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The right technology can help make payroll processing faster, cheaper and more convenient for you and your employees.
It takes money to pay employees—even more than you may realize. In fact, the process of getting checks into employees’ hands is relatively expensive when you total all the relevant costs.
On average, employers spend $16 to process a single payroll check, according to a 2003 study by PricewaterhouseCoopers (PwC). Moreover, the study found, it matters little whether an organization uses one of the major enterprise resource planning (ERP) systems ($17.72 per check) or a smaller vendor or homegrown software ($14.45 per check). (Larger organizations can achieve some economies of scale, however. Companies with 1,000 to 4,999 employees had an average cost of $20 per check, while those with more than 5,000 employees paid 35 percent less, or $13 per check, according to the PwC study.)
Why is the average cost so high? PwC discovered that 71 percent of the cost went toward labor, while software, maintenance and materials accounted for less than one-third of the total.
Fortunately for employers, using the appropriate technology can help slash both the labor and materials costs of processing payroll, while giving employees greater access to their own payroll and benefits information.
Slashing Labor Costs
For employers looking to reduce the labor involved in payroll, the keys are system integration and self-service. By linking payroll systems directly into time and attendance software, companies can eliminate manual entry of data by supervisors and payroll or HR personnel, along with its attendant errors and the need for double and triple checking. Linking systems not only cuts time spent entering and verifying data but also eliminates the costly process of manually cutting checks to correct errors. And employee self-service moves the entry of personal data over to those most interested—the employees themselves—and enables them to look up, enter and modify payroll information without the assistance of HR or payroll staff.
Achieving these time- and money-saving steps requires an exact interplay between several types of applications. In selecting payroll software, therefore, you are not just looking at payroll. You are looking at part of an entire system.
“Fundamentally, you have a number of key application modules that are becoming very integratable and intertwine with payroll processing,” says Albert Pang, research director, enterprise applications, for International Data Corp. (IDC), a San Mateo, Calif., research subsidiary of International Data Group Inc., the Boston-based technology publishing company.
“You want to avoid looking at payroll in isolation and eliminate manual processes,” says James Holincheck, a research vice president in Chicago for Gartner Inc., an IT research and consulting firm based in Stamford, Conn. “A lot of the things that drive payroll would typically get maintained in another system.” In fact, he says, it is hard to buy a stand-alone payroll system. “There isn’t a market for stand-alone payroll software, unless one is outsourcing the gross-to-net processing,” he continues. “Companies are looking for a broader set of solutions.”
For example, Titan America, a cement and building materials producer headquartered in Norfolk, Va., with 1,900 employees at 80 locations in nine states, runs Infinium payroll software (now part of SSA Global Technologies Inc. of Chicago) on an IBM AS400 server. It has a feed to and from the company’s timekeeping software—supplied by Kronos Inc. in Chelmsford, Mass.—and the company’s accounting system, and it has an interface to the employee appraisal system.
“We wanted an integrated human resources, benefit and payroll system; plus, we needed a centralized database and the ability to allow field HR and payroll personnel to access their area’s employee system,” says Yvonne Smith, PHR, director of employee services. “It was also important for us to have an electronic feed from the payroll system into our accounting system.”
Having such an integrated system cuts down on the time spent adding new hires to payroll, accommodating employees’ changes in their benefits, transferring funds, and performing financial reporting or audits. Information entered into one system becomes available in all the others. Thus, a new hire added to the HR system is automatically added to the payroll system and becomes a financial outlay in the accounting system—without additional manual entry.
Integration in Action
Blue Cross and Blue Shield of South Carolina, based in Columbia, is another organization that has sought better systems integration. Although the company has used the same software provider for nearly three decades, it has regularly upgraded its payroll software and connected it with other applications, establishing employee self-service and reducing manual input. Managing payroll for nearly 13,000 employees in 36 states is centralized at headquarters; it takes 28 staff members to process benefits and payroll.
The organization has used payroll software from Genesys Software Systems Inc. of Methuen, Mass., since 1978, upgrading it and expanding its capabilities over time. It currently has a mainframe version of the application and in 2001 added a web self-service interface. “We had created an internal portal called My eWork, and in this we have a section called My HR Manager,” says Barbara Kelly, vice president of HR.
Through that portal, employees can change their demographic and tax information, enroll for benefits and file annual conflict of interest statements. The portal also includes access to a dynamic benefits compensation statement that calculates the value of employees’ benefits in real time and shows what percentage of total compensation that represents. It also contains external links that connect employees to their pensions, to their 401(k)s—which are managed by Fidelity Investments—and to providers of automobile or life insurance. Having real-time access to such information, rather than just periodic statements, lets employees see their current balance at any time without contacting HR or payroll. “Even if they don’t have a personal web account or home access, they can get to these sites while at work,” says Kelly.
Managers can access additional processes, policies and forms, and they can enter salary changes and bonuses. This saves time both for HR and for the managers since it eliminates paperwork and manual entry. The Genesys software connects with several other applications. Blue Cross has developed its own in-house electronic timekeeper system, called My eTime, for tracking both time and production, and this links into the payroll system. Most employees record their time electronically. Even staff members without computer access, such as those working in mail services or in the cafeteria, fill out scanable paper timesheets that load directly into the system.
The Genesys application also feeds information into the e-mail and telephone directories and the organization chart. This doesn’t cut payroll processing costs, but it keeps the organization as a whole up-to-date on any changes, without requiring human interaction. “The payroll system feeds into OrgPublisher [from Aquire Inc. of Irving, Texas], which gives us up-to-date organization charts and information,” says Kelly. “Managers can look at education, salary, demographic and other information on their division.”
Dealing With Regulatory Exceptions
Perfect system integration—although desirable—may be impossible for some companies. The larger and more geographically diverse a company is, the less likely a single payroll system will handle all of its needs. A payroll system must be more than a good fit with a company’s organizational structure or other HR applications. It must also be geared to the regulatory requirements of the areas in which the company operates, since payroll laws and regulations vary from state to state.
California, for example, does not permit the use of payroll cards, which are widely available in other areas of the country. (A measure in the California Assembly to allow the use of payroll cards appears to have no chance of passage this year.)
In addition, some cities have regulations such as “living wage” ordinances that affect companies doing business with the city. “Compliance is a problem,” says Gartner’s Holincheck, “especially for large global organizations, and rarely do you see them using a single payroll system.” He says multinational organizations typically have 80 percent of their employees working in a relatively small number of countries, while the remaining 20 percent are spread out across many nations. In such circumstances, the organization may have a single payroll solution that works for the bulk of its employees and that is integrated with the global HR system. But it is simply unrealistic to have one system that works for everyone.
What about employees who aren’t covered by such a system? “Look at outsourcing or other local solutions,” says Holincheck. “If you have only 15 or 20 people in a sales office in a country, it doesn’t make sense to implement software to meet local compliance issues.” Large multinational organizations, Holincheck says, can select one of the major ERP vendors that have the resources to keep up with regulatory changes in a broader number of countries. Another option is to go with a vendor that specializes in particular countries, including countries in which your company operates.
Industry And Union ExceptionsIn addition to varying legal concerns, one also must consider the specialized demands of a particular industry or collective bargaining agreement before deciding on a payroll system.
“If the vendor does not have experience in a particular industry—such as hospitality, retail, manufacturing—then that could be a problem,” says IDC’s Pang. “There are different pay rules, different union rules, and that is not the type of thing you want to mess with in any technology implementation.”
Restaurants, for example, need a system that adds tips paid by credit card to the appropriate employee’s paycheck. Also, tips, whether on a credit card or given in cash, must be declared as income and, in certain circumstances, can affect an employee’s pay when calculating overtime rates. Moreover, while federal law allows tips to be credited against the minimum wage, some states, such as California, forbid this practice.
An insurance agency, on the other hand, will have to consider rules regarding base pay, commissions and bonuses. And a manufacturing plant may have salaried and hourly office employees as well as one or more unions representing its factory workers and drivers.
As with legal issues, the payroll system selected must meet the requirements of the majority of a company’s employees and yet be flexible enough to accommodate those with special needs.
While cutting down on the paperwork and multiple entries involved in processing payroll can cut out a large part of payroll costs, smaller—but significant—savings can be achieved by addressing how the money is delivered to employees.
For example, direct deposit—which saves employees a trip to the bank and frees up time for human resources and payroll staff—has been a big hit. Kelly reports that 96 percent of Blue Cross employees use it. Not all employees have bank accounts, however. This is particularly true for lower-wage workers, who may pay exorbitant fees to a check cashing service.
A better option for these workers may be payroll cards. A payroll card is like a card for an automated teller machine (ATM). On paydays, the employer deposits the pay into an account for the employee, who can either withdraw the money in cash from an ATM or use the card to make purchases.
Although payroll cards are normally used for paying staff, their adoption by Georgia’s Department of Human Resources (DHR) began instead with some of the agency’s clients—recipients of child support payments—and employees were added to the system later. Despite its name, the DHR is not the HR department for state employees. It’s the agency that manages health and human services for Georgia residents, and its functions include collecting and distributing child support payments.
To cut costs, last year the DHR replaced the 150,000 child support checks it mailed out every month with payroll cards from MasterCard. It contracted with Affiliated Computer Services Inc. (ACS) to set up the program and host it on its servers in Dallas. Setup took six months; money began to be posted to the cards in April 2004. Three months later, the feature was added for employees who had not signed up for direct deposit. A data feed was set up from the department’s PeopleSoft HR system into ACS’s servers for processing. The money is deposited into the employee accounts on payday. The department now mandates that its 20,000 employees, who are paid by the DHR’s Office of Financial Services, use either direct deposit or payroll cards.
“We’re getting out of the check writing business—period,” says Nora Akins, a project manager for the DHR’s Office of Child Support Enforcement who oversees the MasterCard program.
“We started with 1,500 employees using the cards, primarily lower-paid employees who don’t have bank accounts,” says Akins. But that number has dropped to 1,000 over the past year, which is a sign that employees are moving into the mainstream economy. “With the cards, they establish a relationship with a bank in their community,” says Akins. “Where the bank may not have offered them an account before, when the bank sees there is a regular income, they can get an account.” These employees then move over to direct deposit.
An electronic payroll system saved the day for retailer Stein Mart when Hurricane Katrina hit. Stein Mart, with 17,000 employees, many in the storm-battered Southeast, was able to pay all of its employees regardless of their location. Just weeks before the hurricane struck, the chain converted to an electronic payroll system using Ecount’s 100% Payroll Solution. Ecount, based in Conshohocken, Pa., set up electronic pay destinations for all of Stein Mart’s employees, providing access via direct deposit, Ecount Visa Paycards or Ecount Pre-Checks, which can be cashed like a check.
The ultimate goal of all these payroll options is to completely eliminate paper from the system. And the final step may be eliminating payroll stubs. Although Blue Cross hasn’t completely gotten rid of its checks, it is implementing electronic notification of deposits. Employees can go online and check the statement.
“With the greater security we put in place, we can electronically put out this information,” says Kelly. “This is a huge cost savings for payroll instead of printing, stuffing and sending out these notices every two weeks.”
The State of Georgia is rolling out a new version of PeopleSoft to all its departments that will enable it to issue electronic pay stubs. “We anticipate it will save us a little money on postage costs and give our staff more time to do their regular functions more efficiently and effectively,” says John Sartain, director of the DHR’s Office of Financial Services.
At Blue Cross, personnel will be shifting from stuffing envelopes to screening prospective employees. “We have more than enough work to do on the applicant side,” says Kelly. “We will be focusing on more-meaningful work instead of sorting paper and waiting for the printer.”
Drew Robb is a California-based freelance writer who specializes in technology, engineering and business.
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