How to Identify and Avoid Payroll Leakage

The greatest cost of doing business is often payroll: wages, overtime, bonuses, benefits, and taxes. Payroll can account for as much as 70% of total business costs. Because of this, there is a clear need to assess those costs, particularly when payroll goes wrong.

Payroll leakage – when payroll is not in ‘control’ and/or unintended payments are applied to employees – isn’t uncommon and can cause both overpayment and underpayment. Both instances may also have an adverse effect on tax contributions for both the employee and the employer. The average payroll can leak between 0.5% to 2.5%. (Source: Infor, ISG) A large chunk of overpayments are recouped, but many businesses will not chase overpayments under a certain value due to the effort/resource required.

To some professionals, including myself, the suggestion that a payroll is ‘out of control’ is a wild contradiction and a damnation of what a payroller does. Every payroller I’ve ever known will do everything within their power to ensure employees are paid correctly and on time, every time. However, this doesn’t mean there isn’t room for review or change, you should never be complacent when it comes to paying people!

Over the last several years, I have had the opportunity to work with businesses in a consulting capacity; analysing, assessing, recommending, and implementing change, transformation, and simplification activities. In that time, I have found that overpayments (and underpayments for that matter) can occur, due to several reasons, a few of those being business processes not being followed, the timeliness of actions not being carried out, misunderstanding guidance or instruction, poor system build, miscommunication, and even capability.

Fixing the Leak

Do you ask yourself:

  • Are managers applying a ‘tickbox’ approach to signing off everything?
  • Why isn’t the payroll team preventing errors and overpayments?
  • Is the solution fit for purpose?
  • Where are the pain points?

There’s no point in playing the blame game; time will be better spent fixing the situation.

Tools and Resources

To find the good, the bad, and the ugly in payroll it’s you should start at the beginning: Current State Assessments, Health Checks, Opportunity/Threat assessments, and Gap Analysis can be invaluable in the discovery phase.

Current State Assessments
The research process begins with secondary research, internal and external sources to obtain qualitative and quantitative information. Sources are not limited to: websites (external and internal), reports and process documentation, industry trade journals, newsletters and other literature, market reports, news articles, press releases and web/podcasts.

Moving on to primary research, where interviewing people provides first-hand information – trends, landscape. They validate and strengthen secondary research findings and further develop understanding. You should cover the bases, which usually involves having conversations with Exec Members, Directors, Heads of Departments, Managers, Team Leaders, key opinion leaders, and other industry recognized professionals.

Keep it simple, break down questions into manageable issues, which will help identify knowledge, process, technology gaps. Consider; supplier(s), resource/knowledge, product, cut-offs, data, payments, hand-offs, communication, effort vs results, and perception of the function.

Health Checks
The objective here is to investigate all aspects of the payroll operation and identify risk exposure. Highlight benefits – optimisation, quick wins, reduction of errors, improving quality, reduce operating costs. Identify risks – non-compliant payments/deductions, potential operating failures, fraud opportunities, over or underpayments.

Cover all aspects of the business – organisation, headcount, technology, teams, third party suppliers and software support, control groups, pay frequencies, legislation, penalties, privacy laws, competencies, processes, risk mitigation, compliance, data, volumes, KPIs, policy, sources, payment, payslips, GLs, interfaces, variation, and absence.

Opportunity/Threat Assessment
Combine the findings of the Current State Assessment and the Health Check and there will be overlap. Grade the impact of not completing, the likelihood if risk if not completed as well as the value of completing, and the saving of completing (there doesn’t always have to be a monetary gain, it could be time or reputation for example). Consider the path to green, what do you need to do to make an item happen, who needs to be involved? Finally, decide whether or not you want to take an item forward or not, or if it can be put on hold whilst you concentrate on other things.

Analysis
There are many ways of doing this, but I do like a good SWOT and/or GAP document. If you’re not completing a Current State Assessment or Health Check, either/both will help you see what works and what doesn’t work.

Opportunities and threats come in the shape of innovation, technology development, and people development. There can be further threat from loss of resource, resistance to change, and the changing legislative environment. Capabilities, experience and processes are both strengths and weaknesses.

Through both SWOT and GAP, your results will be very straightforward, allowing you to remove any complications. My suggestion is to use both SWOT and GAP together, intertwining the methods and making it a hybrid process.

I also use a MoSCoW principle and ‘paintball’ priority matrix to ascertain importance. MoSCoW applies a must do, should do, could do and won’t do principle – what’s non-negotiable, what’s important/not vital (but adds value), what will have small impact if left out, and what is not a priority at this time. The ‘paintball’ priority matrix is a more pictural and less table-like method of charting impact vs effort.

Remember to Rely on Your Biggest Asset — People!

An organisation can’t consist without people; they are simultaneously both its greatest strength and weakness. As a result, it is important to ensure that every role that touches payroll has their responsibilities and accountabilities defined, documented, and agreed upon.

This situation applies not only to members of payroll teams, but to all parties. They should be aware of and understand the part they play in a business process (whether they are a leader, coach, or employee.) The same applies to third party suppliers. It is also worth taking the time to determine how confident you are that the required skills, qualifications, and training are up to the highest of standards.

Managers should work with employees, the payroll team, and the business to prevent/recoup overpayments wherever possible. Employees should promptly inform the business with any unexpected payment they knowingly received or any payment to which they know that are not entitled.

Processes
It is crucial in quality terms to ensure that processes are documented from end to end. Doing so will not only help identify any gaps in risk mitigation efforts, it will also ensure monitoring, reviewing, and making efficient changes to those processes, when required.

Taking this approach will also provide an accurate view of the impact of any potential changes introduced across the whole process, and where and whom they would affect. Documenting the payroll process from end to end is also important in data management terms. The aim being to boost efficiency and enable any changes to be made in the most appropriate manner.

Another important consideration is ensuring appropriate segregation of duties is in place so that key transactions are given suitable levels of authorisation and compliance. From a fraud perspective, guarding against conflicts of interest in personnel terms is vital, as is ensuring employees are not provided with access to systems that are not directly relevant to their job roles.

It is also worth bearing in mind, however, that security measures should always be proportionate and never prevent users from actually doing their jobs.

Technology
Assess the IT-based infrastructure, systems and configuration that run payroll processes, review the quality of automated processes and controls to ensure you are not simply automating bad ones.

It also makes sense to be aware of how payroll systems integrate to other corporate or third-party systems such as HR and Finance.

Communicating Change
There is a clear need to communicate the cost of payroll. There is a need to build dependencies in order to embed the behavioural changes needed to mitigate this expense. Information should go beyond distribution, it should challenge recipients to consider their actions. The aim of all communication is that it is:

Timely: Be appropriate, clear, and concise.
Tailored: Be personalized and specific.
Role-Orientated: Provide a better understand of role and expectations for key people management tasks.
Insightful: Provide guidance and tips to enable effectiveness in roles.
Challenges Behaviour: Go beyond delivering information and challenge behaviour.
Explores: Drive exploration of data and seek to understand what it means.
Reconfirm: Endorse awareness and understanding of business processes and improve the way leaders manage people.
Inform: Provide education to those who can impact cost reduction and how their role works together, and with broader stakeholders to help to embed behavioural changes needed in making change a success.
Equip:
Equip people with need-to-know information, building curiosity, and confidence.
Signpost:
Signpost additional tools & resources, encouraging a self-service approach.
Recognise:
Help people recognize the roles of broader stakeholders in leading managers through change.

For effective communication overall, I think it’s important to identify the correct resource for delivering that information. A message from an external consultant or department manager probably won’t be as well perceived as information from a CEO or a director. That’s regarding the employee aspect; Information that is sent to an employee is often only well-read when they can see what’s in it for them.

Conclusion

Working to find and quickly resolve potential payroll leaks can leave a lasting financial impact on your organisation, while also streamlining the way your payroll function and departmental heads work together. If you’d like to learn more about my thoughts and personal experiences with payroll leakage, reach out to me personally, by joining our private discussion board on this topic!

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