The true cost of payroll

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In every organisation’s P&L, payroll sits comfortably in the top 3 expenses. That probably doesn’t surprise you, but what might surprise you is that it does so despite the fact that most organisations actually have no idea what the true cost of their payroll function is. Obviously, they know the costs of their payroll employees – they know their salaries, wages, super, leave entitlements, taxes and so on. They know the costs of the people directly involved in the delivery of the payroll function. The problem is as much as 50% of the true cost of payroll is hidden and those hidden costs could be as high as $2,000 per employee for a mid-size organisation.

Think about what is really involved in running an internal payroll system. Firstly, there is an investment in some sort of payroll system installation and ongoing software, maintenance and system upgrade costs. If you are holding the mountain of data that payroll generates yourself then you will have a serious investment in servers. If you are outsourcing that then you are paying some sort of monthly data fee to keep it secure. But that is just the technology – what about the processes, policies and skills?

Secondly, if your processes, policies or skills are inadequate, then mistakes happen. When mistakes happen in payroll the knock on effect is significant. In addition to the costs involved in tracking and rectifying an error there is a corresponding loss in productivity as your employees devote their efforts to arguing the rights and wrongs of payroll instead of whatever their real function is. There is often a corresponding drop in employee morale or satisfaction to boot as few things annoy employees more than incorrect pay.

The reality is whilst there may be a dedicated team to provide the payroll service, the energy and effort required in delivering that payroll extends way beyond those resources.

Thirdly, there is the ultimate hidden cost of all of the payroll intellectual property being held by a small number of people or, in many cases, just one person. If that person is lost to the organisation for any reason the payroll function is enormously disrupted. If payroll is disrupted then the entire organisation suffers and if the disruption is due to fraud then the damage may be irretrievable.

The fact is that most organisations have little or no idea of the true cost of their payroll and, in doing so, leave themselves open to unnecessary risk. The function of payroll is just too important to be treated in such a manner and the true cost might be the very existence of the business itself.