Key metrics to measure payroll performance

Key metrics to measure payroll performance

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Introduction

Managing payroll is a crucial part of any business, encompassing all aspects of processing and delivering employee payments. However, effectively managing payroll extends far beyond writing employee paychecks and should include careful monitoring of payroll processing to ensure your company is efficiently managing its finances.

The payroll management process should include identifying and monitoring payroll benchmarking metrics. This practice is the easiest way to determine whether your company is managing employees in a financially advantageous manner and find ways to reduce overspending.

This article will provide an overview of what payroll metrics are, why assessing payroll benchmarks is essential, which key performance indicators (KPIs) your company should monitor, and how to implement payroll performance metrics.

What are payroll metrics?

Payroll metrics assess key performance indicators specific to payroll expenses and help employers evaluate their payroll processes' efficiency and financial accuracy. Standard payroll metrics that companies should assess are the total cost of payroll, the amount spent on employee overtime, and the amount spent on employee leave time.

Payroll metrics protect your company from overspending by establishing baselines for how much various aspects of payroll should be costing you and measuring how well your company is sticking to these metrics.

If payroll expenses extend far beyond the projected metrics at the end of a fiscal quarter or year, they give you an idea of the areas in which you can improve. Furthermore, payroll metrics allow you to assess your budget and make adjustments as necessary.

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The importance of having payroll KPIs

Establishing and monitoring payroll KPIs are essential to your business's financial well-being and provide valuable insights regarding how much various aspects of payroll cost and where you can save money in the future.

For example, if your company wants to lower its annual payroll expenses but you still need to monitor payroll KPIs, it's difficult to know where you can eliminate or reduce spending.

Suppose you have a business where employees work a few overtime hours weekly. While this may not seem significant, it can be challenging to know how much overtime costs your company without monitoring payroll KPIs.

In addition, suppose that your payroll expenses far exceeded what you thought they would at the end of the year, but you've been documenting your payroll metrics. In that case, you can analyze these metrics and discover the areas where you exceeded your budget.

The metrics you should be tracking to measure payroll performance

Numerous KPIs for payroll could be beneficial for your company to track. Once you begin the process of monitoring payroll KPIs, it becomes easier to add additional KPIs over time. First, you should start monitoring a few key metrics immediately to ensure optimum payroll performance.

Below are four key payroll metrics you should track to measure payroll performance.

Total payroll costs

The most critical metric in payroll monitoring is the total cost of your payroll. Employers spend up to 70% of their total budget on labor costs, which means monitoring payroll expenses is one of the easiest ways to reduce budgetary spending.

Measuring total payroll costs will include all aspects of payroll (e.g., hourly wage, benefits, paid time off) for all your employees. This KPI will give you an overview of how much money you've spent on payroll, and you can assess this on a weekly, biweekly, monthly, quarterly, or yearly basis.

Total payroll costs can give you an idea of where (aside from salary) your payroll expenses are allocated and can help reduce spending in areas such as:

  • Overtime pay
  • Paid employee leave
  • New employee training
  • Employee benefits

Payroll accuracy

Another essential KPI that your company should be tracking is payroll accuracy. Effectively processing payroll is an integral part of running your business. Your payroll processing team (whether it's an internal HR department or a global staffing solution like an employer of record) should be able to manage payroll processing effectively.

Issues that may arise with payroll inaccuracy include:

  • Loss of trust from employees whose paychecks were incorrect
  • Backpay for incorrect payments
  • Back taxes for incorrect withholdings
  • Penalties and fines as a result of not adhering to local tax and labor laws

Payroll accuracy protects your company from legal ramifications associated with improper payments, and it has secondary benefits for your business, such as employee trust and retention.  

Employee overtime

Employee overtime is an often overlooked aspect of payroll, but overtime expenses can add up quickly. While it depends on where your employees reside, many countries require additional compensation for overtime hours.

For example, the Fair Labor Standards Act (FLSA) covers employees in the United States, which entitles them to be paid 1.5 times their standard wage for overtime.

Suppose you have 20 full-time employees who each make $20 per hour, your typical weekly salary expenses are roughly $16,000. However, because of recent employee turnover, you've been short-staffed for three months. Each employee has been averaging approximately three hours of overtime weekly to make up for this.

Your additional weekly labor expense for each employee is about $90. While this may seem like little, you must account for each employee making this amount for an extended period. Therefore, your total overtime expenses for those three months end up being $21,600.

By compiling and assessing this data, you learn that you could have hired an additional full-time employee for six months without exceeding the amount you spent on overtime pay. In addition, your existing employees would have experienced less burnout.

This is just one example of how analyzing employee overtime spending allows you to understand how to allocate payroll funds appropriately.

Employee leave time

Employee leave time can be costly for employers when not managed properly and can encompass all types of paid and unpaid time off, including:

  • Sick days
  • Paid vacation days
  • Public holidays
  • Mental health days
  • Paid parental leave

When managed efficiently, paid time off can save employers money. For example, if you have no rules regarding paid vacation rollover, employees can stack vacation days for years and take months off at a time, which you will be required to compensate them for.

Even if you don't compensate employees for time off, absenteeism can negatively affect productivity and have secondary financial implications, such as overtime pay for other employees. Therefore, monitoring the efficacy of employee leave time and analyzing its impact on your payroll is essential.

Best practices for implementing payroll performance metrics

If you've been processing payroll without monitoring KPIs, implementing processes for assessing payroll performance metrics can feel daunting. However, the key is to start small and work your way up.

Select a few key metrics (such as the ones listed above) and have your payroll team begin collecting data on the performance of these metrics monthly. Whether they compile this data for your reference or start reporting the results to you every month, you should begin gaining meaningful insights from the data within the first year.

As your processes become more streamlined, consider adding additional payroll metrics to begin reporting on. Over time, these insights can help you make more informed labor decisions that can save your company money.

Simplifying the payroll process with Skuad

Partnering with a global employment and payroll platform like Skuad can help simplify your payroll processes, remain compliant with local payroll laws, and analyze payroll metrics for your globally distributed team in one easy-to-use platform.

Reach out to learn how Skuad can help you manage employee payroll today.

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