irrespective of industry vertical or the size of the employer organization. From the employer’s perspective, robust and secure payroll management is necessary for regulatory compliance and employee satisfaction.

What is Payroll and Compensation Management? 

Payroll is an HR function responsible for calculating employee salaries per the compensation policies and ensuring employees receive payouts on time. It includes compliance with tax and labour laws and associated reporting and analytics.

Compensation refers to a broader HR management discipline for designing employee compensation structures across roles and designations. It determines the financial and non-financial benefits the organization must offer to remain competitive in the talent market and ensure employee retention.

Benefits of Payroll and Compensation Management

#1. Enhanced Employer Branding

Compensation remains the top priority for candidates for selecting their workplace. A well-designed total compensation package benchmarked against competitors is a core component of the employer value proposition (EVP). Communicating the EVP effectively as part of your employer branding is crucial for attracting top talent.

#2. Improved Employee Satisfaction

Timely and accurate payroll processing is a must-have for a seamless employee experience. A well-integrated payroll application minimizes the time spent by employees manually updating their timesheets, attendance, and leaves. Self-service options empower employees to efficiently complete payroll-related processes without wasting time in ad-hoc follow-ups with HR Teams.

#3. Authentic Pay Equity

Adhering firmly to pay equity demonstrates your commitment to diversity, equity, and inclusion (DE&I). Payroll reports and visualizations enable organizations to conduct pay-equity analysis in line with HR policies and legal compliance requirements. 

#4. Alignment with HR Budgets

Payroll systems help HR leaders keep track of employee expenses and upcoming payables against HR budgets. Payroll analytics also help define variable payouts, increments and candidate offers in line with the overall enterprise budgeting.

#5. Higher Agility

Streamlined payroll management empowers organizations to adapt quickly to changing market scenarios. For example, easily configurable payroll systems helped leading organizations leverage the gig economy to the fullest during the pandemic. Payroll automation is also a prerequisite for facilitating mergers and acquisition processes and new-market entries. 

8 Biggest Challenges in Payroll and Compensation Management

Challenges In Payroll And Compensation Management
Payroll and Compensation Management: 17+ Benefits, Challenges and Tips 1

#1. Hybrid Workplace Conditions

Hybrid work environments have become the norm. However, these present unique challenges for the payroll process because employees work from different tax jurisdictions. Per the 2021 EY Payroll Survey, 58% of organizations said that their top payroll consideration resulting from the pandemic was evaluating the impact of remote working policies on multi-jurisdictional payroll withholding.

#2. Statutory Compliance

Payroll processing must comply with changing tax regulations, minimum wage laws, and social security benefit schemes. Tax and provident fund deductions must be deposited with respective authorities within stringent timelines to avoid penalties. Payroll systems also ensure reliable audit trails and effectively facilitate internal and external compliance audits on an on-demand basis. 

#3. Payroll Fraud

The payroll process can be vulnerable to several types of deliberate fraud as timekeeping fraud, ghost employee creation, proxy attendance punching, and false expense claims. Members of the payroll team may be involved in these frauds, and they can remain undetected for long periods if appropriate risk controls are absent.

#4. Data Security Risks

Compensation management systems hold sensitive financial data such as employee tax documents and bank account details. Payroll data stored in physical documents or on-premise devices for manual payroll processing are at a high risk of damage or loss. Sophisticated cyberattacks may also compromise the security of online data. An industry-standard cloud solution with built-in backups and business continuity mechanisms is a must to mitigate payroll data risks.

#5. Poor Source Data

Payroll applications must integrate with other enterprise apps like leave and attendance management, performance management, and accounting systems for payroll calculations. These systems must adhere to consistent data formats and governance frameworks and supply deduplicated data to the payroll solution for accurate net pay calculations and timely processing. 

#6. Perceived Pay Equity

There is a gap between how employees and employers perceive pay equity. Per a 2022 Harvard Business Review study, less than half, 41% of employees, believe their employers have successfully achieved pay equity. HR teams must formulate data-backed pay-equity policies and transparently disseminate pay-equity information within the organization and in the public domain to build trust and belonging among employees. 

#7. Executive Compensation

Rising demand for executive and niche technical skillsets leads to higher employee negotiation power and affects compensation levels. Organizations must choose carefully between offering market-beating salaries to top candidates and retention bonuses to top performers.

#8. Employee Inflation Anxiety

Rapidly rising inflation eats into employees’ purchasing power, affects employee morale, and reduces productivity. Organizations must address these concerns in their compensation management strategies and ensure financial wellness for their employees. A 2022 Gartner HR Survey found that 63% of organizations are planning adjustments in compensation in response to inflation.

7 Prerequisites For Effective Payroll and Compensation Management

Payroll &Amp; Compensation Requisites
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#1. Compensation Philosophy

It is a document that sets forth the values and guiding principles for compensation management. It determines hour your payroll strategy adapts to the competition, rewards merit and performance, and aligns with your strategic objectives.

#2. Payroll Tech and Analytics

cloud-based payroll software that is easily scalable and configurable is a fundamental requirement for managing, processing, and executing payroll transfers effectively. It enables timely compliance reporting, executive dashboards, and analytics that help continuously improve the compensation strategy. 

#3. Employee Feedback

Formulating payroll strategies without considering employee feedback and managerial inputs is a big mistake. Understanding which compensation components matter most to different employee segments helps create inclusive compensation packages.  

#4. Clean Employee Database

A comprehensive, deduplicated, and error-free employee database is a fundamental requirement for compensation management. Up-to-date tax information, performance information, and direct deposit details for each employee are necessary input for payroll processing. 

#5. Structured EVP

A wholesome EVP outlines all types of compensation, including the financial components and supplementary benefits such as life and health insurance. You must clearly define all pay structure components, like basic salary, conveyance, allowances, and retirement contributions, for each employee, for payroll processing.

#6. Fair Performance Evaluation Process

Unbiased, structured, and automated performance management ensures that the most deserving employees benefit from the financial incentives as per your compensation policies.

#7. Payroll Expertise

Depending solely on the HR departments or accounting professionals for payroll processing can backfire. It makes sense to hire specialized talent or outsource payroll processing to experts to ensure 100% compliance with ever-changing labor and tax laws. 

How Can HR Tech Simplify Payroll and Compensation Management?

Payroll automation helps streamline the payroll process in multiple ways, 

  • Self-Service Portals – Employees can upload tax documents, submit expense and insurance claims and resolve payroll-related queries efficiently.
  • Automated Tax calculations – Payroll systems automatically calculate tax deducted at source (TDS), professional tax, and other deduction amounts based on tax rules and document proofs submitted by employees.  
  • Simplified Return Filing – Employees can download digitally signed income tax forms from payroll portals for streamlined tax return filing at their end.
  • Risk Management – Payroll analytics can generate automatic pre-emptive alerts against potential fraud or non-compliance risks useful in payroll audits.

Final Words

Payroll management is one of the chief HR processes most suited for automation. It is rule-based, mechanical, and must execute repeatedly and consistently. Moreover, centralized payroll data is crucial for an unbiased and performance-based payroll strategy.

Hence payroll and compensation management software can be the best starting point for your HR automation journey. Especially for small and medium businesses that rely on excel sheets for manual payroll processing, it can deliver immediate improvements in employee engagement and productivity levels. It is crucial in driving top-management buy-in for moving towards unified human resource management systems

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Bhim Singh Bhandari

Bhim Singh Bhandari is a Manager of Accounts & Taxation at HROne, where he manages a full range of tax services and ensures strategic tax planning. He reviews complex income tax returns, coordinates audits and disseminates his knowledge of accountancy and taxation, like payroll and compliance, to various company leaders and managers.

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