At the leadership table, all eyes across all departments are on decreasing inefficiencies and increasing cost savings. Companies usually track some basic data, such as financial statements or employee and customer feedback, but many may not have a more robust set of metrics, or Key Performance Indicators (KPIs), to track success.
This is especially true in the payroll department, where only 60 per cent of organizations track KPIs in relation to payroll — and these are mainly related to the timeliness of processes. Less than one-third track KPIs related to accuracy or even more strategic workforce measures like operational costs.
However, with clearly established KPIs and the data to track them in place, you can quantify progress and adjust processes to reach your departmental — and organizational — goals. You can move payroll from being seen as a cost centre to a value creator.
Payroll KPIs are performance measurements that allow you to evaluate how well your payroll processes are running and their relative costs.
These four key payroll performance metrics will help ensure your department allocates resources correctly and supports your organization’s goals. But keep in mind that KPIs work best when they align with specific processes and challenges you have.
KPI #1: Accuracy Rate. One of the most critical KPIs to track is how accurately the payroll department processes payroll for employees. After all, payroll inaccuracies do more than waste company resources — they can also lead to tax-related fines and unhappy employees. A low error rate, on the other hand, demonstrates the payroll department’s commitment to excellence and helps establish trust with employees.
How to measure this KPI: Keep track of payroll errors per pay period. Divide the number of pays with errors by the total number of pays issued to get an error percentage. Track the rate for each payroll processed and maintain an average for the year.
KPI #2: Turnaround Time. It is important to track how long it takes your department to process each payroll to ensure employees and remittances are paid on time, clarify the expenses involved and find efficiencies. A quick turnaround time also contributes to employee satisfaction and a positive company culture.
How to measure this KPI: Track the hours each person in your department spends on each payroll run, including the time spent reviewing data and fixing errors. Review this number regularly to identify processes that could be improved or seasonal trends that may need to be addressed.
KPI #3: Cost per Payroll Run. This metric includes the cost of labour, software and other expenses associated with payroll processing. You can then ensure that payroll processing is cost effective or identify areas where savings can be achieved.
How to measure this KPI: Add up all of the costs associated with processing payroll to determine the cost of each pay run. Divide the total cost of payroll processing by the number of employees paid to get a cost per pay issued.
KPI #4: Payroll Costs as a Percentage of Revenue. As payroll is one of the biggest expenses for an organization, this metric is important for understanding the overall financial health of the company and identifying areas where cost savings can be achieved. Many companies use labour expense as their only metric for the payroll department, forgetting about the other payroll expenses outlined above—where the real cost saving may be found.
How to measure this KPI: Add the total costs of the payroll process and divide it by your total revenue to find this percentage.
The metrics listed above are just a few examples of the many payroll KPIs that you can track. Start with what makes sense for your organization to capture the business impact of payroll data on your organization as a whole. KPIs will help you not only improve processes and decision-making but also demonstrate and communicate the value of the payroll department to the organization.
This article is an excerpt from Dialogue Magazine, which is received by members of the National Payroll Institute. If you are not already a member, we encourage you to join.