Why payroll accuracy is more critical to business success than ever before!

**An abbreviated version of this article posted on HRO Today entitled On Time, On Budget**

I have worked in HR and Payroll my entire career spanning the last decade. I have written multiple books, published dozens of articles, spoken at conferences, and gotten into the nitty-gritty of payroll with real-life implementations, supporting live customers, as well as writing and teaching payroll courses. My work has spanned from Fortune 100 to mid-size companies in many industries. Throughout this time, I have been a huge believer in continuous learning and always made a conscious effort to stay dialed into trends to know what is going on in the industry via events, webcasts, constant reading, and conversations with others in the industry. Recently I changed roles and work on a Global team where I am fortunate to be able to spend more time than ever talking to people all over the world as part of my job. I talk with prospects evaluating new payroll options and I talk to customers using our payroll products. I talk to colleagues around the globe and across the organization: our product people creating the solutions, our sales organization interacting with prospects, and our consulting organization implementing the product for customers. I also get to talk to partners doing incredible things to meet customer challenges. I have never been as tuned into the industry as I am now, and it has really expanded my perspective.

It has always been extremely important to pay employees on time and accurately. Being occasionally one day late or 99% accurate isn’t good enough. For those who work in Payroll they know “no news is good news” as it tends to be a thankless job where people expect perfection and only talk about it when something goes wrong. However, based on everything I am seeing I wanted to take time to write about how payroll accuracy is more critical today than it ever has been before and why this trend will only continue.

Why is it so difficult to get right?

Before we talk about trends and implications, I want to discuss why it is difficult for many organizations to get payroll right. While there are many organizations who treat it as a standalone function, in reality, payroll cannot be siloed. For employees to get paid accurately it requires different people in the organization – who may report to different places – to be on the same page consistently every single time. In some organizations Payroll is part of Finance so it is even further segregated from HR. There are many moving pieces that must be correct. If there are mistakes in compensation, it will result in incorrect bonus or merit amounts. If there are mistakes in an employee’s benefits elections, it will cause incorrect deduction amounts. If an employee has incorrect time data, it will cause a different payment than expected. From an employee’s perspective they don’t care if it was compensation, benefits, or time – their pay is incorrect! Employee's also do not care if you run payroll in-house or if you outsource it, they just know it impacts their finances. It does not matter whose fault it was. In any scenario it should not have happened and better be fixed yesterday.

Impact to brand and reputation

With the world more connected and impatient than ever it is critical for successful organizations to pay people accurately and in a timely manner. The last thing you want is employees and former employees submitting Glassdoor reviews about how your organization consistently messed up its pay. The value of a brand is very significant and any loss of business reputation can be costly. Today, issues that used to stay behind closed doors are coming out for the entire world to read about, which can result in serious ramifications that were never concerns before.

Here are examples of reviews on Glassdoor that would make me hesitant to work at any of these organizations:

Payroll issues causing turnover

There are serious implications for employee turnover that come with payroll errors. There is a Kronos study with fascinating statistics. One of the first things that stuck out to me was the number of employees who start seeking new employment elsewhere after experiencing a payroll mistake:

“Approximately one in four employees – 24 percent – will look for a new job after the first payroll mistake, while another 25 percent will seek new employment after the second issue.”

The study found nearly 50% of employees will seek a new job after only two payroll errors, and salaried employees were more likely than hourly employees to look at new opportunities. It isn’t surprising to see that more skilled employees will start looking for a new job sooner, and I am willing to bet the top performers with the highest demand from the marketplace will be the first to leave. 

The numbers are astonishing! While payroll accuracy has always been critical, the younger the workforce, the less tolerant they are for payroll discrepancies and the readier they are to act (both with online reviews and by leaving the organization) when issues occur. It’s shocking to see how many younger workers will leave an organization even if they are ultimately paid correctly. This completely backs up what I hear when I talk to prospects and customers daily. Examples of some of the conversations I have had recently:

“It’s so hard to keep fresh college graduates in our organization for longer than a year because they come in expecting so much.”

“The expectations of the younger workforce are way higher and if you upset them they look to leave right away.”

To make it worse, in many cases employees are no longer giving two-week (or even two-day) notices. A new phenomenon in the workplace is employees “ghosting” employers. Here is an interesting article on the topic:

“A number of contacts said that they had been ‘ghosted,’ a situation in which a worker stops coming to work without notice and then is impossible to contact.” 

I have had many conversations of this happening in the last year regarding lack of professionalism and respect of the younger workforce. Regardless of personal feelings this is a reality that organizations must be aware of. 

How much does this cost an organization?

It is well known that employee turnover is extremely expensive for an organization. The research on how expensive varies, but no matter how you slice it losing employees gets pricey very quickly – millions of dollars for some organizations! During my research I came across some interesting articles on the topic.

• High turnover costs way more than you think
• How much does employee turnover really cost?
• Companies need to know the dollar cost of employee turnover
• What you need to know about the cost of employee turnover

Here are a few quotes from these articles that stuck out to me:

“An organization with 500 employees and an average annual salary of $65,000 that loses 90 employees per year to turnover has an annual employee turnover cost of just over $3,000,000.”

“According to business expert Josh Bersin, a new employee can take up to two full years to reach the same level of productivity as an existing staff member.”

This is worse when you realize it is the best, brightest, and most expensive people to replace who will be the first ones out the door.

There are many reasons a superstar employee may leave an organization, but if I were leading an organization it would be horrifying to think I was “ghosted” by a critical employee due to a preventable payroll mistake.

What should organizations do to improve?

1.  Continuously audit your payroll

Many organizations still have practices in place that are focused on ensuring all data is correct right before payroll runs. This results in high stress building up to that moment and makes it very difficult to ensure accuracy. I have spoken with so many organizations who are constantly under extreme pressure because they have 20+ audit reports to run right before payroll to help identity and fix discrepancies. This causes anxiety and errors in payroll especially when there is not enough time to investigate or get a question answered when someone is out of the office. Many of these organizations have been running payroll this way for more than 20 years without ever changing the process and they have a tough time grasping how they could get ahead of payroll with proactive auditing.

Instead of operating this way, organizations should have continuous payroll auditing beginning on day 1 of a new payroll period. These audits should be focused on the data that goes into payroll, but also on simulating how that data will be calculated to avoid surprises. The more proactive rather than reactive an organization is, the more accurate their payroll will be and the payroll department will be much happier without the frequent fire drills every time payroll is being run.

2.  Improve internal communication across the organization and different teams

I previously explained how working together with people across the organization who have a part in payroll accuracy is critical since payroll is so connected in the business. To get it right, this must be a conscious effort to get people on the same page. I recently spoke with an organization who made an intentional change because of previously upset employees who did not receive correct bonus payments they were counting on for holiday shopping at the end of the year. Consequently, this huge spike in upset employees resulted in higher than normal employee turnover.

To avoid this from happening again, they restructured their organization, and put new communication practices in place to ensure the employees working on payroll would start working more closely with the HR staff working on compensation during periods where raises or bonuses are given. By doing this they ensured everything goes as smooth as possible. Their effort paid off as they have had minimal issues due since putting this change in place.

3.  Revisit outdated processes

There are many companies who have the same processes in place as when they initially went live with their existing HR and Payroll system. In many cases 15 to 20 years ago. There are simply better ways to do things in 2019 then there were in 1999 or even 2009, and these can provide real business value to ensure a more accurate payroll.

For example, I recently spoke with a customer who uses a different system for time and attendance management than payroll. They receive an interface file once a week containing all their time and attendance data, right before payroll. This makes it nearly impossible for the payroll department to proactively audit time management related calculations. This organization built many audits in their time and attendance system to ensure accuracy, but still ran into discrepancies at times. It is 2019 and modern technology provides easy access to data with APIs instantly. So why is essential payroll related information flowing in right before payroll? Organizations should look at the whole chain of information needed to run payroll and to work closely with different data providers to check for opportunities to increase efficiency.

4.  Look at continuous improvement

I recently spoke with an organization who always pays severance within 30 days of an employee leaving. They recently had an issue where an employee was terminated but was still being paid beyond the 30-day window for many months and ended up having to write it all which resulted in a substantial loss for the company.

I am a huge believer in continuous learning and with HR and Payroll technology this is no different. To ensure this never happens again I recommended they create an audit to check for employees who are terminated more than 30 days and are still being paid.

Whenever a payroll issue occurs the question should be asked: what could we have done to prevent this from happening? Maybe there is an audit check that we can add to the system? Maybe there is a process change to be made to ensure it does not happen again? I have seen some organization that are quick to point fingers and place blame, but that is not a productive or helpful response. It is much more effective to fix the issue as best as possible and then focus on continuous improvement to prevent the same problem twice. As the old saying goes “fool me once, shame on you, fool me twice shame on me”

5.  Keep it simple

I have seen some organizations that have created a huge employee handbook filled with rules and guidelines. Over the years the handbook grew because of issues they ran into. They kept adding rules employees need to follow, but there is a such thing as over managing. In some occasions process simplification might be a better approach.

I recently spoke with an organization who has a very hard time getting their employees to submit their time-sheet data in a timely manner, which caused headaches for their payroll department. They ensured employees would submit their time sheets by making every manager accountable for it, including disciplinary action for noncompliance. Upon hearing this I asked a few questions: how easy is it for your employees to enter their time? Do you provide a mobile app? Is it an easy and intuitive process that new employees can easily figure out? If you are guessing that their answers to these questions were not positive, you are correct. You get much further with motivating employees by making things easier and providing intuitive tools rather than ruling with an iron fist or a huge employee handbook. 

6.  Automate manual processes

I recently spoke with an organization with a legacy system that required manual calculations to enter retroactive changes into the system. This organization was using an excel spreadsheet with formulas to do the calculation and then putting that manually into their payroll system. They had strict rules in place to limit the impact as much as possible, but it was an area with a lot of pain and one they were really looking forward to being able to automate. Manual processes can be cumbersome and increase the risk for data errors because of someone making a keying error.

My recommendation is to take any processes that can be automated and put them into your HR and Payroll system. Rather than manually calculating a retroactive from an excel spreadsheet this should be automated in the system to calculate it based upon data entered.

7.  Track results

If your organization is serious about ensuring payroll accuracy, there should be tracked metrics to see if you are improving or regressing. I spoke with an organization who did just this. They wanted to improve employee perception and optimize their payroll operations. They started by tracking total employee issues reported each month, and how many off-cycle payrolls they ran. They set targets for improving the employee experience by having less issues and for operational efficiency by running less off-cycles. The metrics helped them to focus and focused on improving it over time. This organization was able to reduce payroll queries by 50% and reduce the need for off cycle runs by almost 40% which resulted in a huge time savings for their payroll staff every month.

The new business reality

The very clear reality for is this: If your organization struggles with payroll accuracy and nothing is done, don’t expect the problem to stay the same as it will certainly get worse. Top performing organizations are ones who have top quality people. As Steve Jobs once said:

"When I hire somebody really senior, competence is the ante. They have to be really smart. But the real issue for me is, Are they going to fall in love with Apple? Because if they fall in love with Apple, everything else will take care of itself.”

If you cannot keep quality people because of payroll delays or inaccuracies, you cannot bring in top talent because of a tarnished reputation, and business success will be nearly impossible. I dont know about you, but it would be impossible for me to fall in love with an organization who messes up my pay.