David Crewe: Payroll leakage – are you seeing unexpected cost explosion?

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David Crewe: Payroll leakage – are you seeing unexpected cost explosion?

As a Chief Financial Officer or Financial Director, whether you are running a multi-million pound business, or looking at your general finances, finding out at the last minute that you or your department heads have spent more than budget or business plan, is not a pleasant situation to be in. And it seems to be happening more and more.

The questions you continue to ask are:

    • How does this continue to happen?
    • Why are people not proactively reviewing people costs?
    • Are managers just signing off everything?
    • Why aren’t payroll trapping errors and overpayments?

 

Are you continually asking these questions without being given a solution?

Within MHR’s managed service centre, we call this phenomenon PAYROLL LEAKAGE. A term normally associated with water, we class ‘payroll leakage’ as a payroll that is not in control, where payments are given to employees that aren’t entitled to it, or not enough is given which affects tax contributions. Perhaps there are costs you cannot even identify as overpayments or incorrect payments.

People costs are one of the biggest overheads in most organisations, yet the absence of credible checks, balances and controls within in-house payrolls shows serious negligence. Keeping close control of your people costs, and forecasting how these may develop, is a key factor in successfully delivering your business goals, aims and plan without wasting time and money unnecessarily. You don’t want to be a position each month signing off multiple faster payments, as a manager hasn’t processed data correctly or an employee forgot to put in their bank details.

These basic business practices can, and should, be avoided, especially when they’re costing organisations a minimum of 2 per cent of their overall payroll bill.

Evidence suggests the retail industry is particularly at risk of ‘payroll leakage’ due to poor data quality and processes. One crucial example of bad practice is employees leaving but continuing to get paid! Retail employers have also been falling foul to recent changes in the National Minimum Wage, leading to underpayments and fines due to lack of compliance.

Repairing the leak

At the start of the year, you need to complete a financial workforce plan (FWP), analysing your current workforce, determining future workforce needs, identifying the gap between the workforce you will have available and your future needs. This can all be done using your existing people data and collaboration across different departments.

Ensure your plan is agreed and signed off at all senior levels so that it’s locked in and final. Now everyone will be on the same page and know the numbers to hit, ensuring transparency across the organisation for your managers.

Within Managed Services, we take your workforce plan and implement the data into our solution, to plan out the coming 12 months or further. Then, each period we draw make comparisons based on the information we have in the payroll service against the original workforce plan.

These comparisons look for unexpected trends or information in the payroll cycle: a manager mis-keying information, missing data, high value temporary payments. Comparing data sets at specific times in the month, we start to flag these to you, providing you with early warning signs to help to manage a business message or fix the issue before it goes to payment. Reports in month and after the payroll has run flag these anomalies to you for investigation and action.

Pre-payroll analysis – It is important to carry out data checks to make sure your information is always accurate. This ensures people get paid correctly, on time and without constant problems and headaches for them and your organisation.

  • Missing NI numbers
  • Missing dates of birth
  • Missing address details
  • Missing destination bank account details
  • missing contractual hours
  • Missing salary details

 

Are you using analytics and bespoke payroll checks?

Another way to identify overpayments is to use bespoke checks and reports. These will be set up with rules to determine what should always to be true in your payroll, and what should never happen. Real examples of these are: “we should only have one head chef in each section”. Check to see if anyone else has been put on that rate to avoid paying too much.

It’s time to change

The complexity of payroll requirements to remain complaint with changing legislation, without any changes to existing infrastructure have led to outdated payroll systems and archaic processes. With ‘payroll leakage’ becoming a growing problem, organisations need to audit their payroll and decide if it’s still fit for purpose.

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About David Crewe

David is head of service operations at MHR. David is passionate about transforming the payroll industry with automation, leveraging his expertise to help fix and improve payroll processes.

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