How to reduce global payroll costs

Payroll costs represent a large chunk of a business’s overall expenses. For instance, an analysis conducted by Deloitte found that, for a typical Fortune 500 company, payroll expenses average between 50% to 60% of company spending.

International organizations with a global workforce usually have even higher payroll expenses due to costly international payments and the costs linked to global payroll compliance. Without strategic cost control, the expenses can quickly add up and even decrease business profitability in the long run.

But what exactly is included in payroll costs? And what can businesses do to reduce payroll costs for their global teams?

Before organizations can take effective measures to reduce their global payroll expenses, they first need to understand what cost factors fall under the payroll cost umbrella. Payroll costs (or payroll expenses, whichever term one prefers) primarily include:

• Salaries and wages 

• Payroll taxes 

• Statutory and voluntary employee benefits 

Salaries, payroll taxes, and benefits are necessary business expenses because they can’t be reduced without risking an increase in employee turnover or non-compliance with the law.

However, there are additional expenses linked to payroll, which organizations can actually control. They include: 

• Labor and administrative costs for payroll processing

• Payroll software and tools as well as costs for payroll outsourcing

• Processing errors

• Compliance fines

• Bank fees and foreign exchange fees for international transactions

The cost of running a global payroll comprises many different cost factors businesses need to consider. Knowing what drives global payroll expenses up is the first step towards making the necessary changes to cut costs in the long run. Here are 9 different ways to reduce payroll costs for global teams.

Revision of the global compensation strategy

One way to reduce payroll expenses in an international organization is to revise the global compensation strategy and base employee pay on location instead of paying employees in similar roles the same salary (based on the average salary in the headquarter country) across all geographies. Especially for organizations that are based in countries where salaries are high, this could significantly reduce payroll costs.

Use of alternative pay methods

One of the downsides of working with a globally distributed team is having to process a growing number of international payments each month to get everyone paid. The problem is that SWIFT payments, which are the most common payment type used for international bank transfers, are notoriously expensive. 

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One SWIFT transfer can cost up to 50 euros, depending on the number of intermediary banks that need to be involved in the process. With a growing global team, service fees and fees for currency exchange can quickly turn into a hefty expense each month. Global businesses should therefore look into alternative salary payment methods like paying employees in Bitcoin or using a digital wallet to send instant global payments. 

Contracting international freelancers

With the growing gig economy, freelancers and contractors have become a crucial part in almost any business. They can be a great addition to the internal team and offer valuable external expertise, but hiring contractors and freelancers is also a great way to reduce payroll expenses. 

Since contractors pay their own taxes and social security contributions and don’t get any statutory benefits such as paid annual leave, they cost the business a lot less than hiring a full-time employee. The only thing businesses should look out for is the risk of employee misclassification.

Reducing overtime

Overtime pay is often overlooked although it’s a major cost driver for payroll expenses. In most countries, overtime must be compensated at higher rates. Typically, overtime pay is anywhere between 150% and 200% of the employee’s usual hourly wages, depending on the amount of overtime and the time of day.

Businesses that manage to optimize their operations and cut back on overtime can decrease their payroll costs significantly. Payroll data can help organizations get insights into which departments or regional teams frequently work overtime and take action—for instance by hiring a new full-time employee to pick up the additional workload. 

Payroll automation

Payroll expenses also include the cost of paying the person who processes payroll. The more human intervention is needed, the longer it takes and the higher the cost for payroll.

An easy way to save money on payroll is to leverage technology to automate payroll processes and data flows between different systems. This can be achieved through payroll software integrations and payroll automation. 

Reducing payroll errors

Automating payroll processes will not only help reduce payroll costs by shortening processing times, but it can also reduce the error frequency in payroll. Errors in payroll lead to additional work and expenses because payroll then needs to be recalculated before an additional payment outside the usual payroll cycle is issued. 

Enhancing employee retention

According to the Deloitte Global Payroll Benchmarking Survey, 30% of all off-cycle payments aren’t due to payroll errors, but to employment termination. Employee turnover costs businesses a lot of money, and not only because of the additional payments that need to be processed. 

Estimates suggest that the cost linked to employment termination is equal to 1.5 to 2 times the employee’s (annual) salary. This not only includes severance pay, but also other factors such as the cost of hiring, onboarding and training a new employee as well as the productivity gap between the former employee and the new one.

Businesses trying to reduce their payroll expenses should hence improve their employee retention strategy, for instance by providing attractive employee benefits packages, offering remote work options, or taking their teams on workations. 

Improved global payroll compliance

Payroll is highly regulated, which is why payroll compliance is a fundamental part of payroll management. In addition to statutory payroll reporting obligations with regard to withheld payroll taxes, there are other legal obligations such as gender pay gap reporting. 

What’s more, withheld income tax and social security contributions must be submitted to the local authorities according to fixed schedules. Late payments and false reporting lead to fines, which can easily be avoided by outsourcing payroll to an experienced service provider. 

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Payroll outsourcing

Although not the cheapest option for managing payroll per se, using the services of a payroll provider can reduce global payroll expenses in several different ways. First of all, payroll providers are experts in their field, which means they have the necessary knowledge and experience to run payroll smoothly and efficiently. 

Second, their expertise will guarantee full compliance with payroll regulations, which means the client business doesn’t need to worry about fines. Third, they often operate with payroll software that integrates with other workforce management tools, automates manual processes, and reduces payroll errors.