Centralized vs. decentralized payroll: Which option for your business?

Employee experience and retention, talent attraction, strategic decision-making… Many business areas are directly or indirectly related to payroll and the data derived from it. And given that accurate and timely payroll processing and payments are what keep employees from quitting their jobs, one might almost say that payroll has the potential to bring down entire companies. Getting payroll management right should therefore be every business’s top priority. 

But what might seem like a pretty straightforward task for businesses operating within only one jurisdiction can quickly turn into a major challenge for organizations with a global team and entities scattered across various geographies. Managing global payroll creates a multitude of challenges for all types of businesses, from startups and scaleups to large enterprises. One of these challenges is choosing the right global payroll model, which can either be a centralized or a decentralized payroll system.

Both approaches to global payroll management have their pros and cons and the decision which approach to follow must be taken by each organization individually. In this blog post, we’ll discuss the benefits of centralized and decentralized payroll to help you choose the best option for your business. 

Before discussing the advantages (and disadvantages) of centralized vs. decentralized payroll systems, we should first define what these terms actually mean. Let’s start with centralized payroll. 

Following a centralized approach to managing global payroll means creating a dedicated payroll department, usually based at the company’s headquarters, which will coordinate, manage and oversee payroll operations for the business’s global employee population. In other words, payroll for all the different entities the organization has across the world is managed centrally via one payroll system with standardized processes, typically using a global payroll solution. The decision-making process in this model is top-down.

Organizations with a decentralized payroll system, on the other hand, don’t have a central payroll department holding all the decision-making power with regard to payroll. Instead, they either have local payroll teams for each geography or outsource their local payroll to specialized payroll services. Depending on the number of entities in the region, they may also operate their payroll through regional payroll processing centers. For instance, payroll for all their entities and employees in the APAC region could be processed via one regional hub. 

The key difference to a centralized global payroll system is that the different vendors and payroll teams use different systems, follow different processes and can make their own decisions—at least up to a certain degree. 

A centralized approach to payroll management offers businesses several advantages. The most cited ones being enhanced control, data access and security, and efficiency. Let’s look at these advantages in more detail.

More control

Centralizing payroll processes for all jurisdictions and entities in one single system which is administered by a central payroll team means more control over costs, expenses and processes. With centralized payroll management based on standardized global processes, it’s also easier to make sure that global payroll operations are in line with the business’s overall globalization strategy. What’s more, standardized payroll processes across geographies make it easier to hold people accountable for potential errors.

Consolidated and easily accessible data

A centralized payroll system collects, stores and organizes payroll data in one central database which is managed by one department, but accessible to all departments in the organization. Payroll consolidation makes accessing payroll data very convenient and easy, saves time and allows upper management to make well-informed, data-driven business decisions. Having access to consolidated global payroll data is also a crucial prerequisite for leveraging the strategic potential of payroll.

Enhanced data security

Centralized payroll systems are generally considered to be more secure. That’s because it’s easier to protect one central system than setting up security for multiple systems in different countries. Like this, the business can fully focus on taking all the possible security measures to make the system absolutely bulletproof. This will result in a much higher level of payroll security than processing payroll through a multitude of subsystems with mediocre security standards. Using a centralized system also allows businesses to mitigate security risks that arise when transferring data between the different systems through unsecured channels like email. 

Increased efficiency

The last advantage of centralized payroll which is often mentioned in the discussion centralized vs. decentralized payroll is that a centralized approach increases efficiency. First of all, having a single source of truth for global payroll data makes it a lot easier and faster to extract sets of data for reporting purposes, which can help reach operational goals. Second, running global payroll through a centralized platform paves the way for integrating HR and payroll software, which unlocks a whole new range of benefits for the organization. Third, centralizing payroll puts an end to double data entry, duplicate files and more. Fourth, it’s easier to train new payroll staff if there is only one system. 

After looking at the advantages of the centralized global payroll approach, it could seem like there’s an obvious answer to the question of centralized vs. decentralized payroll. However, there are some issues that can arise when global payroll is managed, controlled and executed from the company headquarters via one central system. And it’s these potential problems that underline the advantages of managing global payroll through a decentralized approach.

Local expertise and compliance

The main problem with streamlining global processes is that the business must still fulfill local compliance requirements. Payroll operations can be streamlined up to a certain degree, but when it comes to compliance, there always are varying regulations and requirements concerning tax filing and reporting, registration, and more. 

Handling tax and payroll compliance for multiple geographies via one central payroll department can quickly become an overwhelming task for the payroll team, and the lack of expertise and knowledge significantly increases the risk of costly compliance errors. A decentralized payroll approach where payroll processes are outsourced to local payroll service providers can help mitigate compliance risks, since outsourcing payroll allows the organization to benefit from their providers’ local expertise and knowledge.  

Locally oriented decision-making

Just because decisions are taken in a centralized manner through the payroll department at the company headquarters, this doesn’t mean that what has been decided is really what will work best in each market and for each entity. In fact, taking decisions on the local level does have its advantages because it allows the local entity to make decisions and adopt processes that are better adapted to local circumstances.

Improved responsiveness

Following a decentralized global payroll approach and transferring the decision-making power to the local level further leads to better responsiveness. If the local team can make decisions and take action without having to run everything by the central payroll department, issues can be sorted out much faster. Decentralizing payroll management also means reducing the distance between the employees who receive the paychecks and the people who are in charge of administering paychecks and payments, which removes obstacles in the problem-solving process.

Lower risk in case of system failure

It’s never great news when the payroll system is down. But the consequences of system failure are much more severe with a centralized payroll system. If the central system fails, this means that none of the business’s employees worldwide—which could be tens of thousands of employees in the case of a multinational enterprise— will get paid. With decentralized payroll systems, on the other hand, problems with the system only affect the employee population in a specific geography. 

The question of whether to choose a centralized or decentralized payroll model usually arises when a business starts to operate and hire employees across several geographies. In the beginning of their global expansion, most businesses find it more convenient to simply outsource their payroll processes to local payroll specialists because the set-up process is faster and involves lower costs than the ones associated with setting up a centralized payroll system and hiring a dedicated team of multi-country payroll experts. Plus, having an experienced local partner to rely on when entering a new market significantly reduces the compliance burden.

However, with a growing global presence and a growing global team whose members work from all over the globe, the complexities usually begin to build up. With every new entity or geography added to the list, it becomes harder to consolidate global payroll data and make well-informed business decisions that ensure future growth. That’s usually when organizations should think about making some changes. 

This doesn’t necessarily mean centralizing every aspect of payroll management. But the business will have to find a way to simplify its global payroll and increase its data transparency and accessibility, without making any concessions with regard to local compliance. That’s where global payroll solutions like Lano come into play.

Lano offers businesses a unified global payroll solution based on a cloud-based payroll platform and a network of experienced payroll partners covering more than 170 countries worldwide. Have your local payroll set up and processed by experts and put payroll compliance and global payments on autopilot. Consolidate payroll data from all your payroll service providers in one single platform and receive detailed payroll data insights and rich reportings for all your entities. Book a demo to see our global payroll platform in action.