Our recently released benchmark research on optimizing payroll management assesses how organizations use payroll information, processes and technology. It finds that most of them still need to improve. Our analysis compared the forces motivating investment in payroll management systems to broader strategic drivers for human capital management (HCM) that I previously outlined and found substantial agreement. Three of the five leading factors – demand for higher employee productivity (48%), limited alignment between pay and performance (36%), and inconsistent execution of performance goals (24%) – are part of a broader HCM agenda as seen in previous research projects and discussions with clients. But apart from that the research found a disconnect between what motivates companies and what they actually are doing.
While organizations generally are accomplished at managing their core payroll processes, not many are making investments in technology tools to help achieve their HCM objectives. Specifically, in the Technology dimension of our Performance Index analysis, half rank at the two lowest of four performance levels. A key reason for this is that many have not integrated payroll management with other HCM processes. While organizations long ago automated their basic payroll processes, the Performance Index analysis in this research places only one in five organizations at the top Innovative level of overall performance; they have taken steps to integrate their payroll processes with other HCM systems.
This contrast shows up in several areas of the research. For example, four out of five organizations said that their payroll processing system is accurate (61%) or very accurate (21%); only 1 percent said theirs is not accurate. Yet seven in 10 participants reported that their organization uses spreadsheets universally or regularly to track payroll management functions or compliance activities, and 39 percent said reliance on them has made it difficult to manage payroll efficiently. More importantly, only half of participants said they have a human resources management system (HRMS); these systems track and report on information needed for compliance with state and federal employment requirements.
Elsewhere the research shows that only 8 percent have integrated payroll management with their talent management system; while 22 percent said they plan to do that in the next 12 to 18 months, fully half have no such plan. Similarly, 29 percent have a dedicated workforce management system, but only one in five have integrated their payroll management system with it; nearly half (48%) export data from the time and attendance system and import it into payroll manually. The research shows benefits in more systematic operations. Among organizations that have integrated workforce management and payroll management, 62 percent said they have reduced their payroll error rate, which is one of the top five metrics used to measure payroll process effectiveness. So while organizations are focused on improving efficiencies within payroll itself, most are not yet investing in the areas where broader gains can be made.
To attain greater workforce productivity, which is the second-highest priority found in our research, organizations need to connect payroll management to other processes such as performance management, goals and benefits. In the research three in four (77%) of those that have integrated their payroll and talent management systems reported having an effective or very effective payroll management process, compared to 62 percent of organizations that do not integrate these systems. Additionally, two-thirds of companies reported better alignment between incentive compensation and performance after integrating their payroll and pay-for-performance systems.
In the next year, as the employer mandate of the Affordable Care Act takes effect, it is likely that one part of this integration will get more attention and I have assessed – integrating workforce management and payroll. Businesses will need to make sure that the actual hours that employees work match precisely with what is reported in their time and attendance and workforce scheduling systems. Beyond that we urge companies to evaluate broader integrations to achieve the goals that lead them to invest in payroll management to start with – demand for higher productivity, greater alignment between pay and performance and inconsistent execution in performance.