How to create an efficient payroll management system

Payroll is an essential business function which plays a crucial role in employee retention, motivation, and happiness. If leveraged correctly, payroll can further deliver valuable insights that enable strategic decision-making.

In order to leverage the strategic potential of payroll and ensure timely and accurate payroll processing, businesses need a well-designed payroll management system that defines clear processes and policies and ensures operational efficiency.

How to create a payroll system that ensures timeliness, accuracy, and efficiency? What aspects do businesses have to consider when developing a payroll management system?

Broadly speaking, a payroll management system is the set of processes, policies, workflows, and tools used by a company to manage its payroll in an accurate, efficient, and compliant way. The term is sometimes also used to refer to software that is designed for this purpose.

There are many different tasks involved in payroll management. To ensure that payroll runs smoothly, businesses need a well-designed system for managing their payroll. Here is an overview of the essential features of a payroll management system.

• Payroll schedule: Developing a payroll schedule is the first step towards managing payroll at an organization. This includes determining aspects such as pay frequency, pay period, and pay dates. When working out a payroll schedule, businesses should keep in mind statutory requirements and regulations regarding salary payments.

• Payroll and compliance calendar: An up-to-date payroll and compliance calendar is the fundamental basis of payroll management. It should include anything from payroll cut-off dates to deadlines for remitting withheld payroll taxes and submitting statutory payroll reports.

• Payroll software: A modern payroll software is a crucial component of payroll management. Software tools for payroll processing come with numerous features, from payroll calculation to payroll tax administration to payroll reporting.

• Payroll security: Handling sensitive employee data is an important part of payroll management. That’s why a payroll system should also include security mechanisms to keep sensitive payroll data secure. Payroll security encompasses different aspects, from frequently updating payroll software to monitoring access logs and suspicious activity.

• Payroll governance mechanisms: Payroll governance is the system through which an organization’s payroll is controlled and managed. It takes payroll management one step further and includes aspects like accountability, decision-making, and exercise of authority.

• Payroll policies: Internal policies that outline how different processes and tasks related to payroll are supposed to be managed are yet another important part of an employee payroll management system. These policies can include anything from PTO policies that govern employee leave entitlements to specific policies that outline standard payroll procedures, such as timekeeping, payroll processing, and accounting.

• Guidelines for payroll reporting: Payroll reporting is an important part of payroll management, which is why a good payroll system should also include an outline of how often and in which form payroll reports need to be created.

• Payroll strategy: Depending on business size and scope of operations, organizations should also consider developing a payroll strategy to enhance their payroll management. For instance, if a company has employee populations in different countries and works with one or several local payroll providers, a global payroll strategy can help provide clarity on how roles and responsibilities are divided between the in-house team and external payroll partners.

• Payroll outsourcing agreements: If a business relies on payroll outsourcing to manage all or parts of its payroll, the payroll outsourcing agreements become part of its payroll management system because they outline which payroll-related tasks and responsibilities remain with the in-house team.

• Payroll KPIs and metrics: Payroll management also includes monitoring payroll performance. That’s why clearly defined payroll KPIs and metrics should also be part of any payroll system.

• System for keeping payroll records: Payroll recordkeeping is a crucial part of payroll management because it is an important compliance requirement. In the case of an external payroll audit, payroll records are checked in great detail to make sure that they are complete and that the information matches the business’s tax declarations and general ledger.

• Payment infrastructure: The ultimate goal of processing payroll is to get everybody paid. A well-working payment infrastructure is key to achieving this goal. Ideally, the infrastructure should encompass different salary payment methods, such as direct deposit, Earned Wage Access (EWA), and payroll cards.

• Payroll disaster recovery plan: Payroll is highly sensitive to disruptions. In order to limit the impact of potential disruptions, businesses should also think about payroll disaster recovery when developing their payroll management system.

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Why do businesses need a payroll management system? Payroll is a crucial business function that has a direct impact on employees. Delayed or incorrect salary payments can put employees in a difficult spot, decrease employee loyalty towards the company, and can quickly break the trust between employer and employee.

Without a well-structured approach to managing payroll, businesses are likely to find themselves in a position where their payroll is all over the place. This is where a payroll management system comes into play.

A payroll system helps organizations to:

• Enhance compliance: Compliance slip-ups in payroll can be due to either lack of knowledge or oversight resulting from bad payroll management. The latter can be prevented with a good payroll system.

• Increase efficiency: Streamlined processes that follow a clear schedule are much more efficient than non-standardized processes that the payroll team handles on the fly.

• Ensure timely employee payments: The overall aim of a payroll management system is to make sure that there are clear procedures in place that outline how payroll is supposed to be handled. This way, everyone in the payroll department knows what they have to do and when, which ensures that employees get paid accurately and on time.

• Have peace of mind: Given the crucial importance of payroll, businesses want to make sure that their payroll is well-managed. An effective payroll management system offers businesses peace of mind.

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Not all payroll management systems are the same. Every business needs to develop its individual system that fits in with other business processes and workflows. However, there are a few key attributes that characterize a good payroll system. They include:

• Efficiency: Realizing efficiency gains is one of the key reasons why businesses need a payroll management system, but efficiency is also a key characteristic of these systems.

• Scalability: Business growth is a declared objective of all organizations. A payroll system should be scalable to respond to the needs of a growing workforce.

• Resilience: A system for managing payroll should be resilient enough to limit the repercussions of disruptions in payroll. A payroll management system should also help an organization future-proof its payroll.

• Advanced technology: Manual payroll management with spreadsheets is no longer an appropriate way of managing payroll. In the digital era, a good payroll system should use advanced technologies that automate manual processes.

• Well-structured approach: Streamlined processes are key to system efficiency. This also holds true for payroll. A payroll management system should hence be well-structured and outline clear processes that the team can follow. The more organized the payroll system, the better the results.

• Clear distribution of roles and responsibilities: Roles and responsibilities in payroll must be clearly defined. This ensures that all members of the payroll team know exactly what to do at any given moment and that all aspects of payroll are taken care of.

At the end of a day, a payroll management system should fulfill two critical functions. First of all, it should ensure that employees get paid accurately and on time. Second, it should ensure that all payroll processes, documents, and records are in line with statutory compliance requirements.

Most businesses have some sort of payroll management system in place. The trick is, however, to create a system that not only fulfills its purpose but that is also efficient. Here are a few tips to help you get there.

• Leverage automation: Payroll automation can replace time-consuming manual processes and thereby increase efficiency. The more payroll tasks are automated, the more time and resources can be dedicated to more important tasks and projects.

• Put compliance in the forefront: Compliance is a key requirement in payroll. When creating a system for managing their payroll, organizations should make compliance concerns a priority.

• Streamline processes: Streamlining payroll processes is one of the best ways to increase payroll efficiency. Automating processes where you can is one part in this, but it’s also about creating standard procedures that can be followed for each payroll run.

• Define suitable performance metrics: Businesses that want to effectively monitor their payroll performance need suitable payroll metrics they can track, such as time needed to process payroll, time needed to solve payroll issues, and payroll accuracy. Monitoring payroll metrics can help businesses identify potential issues early.

• Choose the right software: The payroll software is the centerpiece of a business’s payroll management system and as such, it should be chosen carefully to ensure that it really meets all the requirements.

• Implement employee self-service: Payroll self-service enhances the employee experience and also reduces the workload of the HR and payroll department. If employees can complete certain tasks themselves, such as updating their personal information, the payroll team gains valuable time.

• Implement employee time tracking: Keeping track of employee hours through timesheets is a thing of the past. An automated time tracking system saves time, enhances accuracy, and helps prevent payroll fraud.

• Outsource payroll where needed: Depending on internal expertise and capacities, the best approach for a business to manage its payroll might be outsourcing. Payroll outsourcing can save businesses time and money by streamlining processes and freeing up internal resources.

An effective payroll management system helps businesses get the most out of their payroll and maximize compliance. For multinational enterprises, however, the value of a well-designed payroll system is even greater.

Global payroll solutions like Lano help businesses effectively manage payroll for their globally distributed teams by offering a consolidated global view of payroll data and processes across different countries, providers, and entities.

Get access to unlimited local payroll expertise thanks to our network of pre-vetted payroll partners and manage all your payroll centrally through one single system. With our global payroll consolidation platform, you can get detailed insights into your global payroll data to inform business decisions.

Interested in knowing more about how Lano can help you simplify global payroll management? Book a demo with one of our experts to learn more.