Employees have many liabilities linked to the pay cycle of loan and credit card EMIs, bills, and more. Employees depend on the timeliness of paychecks to ensure that these liabilities get cleared in time.
From an employer’s perspective, if the organization can meet these expectations, employees experience higher satisfaction levels. More importantly, it can reduce the time spent by departments concerned with error handling and responding to queries. Let’s learn everything about how to measure payroll performance and its necessary KPIs.
What is Payroll Performance?
The assessment of an organization’s ability to pay its employees’ salaries accurately and timely is payroll performance. Syncing attendance data, calculating overtime and compensations, considering leaves, and many other things are involved in ensuring payroll performance.
How Do You Measure Payroll Performance?
The performance of payroll operations is tracked heavily by big organisations. Specific Key Performance Indicators (KPIs ) are utilized to ensure that payroll performance remains up to standard. These KPIs also point towards strengths and areas of improvement of the payroll performance – whether through internal processes or external dependencies. It would ensure top-notch payroll performance.
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Payroll KPIs: Know Everything
Tracking KPIs, and their metrics become mission-critical in optimizing payroll operations and reducing efforts, time, and money spent.
An independent study reported that 64% of large organizations, 49% of mid-sized, and 44% of small enterprises track KPIs related to payroll.
Why Track Payroll KPIs?
- Do a status quo analysis of existing payroll
- Conduct a to-be analysis of the future payroll system
- Establish quality benchmarks of payroll performance
- Identify problem areas for improvement
- Ensure punctuality in payment
- Keep overtime and other leakages in check
- Reduce costs involved
9 Payroll KPIs You Must Track
There is a cost involved in deploying payroll operations known as payroll cost. It includes software subscription fees, outsourcing, the salary of payroll staff, and the cost of errors if any. Keeping the payroll cost in check is foremost since it can impact profitability.
To calculate payroll costs, you must first decide on a time interval, keeping in mind the payment schedule. Payroll costs over this pay period can then be cumulated and weighed against factors such as the number of employees. They are measured as a proportion of top-line or bottom-line figures.
Productivity and Effectiveness
Payroll processing must account for many variables like differences in compensation type, various leave categories, tax and investment calculations, and time tracking. As for productivity, tracking the efforts required to complete payroll operations is prime.
Another main factor is the effectiveness of payroll operations. By its nature, payroll is a standardized system; hence, the need for making deviant payments should be minimal. Every deviation can negatively impact the effectiveness of payroll performance.
In simple terms, the productivity of payroll operations can be measured either as a function of time invested (labor hours) or people required (manpower). Another way of measuring productivity is to consider the ratio of payroll staff to the total number of employees.
Effectiveness is measured as the ratio of the number of payroll errors to the number of payroll runs that can be used.
Calculating overtime accurately is paramount from an employer’s perspective because it is an indicator of workload distribution. If it is seasonal (for example, year-ending), there might be less cause for concern.
However, if you see overtime consistently high, it could either mean that there are too many responsibilities or that the team size is insufficient. You might need to take a closer look at your overtime costs to gauge if a more cost-effective option would be to hire another employee.
To measure, you can aggregate the total overtime expenses and measure them as a proportion of the total payroll cost. Over some time, you can also fix an overtime budget and try to stay within it. The number of times you’ve exceeded the budget can be another metric.
Leave of Absence
Employee leaves can be an important metric for tracking payroll. There are two reasons for this. One, leaves of absence can be a good indicator of any workplace adjustments required. It is especially true with the varying types of leaves given – sick leave, maternity leave, and leave of privilege are prominent examples.
Two, if a significant portion of payroll cost, specifically salary bill, is incurred in giving paid leaves of absence, it could indicate an inefficient payroll structure. It can be optimized to reduce the cost to the company.
Cost of Training
Since it is a business need, tracking the cost of training can be very important. You need to be mindful of the links to other cost heads. For example, induction training cost is linked to the hiring budget.
A subdivision of the cost of training that is specifically important for payroll is the cost of payroll training. There is a lot of training required for employees on payroll systems and how to use them. The payroll training cost can be a good indicator of whether the system needs simplification or replacement.
The overall cost of training is tracked in financial statements. The cost of payroll training as a percentage of the overall cost of training/payroll can be a good indicator.
Number of Errors
Payroll errors tend to spiral out of control, especially because it is such a sensitive matter and many grievances or queries arise from this. It is critical to minimize errors to save costs and time. But, payroll processing cheatsheets can ensure fewer errors and more efficiency.
Once benchmarks are established, action taken can reduce errors by implementing a new policy or a system.The basic metric for payroll accuracy is the ratio of the number of errors to the number of payment runs.
Time to Run Payroll
Payroll departments need to run efficiently – this is a prime tenet of payroll performance. The time spent running payroll can be a good indicator of the need to implement a payroll system. It also has a direct implication on payroll accuracy.
Your payroll team will need to track and measure the time spent on each payroll run, accounting for seasonal and holiday variations.
Payroll as Percentage of Revenue
Since payroll is an integral part of the bottom line, organizations should track it closely. The revenue-to-payroll ratio is arguably the most critical metric for measuring payroll performance.
If this ratio remains in a healthy positive zone, the company’s payroll performance remains optimal. Understanding how much of this ratio can be tweaked towards improving payroll operations is pivotal.
To calculate this ratio, divide your top-line figure by the sum of the total cost of the payroll process and the total compensation package.
Cost of Payroll Per Employee
Another way of looking at payroll efficiency is by comparing the cost of payroll with the number of employees. Simply put, it gives you the true or real cost of payroll. Whether the payroll cost being incurred by the employee base is justified or not is determined by the true cost of payroll.
To calculate, simply divide the total cost of payroll by the number of employees.
Checklist: How to Get the Most from Your Payroll KPIs?
Payroll KPIs should typically be aligned, keeping an objective in mind. Whether the challenge is towards managing headcount or catering to growth, payroll performance metrics will ensure that the resource allocation toward payroll happens in a structured manner.
Payroll KPIs need to be implemented effectively. While setting metrics for these KPIs, it is pivotal to keep a few details in mind:
- Use SMART methodology to define metrics
- Set your benchmarks using a mix of internal targets and external pointers
- Define all the data that needs to be captured
- Before rolling out, take your payroll team through the metrics to take their buy-in
- Fix a time interval to review results and revise them as and when required
Typically, these KPIs work best in the long term when there is an automated payroll system in place that helps you in data input and throws out data. The highly integrated software not only ensures accuracy in KPIs but offers dashboards to easily understand them.
Trends suggest that getting a world-class payroll system would be one of the defining changes in this decade. With HROne, the focus is on optimizing payroll performance while keeping costs in check.
Global payroll processes get complicated as workforce dynamics, and employment models change. HROne can help streamline payroll operations, reduce inefficiencies, and positively impact the bottom line.