Payroll metrics and KPIs

Monitoring payroll performance is an important part of payroll management. Timeliness, accuracy, and efficiency are three key objectives every business should aim for when processing payroll.

In order to effectively monitor and improve the performance of their payroll, organizations need clearly defined metrics and KPIs they can use for benchmarking their payroll. But which payroll metrics should businesses monitor to make their payroll operations more efficient?

Payroll metrics are measures that are used for assessing and tracking payroll performance. Strong payroll performance is important for ensuring the timeliness and accuracy of the payroll which, in turn, is crucial for employee retention.

Another term that is often used interchangeably with payroll metrics is payroll KPIs. Working with key performance indicators involves setting a goal beforehand, and then tracking the progress made towards that goal at different stages.

Payroll metrics and KPIs should be defined based on the SMART principle. This means that they should be:

• Specific,

• Measurable,

• Achievable,

• Realistic, and

• Time-based.

KPIs can be used for all kinds of different business operations, including payroll. Keeping an eye on their payment and payroll processes can help businesses identify weak spots that may cause delays and lead to errors.

Since payroll is a crucial business function that is directly linked to employee financial wellbeing and corporate compliance, performance slip-ups should be avoided at all costs. Shortcomings in an organization’s payroll set-up might have severe repercussions on business success as well as on employee satisfaction.

If payments are repeatedly delayed, employees might get frustrated and start looking for a more reliable place of work. Additionally, it’s hard to expect employees to perform to deadlines and stress the importance of punctuality when the company fails to issue salary payments in a timely manner.

Another aspect to consider is that payroll performance might influence business goals, mainly regarding money and time spent on payroll management. Closely monitoring payroll performance can help businesses identify areas for improvement, which not only saves money, but also leads to more time-efficient payroll and payment processing.

There are many different performance indicators that can help organizations monitor their payroll processes. Here are the most important payroll performance metrics and KPIs every business should track.

Payroll accuracy

One of the biggest advantages of an automated payroll system is the elimination of errors, which goes hand in hand with improved accuracy. However, that doesn’t mean that the risk of making mistakes is completely eliminated, which is why keeping track of errors is an important part of assessing payroll performance.

In order to assess payroll accuracy, businesses can benchmark different metrics. They include the frequency with which errors occur (for instance, number of errors per 1,000 paychecks), first-time approval rate, and the number of off-cycle payments the payroll team needs to process per pay period.

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Time needed to resolve payroll issues

There is no payroll that is 100% accurate. No matter how much effort goes into payroll, with so many different sets of data, frequent changes, and all the regulations, it’s just a matter of time before something goes wrong. When errors happen in payroll, it’s crucial to resolve them quickly.

If it takes a lot of time to correct payroll errors, this might have severe repercussions on the business’s overall productivity and cashflow. The goal is to create an efficient payroll management system that not only helps eliminate mistakes as much as possible, but also allows for a fast and easy fix whenever needed.

Whether it’s issuing an off-cycle payment to correct underpayment or adjusting an employee’s salary data that was updated before the cut-off date but somehow wasn’t processed before the next payroll run, payroll issues should be resolved as soon as possible. Another important payroll performance metric businesses should monitor is therefore the time it takes to correct mistakes in payroll.

Time needed to process payroll

Another important payroll metric any business should monitor is how long it takes to run payroll. In addition to tracking the time needed to complete a full payroll cycle, businesses can also benefit from looking at how much time is spent on each stage of the payroll process.

Businesses that know how long it takes them to process payroll can use this information to optimize their payroll processes and set-up. For instance, if an organization realizes that its overall payroll process becomes too time-consuming, it can weigh the pros and cons of payroll outsourcing and switch to managed payroll services instead.

Ideally, the payroll process should have a high level of automation in order to free up capacities in the internal payroll team to focus on other tasks. Payroll automation is key to efficient, error-free payroll processing.

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Payroll compliance

Compliance is an integral part of payroll, and vice versa. That’s why payroll compliance shouldn’t be missing on a list of important payroll metrics to monitor. Compliance mistakes in payroll can not only damage a business’s reputation, but can also land the organization in hot water with statutory authorities and lead to hefty fines.

Keeping track of compliance mistakes, the incurred fines, and how long it takes on average to correct compliance errors is a must.

Payroll cost

Businesses must know their overall cost of running and managing payroll. Many companies solely focus on how much they spend on labor, but it’s recommended to also monitor how much is spent in actual payroll operating costs.

This includes anything from license fees for payroll software to the wages of the payroll team to payroll outsourcing costs. Knowing the cost of payroll can help identify areas where the business can save money.

Response time for payroll-related queries

With a growing number of payroll tasks and processes being automated, the role of the payroll manager is changing. As automation puts an end to time-consuming manual processes, payroll professionals increasingly take on the role of a consultant for upper management and leadership.

Response times for payroll-related queries or data requests from C-suite members or managers from other departments are therefore another interesting payroll metric that can be measured to help businesses optimize their payroll performance.

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In addition to these purely performance-related payroll metrics, businesses should also monitor and track different aspects of payroll that relate to their workforce and business operations. This includes overtime, employee leave, and more.

Overtime

Monitoring payroll data closely is crucial, especially when it comes to the overtime hours employees have to put in. Tracking their employees’ hours worked allows businesses to allocate funds for overtime payouts more accurately and identify departments and teams that might be understaffed. Like this, monitoring payroll metrics can help with strategic workforce planning.

Employee leave

Getting insights into when employees take leave allows businesses to identify popular vacation periods and plan accordingly. Popular vacation periods often fall together with school holidays, at least for employees who have kids. When working with globally distributed teams, however, it might be more complex to identify these periods—especially with employees working in different time and climate zones.

Labor costs

Labor costs can be as high as 70% of a business’s overall expenses. Especially businesses that have a very high cost of labor can benefit from monitoring their monthly workforce-related expenses closely.

Once the overall labor cost has been determined, the next step is to determine the ratio between total revenue and total payroll. A healthy positive ratio indicates that the business is doing well and that operations are generating sufficient income.

It’s not enough to define company-specific payroll metrics and then have them sit somewhere in a file on the company system. Businesses that are serious about optimizing the performance of their payroll must actively monitor and track their defined payroll metrics, benchmark them against predefined standards, and take action as soon as they spot a negative development.

Businesses should develop internal tracking mechanisms and define schedules for regularly reviewing and adjusting their payroll metrics to make sure that they keep tracking the right metrics that actually help them improve payroll performance.

This can be achieved through a payroll metrics dashboard that is designed to allow businesses to monitor different payroll performance KPIs. Another way of tracking performance metrics is to use payroll software that includes broad payroll analytics capabilities and lets businesses analyze aspects like error rate and number of off-cycle payments on top of usual payroll insights.