PaytecH

Payroll Best Practices Conference

Best Practices Survey Results Unveiled The survey results were presented at APAs Payroll Best Practices Conference, held in February in San Francisco, CA. By Jim Medlock, CPP What Are Best Practices? Best practices are the optimal combination of people, processes, and technology relative to the vision, mission, and values of each company. In short, a best practice is the best process for your company. But a best practice for one company may not be a best practice for another, and best practices may or may not correspond to a low cost payroll provider. During 1999, the American Payroll Association, with its partner KPMG, conducted a benchmarking study among various companies to compare payroll processes and observe trends. In addition, the study allowed the participating companies to benchmark themselves against each other, providing a tool to network and to find ways to improve their payroll processes. As a result of the findings, APA and KPMG have been able to determine the key factors that allow certain companies to provide payroll services at a lower cost. Most important, the numbers derived from the study help determine payroll trends and processes. In order to compare results, the definitions of cost and full-time equivalent, as used in this study, had to be the same for all companies. Thus, comparing the 1999 study results to your company without ensuring that your definition is the same as the participating companies may lead to differing results, misinterpretations, and confusion. For an opportunity to compare your company to others, APA and KPMG will conduct another Best Practices benchmarking study. If you would like to participate in the 2000 study, please contact David Cole from KPMG at 214-754-2570. To participate you must sign up for the study by August 1.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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Here are some of the findings from the 1999 study of companies with average payrolls of 25,000 employees: * Payroll most frequently reports to the Finance Department. * Ninety percent of companies perform the gross-to-net calculations internally, but only 70% produce employees checks, and only 60% file their own taxes. Outsourcing specific processes has become more prevalent. * For payrolls of 25,000 employees, approximately 24.1 full-time equivalent employees fulfill the payroll process when it is centralized, or approximately 1 payroll employee per 1,000 employees. However, a decentralized payroll process paying 25,000 employees requires approximately 42.8 full-time equivalent employees, or approximately 1 payroll employee per 600 employees. * To produce a check for one employee costs $1.30, while the annual cost per employee is $70. Payroll Processing The study results show that the most common method of payroll processing is a centralized system, which requires fewer employees and results in lower costs. The predominant payroll processing frequency is biweekly, occurring in 52% of the companies surveyed. The next most frequent is semimonthly at 34%. For a company with 25,000 employees, an average of 4,700 new hires join the payroll each year. Sixty four percent of the employees are paid through direct deposit. However, in some companies 98% of the employees use direct deposit. Organizations are using various methods to increase the number of employees who use direct deposit. There is much interest among employers in having state laws amended to allow companies to dictate that direct deposit will be the method of payment. The cost to deliver paychecks and deposit stubs to nearly 1,100 locations averaged $60,000 per year. However, one companyan airlinehad no direct delivery cost because it delivers paychecks and deposit notices by loading them on company planes. The study also showed that, on average, it takes two days to place a newly hired employee on the payroll while it takes three days to remove a terminated employee.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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Payroll Trends Many payroll processes have been reengineered and new technologies implemented during the past year. The most commonly reengineered function was check distribution. Reengineering and new technologies have proven successful in reducing costs and alleviating administrative burdens in the payroll process. Automating the Payroll Process The study revealed that some payroll processing functions have not been automated. Examples of these include: Entry of direct deposit information by payroll personnel; Check/direct deposit stub distribution; and Customer service. Many companies have successfully reduced payroll processing costs by automating the following areas: Payroll stub inquiry; Name and address inquiry and update; W-4 data; Voluntary deduction requests and changes; 401(k) modeling (typically performed by a third party); and Pension calculation (typically accomplished by a third party). Customer Service Customer service is typically a one-on-one interaction between the payroll professional and the employee. Some organizations are moving toward employee self-service (ESS) to allow employees to answer their own questions. Companies that have implemented ESS use tools such as interactive voice response and Web-enabled systems to allow employees to access their information. Other ways that companies are using technology to provide information to their employees are plant floor kiosks and workflow technology. Many organizations have centralized the customer service function into a call center or shared services organization, but few organizations provide customer service in a decentralized face-to-face environment with the employee.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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The U.S. mail remains the most common method of communicating with employees. A few organizations are leveraging e-mail to communicate with their employees, but they are facing both workforce and cultural barriers which may limit the initiative. Recently, Ford Motor Company announced that it was providing its employees with a PC for home use, along with Internet service at a nominal fee. This will allow employees who are currently without intranet/Internet service the ability to access their information. Error Correction Approximately 10.5% of payroll processing time is spent correcting errors, even though the average error rate is only 3%. The average number of adjustments/corrections experienced by the participating companies is 12,000 per year. Clearly, this is caused by the complexity of the payroll process. However, some companies have reduced their adjustment/correction rate to less than 10 per month. Companies with a lower error correction time have a simplified payroll process. Special/Manual Payrolls Nine special payrolls are processed each year, including bonuses, incentives, commissions, and other payments. Even though nine is the average, at least one company had no special payrolls processed during the year. That company has changed its company culture and now pays incentives through the regular payroll. About 3% of employee payments are off-cycle payments, and nearly 50% of these require manual intervention. Relocation and expense reimbursements, for example, have not traditionally been integrated into the payroll system, and require manual payment entry. Now, however, many organizations are reducing special payments by making relocation and expense reimbursements through the payroll system. The surveyed companies issue approximately 40 manual checks per week. Some companies issue significantly more manual checks each week; others have reduced the need for manual checks to a minimum, primarily through chargebacks to the organization requesting them. However, terminations and state laws are still seen as the drivers of manual checks.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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Earnings/Deduction Codes The complexity of earnings and deduction codes results in higher costs for payroll processing and payroll accounting. On average, the number of codes is nearly 200. Most companies have about 25 voluntary deduction codes. Those with more than 25 deduction codes have significantly higher deduction processing costs. Most companies will have seven involuntary deduction codes; again, those with more codes face higher costs. Remittances of voluntary deductions average 85. Of these, 36 pay deductions were for United Way, credit unions, and labor unions. Over 52% of employees have had a 401(k) deduction in the past year. Interfaces/Reconciliations Payroll generally interfaces with only one or two general ledgers, but will interface with 10 to 20 other systems. There is a direct correlation between the number of interfaces with the payroll system and system-related costs. Company reconciliations vary widely; company payroll processes reconcile an average of 40 accounts while some companies may reconcile as few as three accounts. Record Retention Hard-copy documents are still the most common form of record retention. With the changed regulatory requirements allowing Form W-4 to be obtained electronically, many companies are reviewing their abilities to allow employees to update their own W-4 information. One drawback of moving to an electronic Form W-4 is the requirement, in some states, that W-4s be retained on paper. Many organizations are considering the use of scanning technology to reduce paper handling, in addition to electronic record keeping. Electronic approval processes are also being considered by many organizations. Timekeeping The timekeeping function remains a major function of payroll. Most companies use various methods for obtaining time data, with the primary methods being electronic time cards and badge readers. When the objective is reducing costs, the leading method of timekeeping is exception processing, in which employees only report exceptions to their regular schedules. The exceptions for a nonexempt employee would be overtime or time off. However, exception time processing requires a specific type of corporate culture. In companies whose corporate culture may not allow the reporting of exceptions, a combination of timekeeping methods is utilized with proprietary electronic reporting provided by a vendor. Most commonly, the payroll system or department also maintains the employees available paid time off balance. And most organizations do not allow employees without available leave to borrow against future leave accrual.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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Payroll Systems The dominant payroll system is one that is integrated with human resources, benefits, and compensation. Centralized mainframe systems are still prevalent, and many continue to run homegrown legacy systems using the Oracle database engines. Among the purchased software, PeopleSoft is the most common. Other systems seen in the study are Cyborg, Integral, and SAP. Many organizations are considering the use of the Web for leveraging employee self-service and payroll processing. Tax Processing About 40% of the companies outsource or co-source the tax filing process at an annual cost of approximately $25,000. For those processing taxes internally, most use commercially developed tax software. The companies surveyed have, on average, 11 federal employer identification numbers and make 100 federal, 1,100 state, and 1,400 local tax filings each year. The number of W-2s issued averages 31,000 while the number of W-2cs filed is 450. However, the ratio of W-2cs to W-2s ranges from 0.1% to 5%. Cause and Effect The following factors directly influence increasing or decreasing the cost of the payroll process: Fewer earning and deduction codes cause fewer adjustments and errors resulting in lower costs. Fewer payroll cycles (processing runs) mean lower payroll processing costs. Using fewer payroll systems allows better integration with Human Resources, Benefits, and Compensation resulting in fewer errors and higher quality. Direct data entry removes paper from the payroll process, increasing quality and reducing the cost of record retention. Less paper shuffling in the authorization process reduces the number of adjustments/errors and reduces the cost of the payroll process. Increasing the use of self-service technology reduces the cost of customer service. Increasing the use of employee self-service to update personal data reduces both the cost of data entry and the number of adjustments/errors. Increasing the ability of managers to access and update information reduces payroll processing costs by increasing the quality of the data. By making the line manager responsible for the data, fewer errors and adjustments are seen. Perhaps most important, reducing the need for checking and rechecking data improves the payroll process.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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Be Part of the Study APAs Best Practices benchmarking study is an effective gauge of payroll practices in the business world. To see how your companys payroll systems compare to other organizations, sign up for the 2000 benchmarking study by August 1. Jim Medlock, CPP, is APAs Senior Director of Education and Training.
PaytecH May/June 2000 Copyright 2000 American Payroll Association

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