When was the last time you validated that your documented processes actually align with what your employees are doing?
Process documentation is rarely proactively on display. They’ll most likely be lying at the bottom of a drawer somewhere or hidden away in desktop files, and that’s if the processes were ever documented in the first place.
The danger is that if a payroll employee leaves, you either won’t be able to easily access that documentation or worse, you won’t even know what the correct process was!
Validation of processes is important because this is the stage at which you double-check to make sure that your documentation is a true reflection of what you’re doing.
Ask yourself, “How are we confident that the value of the pay that we’re calculating for each employee is actually correct?”.
I’ve seen companies where the CFO thinks that they only have two awards across the whole of their organisation, and from our experience, we know that this just can’t be true. Then we’ll go in and ask the payroll team and they’ll tell us, “we know that we’ve actually got seven awards, it’s just that our systems aren’t configured correctly”.
Circumstances like this set our alarm bells ringing, because it leads to a situation in which an organisation must retrospectively find every single person that’s been classified incorrectly over the past ten years.
Then you need to calculate and pay them the money that they’re owed. Don’t forget to report this all to The Fair Work Ombudsman and hope that they choose to not fine you.
And guess what: if you happen to have overpaid your employees, you’re not going to get that money back.
The Challenge of Inefficiency
The problem with talking about payroll efficiency is that payroll is generally a small department (and cost) relative to the entire company and therefore you may think it is a restrictive area for efficiency improvements.
That’s why instead of trying to make it more cost-efficient, consider the general efficiency of processes and procedures.
Ask yourself, “How often does payroll execute a pay run? How often does our pay run require manual intervention? And does our payroll window include a buffer?”.
Organisations generally have a small window of time to run the pay. After payroll teams spend half a day getting everyone to close their timesheets, they then have to clean up the data.
For example, if it says that someone has worked a 50-hour shift, it’s pretty apparent that they forgot to clock out. They can also cross-reference against last week or last month to make sure that the figures seem reasonable.
It’s only after all that’s been done, they can push a button and send the payment instructions to the bank. The best CFOs and payroll teams ensure that they’ve got a buffer in that window and that they’re regularly finishing with at least 25% of their time to spare. That way, if something goes wrong and delays the process, they’re still able to finish on time.
Another question to ask is, “are our manual interventions documented?”.
Manual interventions are normally needed for edge cases. In some cases, however, they exist to make up for gaps in the base functionality of the Time & Attendance or Payroll systems. Manual interventions are bad since they invite mistakes and may not be executed the same way each pay run.
There is be less chance of errors and inconsistencies as long as there is thorough documentation.
The last thing that you want is to have a pay run where you have no idea what processes and steps were actually executed.
What Employees Actually Care About
Everyone expects to be paid correctly and on time but what happens if there is a delay or an error in an employee’s pay?
We once carried out a survey where we asked employees what was most important to them when it came to being paid. The results surprised us because the majority of people would prefer to be paid on time than to be paid the correct amount.
Why is that? Well, they figured that if their pay was incorrect, it wouldn’t be out by a huge amount and the payroll team would correct it when they made the next payment.
However, if their pay was late, they might miss rent payments and struggle to feed themselves. In fact, 50% of Australians are living from paycheque to paycheque.
I saw firsthand the impact of the 2010 payroll system failure at Queensland Health. When the system went live, as many as 80,000 employees were either incorrectly paid or not paid at all, leading to the resignation of the minister of health as well as industrial strikes from healthcare workers.
People were losing their houses because they couldn’t make their mortgage payments, and the government had to step in because it could have had a serious effect on the economy.
It’s Not the Systems’ Fault
You’ll notice that none of the things that we’ve talked about so far have been about systems. It’s all been about people and processes.
When most people say “system”, they’re usually talking about a technical system, but when you look at the actual definition of the word, you see that it includes all the elements, which in the case of payroll includes both people and processes, as well as the technical solution.
Most modern technical systems are robust and almost every company has access to them. Of course, organisations might have the wrong system for them, or it might be incorrectly configured but that’s not the system’s fault.
In fact, that goes back to the people who implemented and configured that system initially.
Another problem occurs when upper management doesn’t take steps to deal with known issues. Issues or errors need to be mitigated as early as possible, that way you can free up the maximum time to deal with the issues that you don’t know about. It’s the mitigation equivalent of the buffer time that we talked about.
If you look at the systems (remember this means the processes, people and technical systems), you can see that the accountability for them starts with the CFO and then goes down to the Payroll Manager.
At some point, the Payroll Manager signed off on the config, but there’s another level of accountability beyond that.
That’s where the consultants for the software vendor come in. As part of their implementation they’ll typically ask a bunch of questions about what you want and then interpret how their technology needs to implement that requirement.
The problem is that no matter what you say, they’re going to come up with a response that’s based on what their system can do, not necessarily exactly what you asked for.
That’s why we’ve founded a company called Payroll Standard that aims to ensure that these systems are configured based upon a source of truth, and from your side, not the vendor.
The idea is to create a set of rules that are written in plain English and describe how the system will pay people in all sorts of different scenarios. You need to be able to hand that over and to say, “I don’t want to talk about your configuration. This is how I want to pay people. It’s your job to configure your system to do it”.
CFOs’ Visibility (Or Lack Thereof)
It’s impossible for the CFO to know what’s happening in payroll in detail. At best, they get a consolidated view.
There’s a concept in project management called the watermelon state, when something is green on the outside and red on the inside. That’s a common refrain in project management because people don’t like delivering bad news.
It doesn’t help that often, when a problem is reported, upper management doesn’t act upon it. When that happens often enough, employees reset their threshold of what a problem actually is.
This is one of the reasons why organisations start to lose track of their foundational issues because they’re victims of inaction.
Payroll is like the rhythm section of a band. While everyone in the audience is focusing on the singer and the lead guitarist, the rhythm section is expected to keep time and to form the backbone that the music builds on.
As long as it’s working okay and people are getting paid, everyone tends to forget about it. The bandmaster only looks at the rhythm section if there’s an issue with the drum beat or the bass line. This is what tends to happen to CFOs. They don’t know that there’s an issue with payroll until the music falls apart.
So, when you are looking at how or why your organisation may be paying people incorrectly, recognise that the technical system is only doing what it’s told.
Remember to ask how well your organisation knows your payroll processes and how well these processes can be communicated to someone else (in other words, how well they are documented).
Most likely, this is where you’ll find the source of problem payroll outcomes from your payroll processes.
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