BY MOLLIE LOMBARDI
Pay defines the employer/employee relationship. Exchanging something of value for the time and labor of another human is the most essential component of what work is. And while it is the first and fundamental employer activity, it’s become something of a commodity—a necessary that organizations try to get done as quickly and cheaply as possible. But that is changing as the labor market tightens, consumer technology experiences permeate society, and organizations realize that every interaction they have with employees can determine employee longevity with the organization.
In recent data from Aptitude Research Partners, an independent research-based analyst and advisory firm guiding businesses in the Human Capital Management technology landscape, there is a shift in both the “what” and the “how” of payroll. Organizations, particularly midsize organizations, are focusing on getting more from their payroll provider. More functionality (the what) as well as more intuitive experience for administrators and employees (the how).
Reasons for investing in new pay solutions—midmarket Source: Aptitude Research Partners. Payroll Systems Index Report, 2018
Just over half of midsize organizations (defined for this study as organizations with between 500 and 5,000 employees) replaced their payroll solution within the last year, or plan to replace it within the next 12 months. The same companies cited functionality and user experience ahead of cost when it came to their reasons for replacement. Organizations are looking for providers that can not only calculate gross to net effectively, but add functionality like data analytics that allow them to pull insights from payroll data. In addition, they’re looking for capabilities that enhance user experience, like on-demand pay or consumer-grade self-service tools.
Another area of functionality driving payroll solution decisions is the ability to manage risk, particularly compliance risk. Partnering with solution providers that not only have the engine to do the calculations, but also provide services that help customers stay on top of continually changing regulations and compliance issues is critical. Many organizations do not have dedicated the internal resources to keep up with the rapidly changing compliance environment, so partners who can help them with these services are exceptionally important.
Biggest compliance concerns—midmarket Source: Aptitude Research Partners. Payroll Systems Index Report, 2018
Delivering all this functionality in a beautiful, usable, intuitive interface is essential. Because the user experience needs to be very different for payroll administrators, leaders looking for reporting, and employees trying to understand their paycheck, it’s important to find a provider that is cleanly and clearly addressing these three audiences. User experience is so important that 30% of organizations surveyed said they would strongly consider switching to a new provider for a better user experience. It’s important to get payroll right not only because of the financial implications, but also because of the human implications. It would be much harder to develop trust with employees for career development, or performance feedback if employees don’t trust their employer to get the math right in their paycheck, first.
Payroll touches every employee, and it must continue to evolve with changing workforce demographics, shifting business models, and new worker types like freelancers and contingent laborists. Here are some areas of innovation:
We have seen the power shift to employees in recent years, wanting to take more control of their career path, and to have choice about how and where they work, as companies pay more and more attention to retention. As many as 16.5 million people are currently working as contingent labor and/or freelance labor (US Bureau of Labor and Statistics, 2018). Practices like freelancing and contingent labor help employers honor individuals’ desire for flexibility, but they require solutions that provide visibility into cost and quality of the contractor employment arrangements to help the business make better hiring decisions.
Payroll is a huge amount of money. It’s also a huge amount of time spent by your payroll administrators, as well as managers and employees. And it is a clear statement of value of an employee’s time and effort. It’s important to consider not just the number on the check, but how it is delivered and what that says about your company. A clear and accurate paystub is certainly important. But a clear and accurate paystub that also has links to information about potential changes from one check to the next, or financial wellness tips, or even messages from leadership thanking people for their service or their contribution to the overall organization success is quite another. It doesn’t take much to turn a transaction into an engagement opportunity. Money is meaningful, and it can change your organization’s outcomes, as well as impact the lives of your employees.
Research has shown that 78% of full time workers live paycheck to paycheck, including 1 in 10 of people making $100,000 or more (2017, CareerBuilder), and 20% of US households are “underbanked,” meaning they have a bank account, but still rely heavily on resources like check cashing or payday loans. These are the financial realities that employers can help employees face by thinking of their payroll process as a strategic value add. Imagine your car breaking down on Monday and facing the choice of a predatory payday loan or waiting five days for payday to fix it. Not to mention worrying about being late to work because you had to stand in line at the electric company or cable office to pay your bill in cash.
It’s clear that payroll is at the heart of the employer/employee relationship—it doesn't mean it should be dominating your HR staff's time and energy. That is the premise of modern payroll solutions—to simplify payroll and make the experience seamless and non-disruptive for employees. For employees, time is money. The more you work, the more you make. But when administering payroll, the more you work, the more it costs the organization. This is why midmarket organizations are looking to providers that help them simplify the application of compliance rules, provide additional functionality such as timekeeping, and integrate with third-party benefit providers. The result is decreased work, increased output, and little room for inaccuracies.
Vendor selection criteria—midmarket Source: Aptitude Research Partners. Payroll Systems Index Report, 2018
When time and pay are connected you reduce the need for data reentry and manual intervention. The fewer stops along the way between an employee entering time data and the calculation engine for payroll, the fewer points there are for mistakes. In fact, the average payroll error rate for organizations using homegrown payroll solutions is 11.4%, nearly twice the rate of those using a third-party solution or service at 6.1%.
Integration of time and pay also has an impact on talent processes. For example, every program, strategy, or solution that helps leaders create attractive compensation packages to hire new talent, or a strategic compensation plan aimed at retaining top performers, must go through payroll. This is one important reason why midsize companies rate a provider’s ability to supply other functionality and support integration with third-party benefit and other regulatory deductions so highly. In addition, when payroll integrates with other aspects of talent management and human capital management, there are significant benefits in insights and analytics.
For example, organizations with integrated Payroll and HCM are turning data into insight and are:
more likely to utilize business intelligence or data query tools to mine their payroll data
more likely to use dashboards and reporting tools to combine workforce and business data
more likely to use predictive analytics solutions to help with forecasting workforce planning
Payroll is an essential HR process is inherently connected to many other HCM processes, and makes a big impact on employee / employer relations. As the workforce modernizes, so too should your pay infrastructure to meet its demands. Make payroll decisions as you think about where your business may be expanding and understand what other solutions the vendor offers. It’s important to understand if a provider offers a broad HCM suite, because the added value of truly integrated solutions is so much higher than standalone solutions. Look for for providers that not only offer efficient, effective, engaging payroll experiences, but also integrate payroll data and processes with other human capital processes to deliver the most value for your dollar.
Mollie Lombardi is a researcher, writer, and speaker focused on the intersection of human capital strategies, technologies, and processes. Her work has appeared in such publications as Fast Company, the Wall Street Journal, Inc. and other industry trade publications. Her main focus is primary research aimed at helping individuals and organizations blend efficiency, engagement, inclusion, and performance through the use of technology. She Is Cofounder of Aptitude Research Partners, and has held a number of leadership roles at industry analyst firms.