In this podcast episode, we discuss the first of a series of best practices for improving the payroll function. Key points made are:

I’ve talked about payroll before, but only on some specialized topics. You can find payroll controls in Episode 14, and closing the payroll at month-end in Episode 24, and Payroll metrics in Episode 26. There’s also a discussion of payroll cycles in Episode 54. But I’ve never described how to streamline the basic payroll function. We’ll take care of that right now. And by the way, this will take a couple of episodes to get through.

How to Streamline Clerical Work

The main problem with payroll is that it requires a staff that has a pretty high knowledge of payroll regulations, but which is also willing to do an amazing amount of really low-end, detailed clerical work. And that’s an anomaly. What you want to do is streamline as much of that clerical work as possible, so that the payroll staff has more fulfilling work to do. Not only does this make the department more efficient, but it probably reduces the amount of staff turnover.

So how do we do that? Believe it or not, the first step is not to spend a pile of money on better payroll software or fancy computerized time clocks – though we will get that. Instead, you need to ask a simple question, which is – what information do we want to collect? In fact, if you change that question a bit more, the question really is, what information do we need to collect?

Minimize the Data to Collect

From the perspective of the payroll department, the only information you need is the number of hours to pay, and whether or not any of those hours are overtime hours – since they have a different pay rate.

Other parts of the company may want the payroll people to collect additional information, especially job costing information. So let’s say an employee works on four jobs during the day. He has to record start and stop times for each of those jobs, and also maybe the type of activity performed. And then the payroll staff has to wade through all of this extra information, which it doesn’t need. So what do you do? Well, it’s possible that someone wanted the job costing information for a special project.

If so, the project is going to be over with eventually, and as soon as it is, stop collecting the information. Or, the intent is to keep collecting the information for internal purposes, maybe for cost accounting. If so, it’s worth mentioning to whoever is sponsoring the analysis that this type of information doesn’t change much over time, which means that the information you collect has a declining level of utility over time. And that means that at some point, there’s no additional value associated with collecting the information. Or if they absolutely insist on collecting it, then how about doing it for a few weeks each year?

The point is the additional information requires a lot of work by the payroll staff, and it may not be much good to anyone else. So – why collect it? Now, what if you absolutely have to collect the extra information? Say it’s required under a government contract, or maybe you’re using it to bill the customer. OK, so you need the information. But can you decouple it from the payroll information? In other words, let the payroll staff only collect the information it absolutely needs to pay employees, and let somebody else collect all of the other information.

So that’s a key first step for streamlining the payroll department. It’s basically a one-time decision about whether or not to collect information. And if you can restrict that information, then it’s a massive up-front labor savings for the department. And, it’s the best kind of labor savings, because it’s annoying clerical work.

Reduce Data Errors

So now we’ve reduced the amount of data entry. The next problem to work on is data errors. There can be all kinds of errors. You’ve got missing start times and missing stop times, and the wrong person listed on a time record, or incorrect dates, and so on. Tracking down and fixing these errors takes up an amazing amount of time, so you really want to cut back on errors. But the trick is to not just dive into fixing errors. Instead, what you want to do up front is create a system for collecting and classifying types of errors.

So, let the errors pile up for a while. Then assign an error type to each error, and add up the quantity of errors of each type. Then figure out the amount of time it takes to correct each type of error. Now you have what you need.

You should only be spending time correcting the errors that happen a lot, and which require a lot of time to fix. By taking this approach, you can fix large numbers of errors at one time with a single fix, which is the most cost-effective use of the department’s time.

Once a lot of department time has been freed up, you can assign the staff to fixing errors that don’t occur at quite the same volume levels, and which don’t have quite the same impact on staff time. And that, in turn frees up more staff time for more error correction work, and so on.

So by this time, you should be collecting less data, and what you are collecting should be pretty free of errors. But it’s still possible to reduce the amount of data collection by shrinking the number of payroll cycles. I already addressed this in an early episode, so – very briefly – a payroll cycle is the time period from the beginning to the end of a pay period. So if you pay employees once a week, you have a weekly payroll cycle.

Use a Longer Payroll Cycle

Now, in that case, you’re collecting information for each payroll cycle, and checking it for errors, and summarizing it, and inputting it into the payroll system, and distributing payments to employees – and you’re doing it 52 times a year. 52 times! Now if you switch to paying employees biweekly, then you just cut all of that work in half, since there’re 26 biweekly payroll cycles per year. Or you can go to semimonthly payroll cycles, which is 24 times per year. So, the trick is to switch to a longer payroll cycle, so that you can process payroll fewer times – and preferably without pissing off any employees.

And a variation on this is when you have multiple payroll cycles in the same company, such as a weekly cycle for the hourly employees and a monthly cycle for the salaried staff. Bad idea, since that’s more cycles than you need. Instead, put everyone on one payroll cycle, and then, if you can, lengthen the cycle.