How many payroll cycles should I have?

A company may have a variety of payroll cycles, such as one for salaried personnel that runs twice a month, and another for hourly personnel that runs on a weekly basis. If there have been acquisitions, then you may also have a number of other inherited payroll cycles.

A payroll cycle is the length of time between payrolls. Thus, if payroll is processed once a month, the payroll cycle is one month.

Every payroll cycle requires additional staff time to collect pay information, set up the payroll, process it, and issue payments. The solution is to centralize everyone on a single payroll cycle. However, this does not mean shifting everyone onto the shortest payroll cycle - presumably once a week. Doing so does not decrease the workload of the payroll department, since it will be processing a payroll pretty much all the time. On the other hand, extending the one remaining payroll cycle to once a month will likely not go over too well with any employees accustomed to being paid more frequently, even though it eliminates 75% of the payroll processing work as compared to a weekly payroll cycle.

A reasonable solution is mid-way between these two extremes, so that the entire company is on the same twice-a-month payroll cycle. To convert employees from a weekly payroll cycle to a cycle twice as long, consider allowing them pay advances for the first few months, until they adjust their spending habits to the new system.

A slight variation on the twice-a-month payroll cycle is to conduct one every two weeks. This approach increases the number of payrolls per year by two, but also has the effect of giving employees an extra two "free" payrolls per year, which can have a positive psychological effect.

Click here to see an article on how to convert employees to a new pay period.

Podcast: A discussion of payroll cycles is available on Episode 54 of the Accounting Best Practices podcast. Listen Now.

Related Topics
Consolidate payroll systems
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