While we are making no claims that the payroll KPIs featured in this article are set in stone or definitive, they are important because they represent a framework on which you can build.
Once you have the framework, these standard payroll KPIs can then be enhanced through robust industry engagement. That engagement helps lend credibility to the performance measures that we are proposing here.
Instead of thinking of this as a standard model for managers to implement, this should rather be regarded as a standard framework that payroll managers should consider, to help streamline the payroll process and reduce the costs. An important feature of a framework like this is that it is very adaptable, depending on your exact organizational needs.
What Are KPIs?
A KPI is essentially a measure of something within an organizational structure, which allows you to judges how well or how badly you are doing something. It does not matter if the result of that performance review comes out positive or negative. Of greater significance is the production of meaningful data on that specific activity, which you can measure against the targets that you have set for that activity.
The targets that you set for an activity, like payroll KPIs, should be specific. The payroll KPIs should be measurable, they should be achievable or realistic, and they should be timed or on the clock. Payroll management KPIs are probably the most important in any organizational structure because they can help maximize productivity.
Why Does Payroll Need KPIs?
The reality is that even in 2022, there are limited KPI resources available that are specific to the payroll function, even though people working in the industry have always had KPIs or management indicators in the back of their minds. However, the historical flaw has been that payroll managers have been reactionary.
They would look at an issue that had arisen within payroll, and then they would try and establish why that issue had arisen. The problem is that most payroll managers would only look at that issue after it had arisen. The significance of payroll KPIs is that they function as a predicting tool, to find out where you are and what could go wrong, rather than dealing with the aftermath.
Above all else, key payroll KPIs, are critical to meeting your overriding obligation of paying people on time and accurately.
The 5 KPIs To Keep An Eye On
You should always start off by looking at the payroll department. Not all organizations process their payroll in-house. Maybe you outsource the payroll. Maybe you have an agent to process the payroll, maybe you have a bookkeeper to process the payroll. Whatever the method, you still need to examine things like staff turnover, absence monitoring, succession planning, and professional training and development.
You need to have some clarity in your mind on what is and isn't acceptable when you are measuring things like staff turnover and absenteeism. This is something you could measure over a year and it is something you could measure over a month. Regarding turnover and absenteeism, you also want to make sure that you have contingencies and succession plans in place, to help compensate for that. If people are away from work, for whatever reason, how do you deliver on critical outcomes?
You also want to get some clarity in your mind on whether you are giving the payroll staff within your organization the training and development to help them better execute their tasks.
You also want to compare this performance to others within your industry. You can also compare this to others within the private sector, and you can compare the level of your performance to the public sector. Whatever comparison you make, will ultimately determine the payroll manager KPIs that you are going to draft and implement for your organization.
Regulation and Compliance
Regulation and compliance are among the most important KPIs in payroll. Collectively, they deal with matters like adherence to legislation, guidance, contractual payments, statutory payments, deductions, paying employees on time, statutory filing accuracy, and third-party payments. We are dealing with the long arm of the law here. Failure to monitor this can sink a business.
You have to pay people in accordance with the contract of employment. So, that is employment law. You have got to deduct pension contributions, so that is pension law. You have got to deduct tax and national insurance. So, you are also looking at the laws of taxation and social security. The target for all of these factors, most of which have to do with meeting legal deadlines and thresholds, is probably going to be at 100 percent. Anything lower than that measurement will bring about serious consequences for all relevant stakeholders.
The most important areas covered in this chapter are things like Paye and HR policy, terms and conditions documentation, data entry, validation, calculation processes, voluntary payroll registration, and payslips. This all comes down to your ability to pay people on time. The people processing the payroll function need to understand all the terms and conditions that are in place.
To improve the operation of the payroll function, an organization could and probably should consider the registration for voluntary payrolling of benefits. This is the sort of thing that can improve the efficiency of your operation. You also need to establish if you are an organization that gets its payslips out on time.
You could possibly look at options like moving to an online system, which is actually where the world is going anyway. Your major measurement here is efficiency, and while there is a bit more leeway with this, you should be setting your targets as high as possible. You need a payroll function that is well versed on how your company operates, otherwise, you will eventually find yourself competing on a sticky wicket.
The considerations here are the cost of the payroll system, outsourced provision, hardware, licenses, upgrades, maintenance, service costs, payslip costs, and employee costs. A very important area to be aware of within this particular bracket is the hidden costs within an organization.
A glaring example of this would be a business that suffers from leakage. That is something that could be exceedingly difficult to assess, even for the more experienced hands within the organization. There are instances where leakage can account for as much as 3 percent of payroll, which is a significant amount of money, regardless of the size of your organization.
This area takes into account factors like inbound interface processing accuracy, payroll accuracy, percentage of manual payments, percentage of retrospective payments, speed of making agreed changes, level of issues raised, level of issues resolved, and average response time to calls and issues raised. A lot of this has to do with competence, but more of it probably reflects payroll staff attitudes. You should measure your success in this area by determining the overall accuracy of your input and output.
How to Measure and Improve Payroll KPIs?
Is your current payroll process an accurate payroll process? Below, you will find some practices that payroll professionals strictly follow.
Monitor Payroll Costs
Keep a close eye on payroll costs to ensure they are in line with your budget. Use payroll performance metrics to identify any discrepancies. This will help you make informed decisions about managing company resources. Understanding your payroll costs can also help you allocate funds more effectively for other business needs.
Enhance Payroll Accuracy
Payroll inaccuracies can lead to costly errors and decreased employee satisfaction. Use key payroll performance metrics like accuracy rate to gauge the effectiveness of your payroll operations. Accurate payroll processes are not just about numbers; they also contribute to employee morale and trust in the organization.
Optimize Payroll Processes
Streamline your payroll processes to improve efficiency. Consider implementing payroll software that can automate tasks, reducing the chance of human error. An optimized payroll process can save time and resources, allowing your payroll team to focus on more strategic tasks.
Train Your Payroll Team
Invest in training for your payroll department to keep them updated on payroll laws and best practices. A well-trained payroll team is essential for accurate and compliant payroll runs. Ongoing training can also help in reducing payroll errors and improving the overall efficiency of payroll operations.
Track Overtime Expenses
Overtime expenses can quickly inflate labor costs. Use payroll KPIs to monitor overtime hours and their direct cost impact on your payroll expenses. Tracking this can also help you identify if excessive overtime is a symptom of understaffing or poor time management.
Evaluate Employee Turnover Rates
High turnover rates can significantly increase your payroll and onboarding process costs. Use this metric to assess the cost of turnover and the effectiveness of your human resources strategies. A lower turnover rate often indicates higher employee satisfaction and a more stable payroll structure.
Conduct Benchmarking Reviews
Regularly compare your payroll performance metrics against industry standards. A benchmarking review can provide valuable insights into your payroll efficiency and effectiveness. This practice can also help you identify areas where your payroll department can improve, from cost per employee to payroll processing time.
Implement a Payroll Dashboard
Utilize a payroll dashboard to have real-time access to all payroll KPIs. This tool can help payroll managers and payroll staff make quick, accurate decisions. A well-designed dashboard can serve as a central hub for all your payroll metrics, making it easier to spot trends and issues.
Review Payroll Compliance
Ensure that your payroll operations are in compliance with local and federal laws. Non-compliance can result in fee payments and can affect your payroll performance. Regular compliance checks can save you from legal complications and financial penalties down the line.
Your Payroll KPIs are more than just numbers
Optimizing your payroll practices is a multifaceted endeavor that involves various stakeholders, from payroll clerks to payroll admins. The effectiveness of payroll operations can be significantly improved by investing in training costs for your team, thereby reducing the cost of payroll errors. Utilizing advanced payroll solutions can streamline the entire payroll process, making it more efficient and effective. These tools can help in calculating accurate time for hourly compensation, thereby minimizing incorrect payments.
Payroll providers offer specialized payroll services that can adapt to differences in salary type and handle complex payroll tasks. Monitoring key payroll metrics over a specific period of time can provide insights into the cost of payroll per employee, including the cost of overtime hours. This data is invaluable for those in charge of payroll needs, as it helps in making informed decisions to ensure an efficient payroll system that minimizes mistakes and maximizes employee satisfaction.