Errors, Fraud, Lost Dollars: What’s the State of Payroll Management?

Payday may look simple from the outside, but there’s a lot that feeds into it — which also means a lot can go wrong.

What seems like a minor error can snowball and compound quickly, especially in large organizations, as evidenced by these findings in a survey by HR, pay and workforce management platform UKG and audit, tax and advisory firm KPMG:

• Employee pay often represents 40% to 60% of businesses’ operating costs, but management of that pay remains deeply fragmented.
• Organizations lose 2% to 4% of their labor spend on “payroll leakage” from system limitations, processing errors and/or fraud.
• Almost 40% of companies reported between $1 million and $5 million in annual payroll losses; for a large company, even 1% of payroll leakage can cost $15 million in losses.

“This isn’t just a financial issue; it’s a people issue,” said Teresa Smith, the director of UKG’s human insights and human capital management (HCM) strategic advisory group. “When payroll isn’t right, employees feel it immediately. That’s where trust takes a hit, stress goes up, and payroll and HR teams end up stuck in cleanup mode. Over time, that affects morale, productivity and confidence in leadership.”

Access bonus Workspan Daily Plus+ articles on this subject:

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Today’s Challenges

The experts interviewed in this article shared there are several factors that complicate payroll operations, including:

• Regulatory complexity — including shifting wage-and-hour rules and tax laws, collective bargaining agreements, and geographical variability;
• Outdated, manual and disconnected HR and payroll systems, technology and processes;
• Inaccurate or incomplete data from finance or other departments; and,
• A lack of visibility in payroll challenges until they escalate significantly.

With 98% of companies surveyed by global employment platform Multiplier sharing they plan to increase their global hiring in the next few years, complexity is predicted to only increase.

“Without explicit expertise in each region, payroll’s biggest mandates — accuracy and compliance — suffer, creating a very real threat to scalability of the function and the company,” said Rebecca Bello, Multiplier’s head of global payroll.

The Repercussions of Payroll Leakage

A measurable indicator of payroll errors is “payroll leakage” — continual financial errors or losses for an organization from overpayments, underpayments, duplicate payments, continuing payments to terminated employees, compliance penalties, benefits extended to ineligible employees, or work needing to be redone to correct errors.

Leakage can stem from system or process errors such as incorrectly filled tax withholding forms, improper offboarding, misclassified earnings codes or incorrect data inputs — or they can be caused by timesheet, overtime or compliance fraud.

These financial losses often live in the system gaps where no one is looking, said Chetan Jain, an HR strategy and technology offering leader at consulting firm Deloitte.

“Say a large organization is running a biweekly and a monthly payroll simultaneously,” he said. “They have a huge volume of change requests coming in via email: ‘Adjust this time sheet, correct this clock-in, someone came in late.’ They’re almost structurally guaranteed to have leakage.”

How Organizations Can Turn the Tide

As Jain described, payroll is a process with a margin for error of zero. To help address these challenges amid continual change, the experts we spoke to offered the following tips:

• Simplify, consolidate and standardize processes and tools to reduce the need for workarounds and reconciliation.
• Clarify roles and responsibilities so nothing slips through the cracks.
• Don’t run payroll in a vacuum. Make sure HR, finance and IT are aligned.
• Clean up data — including around timekeeping — to promote payroll accuracy well before payday.
• Don’t “set it and forget it.” Audit, review and improve payroll data and processes continuously.
• Treat payroll as a strategic function, not a back-office or transactional one.

“This really is a moment of opportunity for payroll,” Smith said. “Payroll teams are sitting on some of the richest workforce and financial data an organization has, but too often, that insight goes unused. When organizations elevate payroll with better governance, the right technology and real executive attention, that’s when it becomes more than a back-office function and turns into a powerful way to build trust, strengthen resilience, and make stronger and more informed decisions across the organization.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Finance and Budgeting
• Organizational Performance