Payroll is the invisible hero. If it works smoothly and everyone gets paid on time and accurately, every time, and the company complies seamlessly with regulations, no-one really notices. It’s almost as if the money appears magically in employees’ bank accounts every month and “the system” automatically updates all the details of every employee – how many days leave taken, what each employee’s bonus is.
Somewhere a fairy swishes her wand and every detail falls into place. Everything works and everyone is happy. Another perfect save by payroll.
Until it doesn’t work. Then it could set off a chain of events that can only harm a company’s longevity. Bottom line is, take care of your employees: ensure payroll is perfect.
Help is on hand with payroll metrics, also known as key performance indicators (KPIs). These are essential to measure the efficiency of your payroll process. You can assess different aspects of payroll performance to get a more nuanced picture of what your payroll process does well, and where it needs improvement or extra support.
Whatever you wish to analyse, intelligent payroll software allows for basic to sophisticated analytics functions.
Unlike other areas of human resources (HR), payroll doesn’t have standard KPIs. So, what to measure, then?
There are metrics that could be useful to include in a dashboard of payroll metrics to help you identify specific payroll objectives. And there are payroll metrics that you can track for company-wide strategic planning.
Payroll management metrics
1. Cost of payroll
Payroll is your company’s biggest expense. Analysing the running costs of payroll can help you identify ways to make payroll processing more cost effective. How you create the cost of payroll metric depends on what aspect of the payroll process cost you’re trying to measure. For example, if you want to measure the payroll costs over a specific period, you will add up the total cost per time period. But if you want to know the payroll cost per employee, you’ll divide the total payroll expenses by the number of employees for whom you ran the payroll.
Consider the full range of services involved for each expense. For example, the salaries of staff who complete timesheets for payroll, IT support for payroll, the cost of payroll accounting, a monthly outsourcing fee or the cost of investing in and maintaining a payroll system. There are other input costs to consider and would depend entirely on your company’s individual footprint.
2. Time to run payroll
Track how long it takes to move through the whole payroll process, from collecting time and attendance records to distributing the last paycheck in a cycle. You can also measure the time it takes for any one of the steps in the process, or you can combine a set of steps in your payroll process.
3. Number of payroll mistakes
Mistakes cost money, but they’re inevitable. Mistakes can range from a small typo, to not paying an employee. Whatever the nature of the errors, measuring the rate of mistakes per employee is a useful indicator of your company’s accuracy rate.
You can calculate the payroll accuracy rate by dividing the number of payroll runs with errors, by the number of payroll runs.
Company Strategy Metrics
Payroll metrics dashboards include measures that help manage company-wide strategies better.
1. Labour cost as a percentage of total revenue
How much money does our company spend on labour costs like salaries, benefits and overtime in relation to revenue? The answer can tell you a lot about how efficiently you run your business with its current team set-up.
The metric helps you track revenue changes with new hires or when you give your team a pay rise. If your labour costs go up, but revenue doesn’t, it’s worth investigating.
To calculate, subtract total revenue from the total labour cost, including salaries, benefits, payroll tools and services, and so on. You can also calculate the percentage of labour expenses to the entire company’s earnings. Aim to monitor this metric at least quarterly.
Overtime is tricky to manage because it’s so variable. It can easily become a large expense if it’s not monitored correctly. Excessive overtime costs tell you that employees don’t do their work within regular hours. Why is that? This metric guides staffing and workloads decisions.
Introducing the dashboard
Intelligent software includes analytics dashboards that enable you to quickly and easily produce the metrics to analyse your payroll process. Even when you outsource payroll to third-party partners, having a dashboard for payroll analytics remain the best way to keep your finger on the pulse of your company’s greatest expense.