Payroll Management Accuracy: How Do You Measure It, Why & Using What Metrics?
Mar 29, 2024
Payroll accuracy is essential for legal compliance, employee satisfaction, and financial stability. Discover the 5 metrics you must track to improve it.
Payroll management accuracy metrics and KPIs sound like overused corporate jargon until you experience the effects of inefficient and inaccurate payroll processing firsthand.
I have learned of recent payroll mishaps at a well-known retail company that have resulted in both overpayment and underpayment of employees. Some individuals received negative net pay on their payslips, while others experienced delayed payments by up to a week.
Among the impacted employees were those who saw reductions in their salaries due to overpayments in the previous month. Some employees had mistakenly viewed the overpayment as a cost-of-living adjustment.
The fall-out from the salaries chaos was so bad that workers threatened to down tools, which forced the company to pay salary advances to some employees in the same week they had supposedly been paid.
It's anyone's guess how this episode affected productivity and staff morale at the company, and the actual cost can never be fully quantified.
This case highlights the importance of payroll accuracy. But what is payroll accuracy, and what metrics can you use to track and improve it?
What is payroll management accuracy?
Payroll management accuracy refers to the diligence and measures implemented to ensure employees receive full, timely, and cost-effective compensation for their work.
Payroll accuracy speaks to the precision and correctness of your processes for compensating employees for their labour, extending beyond the mere absence of payroll errors.
Accurate payroll management is critical for all companies, particularly in larger organisations where its impact is magnified. Regardless of size, the objective remains the same: to uphold high standards of payroll performance, ensure compliance with tax and financial reporting regulations, foster employee satisfaction, and optimise overall company finances.
How do you measure payroll accuracy?
Achieving payroll management accuracy involves implementing various strategies. However, before implementing these strategies, it's crucial to assess your current level of payroll accuracy to gauge the effectiveness of any improvements.
Hence, it's imperative to measure payroll management accuracy, and to do so effectively, you need to track specific metrics and KPIs. Let's delve into each of these payroll accuracy metrics and KPIs individually and illustrate how to calculate them:
5 payroll management accuracy metrics every company must track.
1. Error rate.
Payroll errors directly affect payroll management efficiency, employee morale, and the company's financial stability. Therefore, , it is crucial to track the rate at which errors occur in your payroll processes.
Error rate indicates the percentage of payroll transactions containing errors. A high error rate suggests inadequately trained or unmotivated payroll staff, inaccurate employee data, and deficiencies in payroll procedures and systems.
Identifying and promptly rectifying payroll errors is crucial as they can adversely affect your business. Maintain a log of all identified payroll errors in each pay cycle to assess their frequency and implement corrective measures accordingly.
It's essential to identify and accurately classify the payroll errors you uncover. Only then can you find their causes and solutions.
Common payroll errors include salary overpayment and underpayment, unremitted taxes, and salaries disbursed into the wrong bank accounts.
You must aim to continually lower your error rate, for which you must set a benchmark to track your progress. If less than 3 percent of your payroll transactions contain errors, your payroll accuracy is considered relatively high.
2. Cost of payroll errors.
Regrettably, payroll errors come with a cost, impacting your business financially. Rectifying these errors demands additional time and effort from your payroll staff.
In the USA, a small business solves an average of 15 daily payroll errors. This puts a heavy toll on your finances when considering that each error can cost up to $300. In Kenya, the cost of payroll errors may be comparatively lower, but it's still crucial to establish a benchmark to monitor the potential expenses incurred while correcting these errors.
The actual cost of payroll errors is hard to quantify. Some of the effects of inaccurate payroll processing, like loss of productivity due to worker dissatisfaction and man hours lost as workers lodge and follow up on discrepancies in their salaries, are almost impossible to put a monetary value on.
3. Tax compliance.
The Kenya Revenue Authority (KRA) ruthlessly punishes businesses that they find to be evading or underpaying taxes. The Kenya Revenue Authority (KRA) has the authority to levy fines and penalties, require interest payments on unpaid taxes, and pursue legal action to penalise tax violations.
You can conveniently monitor the frequency and financial impact of payroll errors annually by documenting and tallying the number of tax compliance penalties against your company and calculating the total fines and penalties paid.
Tax compliance offences can seriously hurt your business, so it's crucial to avoid them altogether. Your benchmark should be a 0 percent error rate, meaning you must aim for 100 percent tax compliance.
Stay up-to-date with changes and amendments to tax laws, regularly audit payroll data, verify that you are using the correct tax bands and rates for your PAYE deductions, and remit your taxes on time to ensure tax compliance.
4. Timeliness.
One consequence of payroll errors is the extra time needed to make corrections before running payroll. This can delay salary payments, adversely affecting the welfare of employees.
Every payroll delay dents your payroll management performance. Therefore, payroll timeliness is an essential payroll accuracy metric to track.
To measure timeliness, divide the number of times salaries were not paid on time by the number of paydays in the period under review and multiply that by 100. That will give you your payroll disbursement timeliness rate, which is also helpful for measuring employee satisfaction.
Payroll delays can lead to undesirable outcomes for your business, including employee absenteeism. Hence, you must aim for a 0 percent incidence, meaning you must pay salaries on time every pay cycle.
5. Employee satisfaction.
Absenteeism is only one of the many ways employees can show dissatisfaction over delayed salaries and other effects of payroll errors. Others are strikes, declined productivity, colleague and customer complaints, and dips in work quality.
You could miss signs that employees are unhappy about the quality of payroll management. Where the signs are evident, directly attributing them to payroll errors may also be challenging.
In such instances, you can use surveys and one-on-one employee appraisal sessions to obtain workers' feedback on payroll errors they have noticed on their payslips. Some of these may not have been reported, meaning you didn't even know they were happening.
Therefore, you can measure the accuracy of your payroll by the rate at which specific errors are reported. If your employees are generally satisfied with the accuracy of your payroll management, the number of reported complaints will be low.
So, by tracking employee satisfaction through reported payroll errors, you can measure how well you are improving payroll management accuracy.
How do you ensure accuracy in payroll management?
You can improve payroll accuracy by eliminating or reducing the incidence of payroll errors. That entails identifying the causes of those errors and eliminating them to prevent their recurrence.
Here are a few causes of payroll errors that you can work on to improve payroll accuracy:
Lack of detailed and precise payroll procedures,
Poor training for payroll staff,
Use of inaccurate and outdated payroll data,
Incomplete employee information,
Negligence by payroll staff
Insufficient supervision of payroll staff.
Addressing these issues will drastically improve your payroll accuracy, but note that many of these will not be overnight fixes. Improving training and updating your systems and procedures will take ongoing effort and constant review.
However, many issues that reduce payroll accuracy can be solved by automating payroll processes with payroll management software.
The software automates data entry, calculations, and routine processes, saving you time and eliminating human errors that are common when people are engaged in repetitive work.
Choose payroll software that integrates with other business systems, like the employee clock-in system. This will reduce the need for human intervention in the payroll process and improve the quality of your payroll, ensuring workers are paid on time, at the correct rate, and for the hours they have clocked in.
Boost payroll efficiency by automating salary disbursement.
Payroll errors can occur at any point in the payroll workflow, including salary disbursement, which is the stage that directly affects and interests your employees, who rely on timely and accurate payment.
Payroll errors at the salary disbursement stage can manifest in various forms, such as salaries being deposited into incorrect bank accounts.
Payroll processing errors can also lead to missed payroll deadlines, which affects employee morale and productivity.
Automating the process with a business payments solution like Intasend will solve most salary disbursement errors.
With Intasend disbursements, you can pay up to 5,000 employees with one request, paying directly into your workers' bank accounts or mobile money wallets.
Disbursing salaries with Intasend is swift, requiring just a few clicks to upload an Excel sheet containing your employees' salary data and then authorize the disbursement.
Intasend disburses salaries for some of the fastest-growing companies in Kenya. Sign up today to streamline your salary disbursements and improve your payroll management accuracy.