Streamlining Payroll, Part 3 (#128)
/In this podcast episode, we continue with the discussion of best practices that can be applied to the payroll function. Key points made are noted below.
So, in the first two parts, we talked about cutting back on the amount of data to collect, and automating data collection, and reducing the number of deductions, and adding self-service.
How to Streamline the Payroll Calculation
Now, let’s talk about streamlining the calculation of payroll. This is not one of the better areas for streamlining. If you have payroll software, or if you outsource it, the systems are pretty good these days. As long as you input the information correctly, then payroll processing is easy.
The Handling of Commissions
But there are still a few holes. For example, part of that calculation bit involves calculating the commissions for the sales staff. And that can be ugly. We’d all like to see a nice, easy commission percentage based on sales or cash receipts, and which never changes. What we get is all kinds of – well, I guess the sales manager would call it – enhancements to the commission plan. I call it a royal pain.
So what we see all the time is the sales manager adding retroactive commission bonuses if someone meets a quarterly sales goal, and another retroactive bonus if they meet an annual goal, and special rates for selling certain products, and commission splits. For the accountant, this is basic seventh level of Hell stuff. And especially when you have to calculate all of it within just a day or two. And especially when the sales manager finds all kinds of errors and wants you to redo everything. So, what can you do?
Well, obviously, complexity reduction is the goal, but how do you get there? One option is to buy incentive compensation software, which cranks out the commissions for you. It’s expensive, but if the sales manager really wants this kind of commission structure, you can have the CFO demand that the sales department pay for the software.
That’s one possibility, but it’s also so expensive that you won’t be able to afford it unless you have at least 100 salespeople. Another possibility is to take the pressure off the accounting staff, and just the sales manager that the commissions are too complex, and so it’s going to take an extra payroll cycle to get the payments out the door.
This does not go over too well, but it does give the message to the sales manager that the system is getting too unwieldy, and you’re not going to pay overtime to the accounting staff just because the sales manager likes complicated commission plans.
Or, another option is to charge the sales department for all of the processing time by the accounting staff. This also will not go over too well – but if the sales manager gets a bonus based on the total expenses incurred by his department, it might get his attention.
Or, perhaps the best option is good old fashioned diplomacy. Try to get on good terms with the sales manager, and point out which parts of the commission plan are really giving you heartburn, and see if you can have those pieces removed. Keep in mind, the sales manager is concentrating on increasing sales – not on keeping the accounting department happy – so don’t expect miracles.
Error Tracking
Now, the payroll person who’s responsible for all of the processing is going to find an error from time to time – and probably on a preliminary version of the payroll register. So, they correct the error and run the payroll again, and check it for errors again, and so forth. Pretty standard stuff. That’s understandable. But what they should be doing is dropping every one of those errors into a database.
This could be a simple spreadsheet. Nothing fancy. What you want to do is let those errors pile up for a while and classify them by type. Then see which types keep coming up. This means you’re not concentrating on the outliers, just on the ones that keep coming back to haunt you. Focus on fixing whatever is causing those errors. Chances are, you’re looking at maybe a half-dozen really deep-seated issues that are going to take some time to fix. But once you get them, all you have left are the outliers that don’t happen very much. And you can pick them off last.
Using a Backup Person
And one other suggestion for payroll processing. This is one of the more complicated payroll functions, so of course you have your most experienced people in charge of it. But, what about a backup person? Everybody goes on vacation sometime, and when they do, you have to drop a backup person into payroll processing – and that’s when you really see a bunch of errors.
The solution is to designate a backup person, and involve them in doing an error check on the payroll register as part of every payroll. That way, you get two things done at once – you have a second pair of eyes looking for errors, and the person doing that review will become more familiar with the payroll system, and will do a better job of filling in.
Use Electronic Payments
OK, enough on payroll processing. Let’s move on to paying employees. The main goal here is to not use checks. We don’t like checks, because they take too much time to process, and they require a lot of controls. And, because there’s a great alternative.
The alternative is electronic payments. Now this is not just paying someone electronically. We’re also talking about no longer sending them a pay stub – and for those of you who like larger words, that’s also called a remittance advice. Instead, we send employees an e-mail that directs them to a secure web site, and on that site is not only their most recent pay stub, but all of them. This means that if you have employees badgering you about getting them a copy of a pay check or a pay stub so that they can apply for a loan, you can direct them to the web site and they can get it themselves.
As for electronic payments, there’re two ways to do it. The older system is direct deposit, where payments go directly into employee bank accounts. There are two problems with it, which are not large ones. Employees have to have a bank account, so that you can put money in it. And second, because of something called pre-noting, the first payment to an employee will probably still be with a check.
You can get around both problems by using the other approach, which is a payroll debit card. This means that you load up a debit card with an employee’s net pay, and they go off and use the card. There are some concerns with this approach because of bank fees and where you can use the cards.
But basically, I don’t care. The main point is to get off of checks and onto some form of electronic payment. If you can do that, along with the improvements that I talked about in the last two episodes, then you essentially have a perfect, streamlined payroll system from beginning to end.