A Guide To The Top 5 Payroll Metrics And Why They Matter

The cost of doing payroll is on the rise. Damaging mistakes, missed deadlines, and out of control payroll administration costs can ripple through a company, affecting its performance in more ways than one. With HR teams dedicating a lot of their time to managing payroll, and at least three to five days required to correct payroll errors, the damage can often go unnoticed, wrecking more havoc further down the road.

One of the most effective ways to manage this damage is to keep an eye on the cost of administering payroll to your organization by watching the function’s key performance metrics. 

Metrics matter, and it is important that we know which ones, in particular, tell us the most about how our payroll is performing and which ones will have the biggest influence on your success indicators – i.e., your Key Performance Indicators (KPIs).

Here, we look at five payroll metrics that will give you the information that matters most and why they are so important to your payroll function.

Why tracking payroll performance metrics matters

Payroll is always changing. New staff, departing employees, evolving expenses, tax complications… These are just a fraction of the elements and variables that influence payroll and its effectiveness. Dominated by numbers and data, payroll’s performance and success can be objectively determined by looking at metrics. They tell us exactly what is costing more than it should and where we can take action to reduce wasteful expenses and streamline the payroll process. 

Payroll performance metrics allow us to figure out precisely how much running payroll is actually costing the company. It can be easy to ignore the expense of running payroll in itself, focusing instead on wage bills and salaries without paying much attention to the effect these errors and delays can have on the expense column. 

From a typo on a single salary slip, to inaccurate tax contributions, mistakes add up, costing departments time and effort to correct. Often, issues can go unnoticed for months, quietly tipping the balance sheet into the red and leading to heavy losses down the road. For example, a ₤10 tax contribution error, affecting 100 employees over 5 years, would rack up ₤60 000 owed to the HMRC, excluding interest! It’s easy to see why monitoring these performance metrics is so important.

Inefficient payroll is one of the main reasons for employee dissatisfaction, and for good reason. While the chief motivator for most people leaving their jobs relates to unhappiness with management or income, late payments of said income and payslip errors are also big contributors. In fact, The Workforce Institute says that as many as 49% of employees will begin looking for new work after just two incidents of errors on their payslips.

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So what are these metrics, how do we measure them, and what can we do to improve on their performance? Let’s take a look.

5 key payroll metrics worth tracking

Payroll metrics can be divided into two categories:

• Payroll Management Metrics – relating to how effectively the company is managing the payroll process
• Company Strategy Metrics – which tell us how well the company is doing to achieve its strategic objectives.

While there are many other metrics that influence KPIs and guide management of overall payroll performance, here are some of the more critical, key payroll performance metrics that you must consider in measuring how well your payroll is doing.

Payroll management metrics

1. Time to run payroll

This metric gives us information on how much time is spent on running the entire payroll process. From the moment the previous month’s payroll closes, the next cycle begins all over again. Tasks like communications exchanges with outsourced payroll providers, entering payroll data, collecting claims and bonus figures and employee reminders all contribute to time spent on processing payroll. 

HR teams often find themselves feeling trapped repeating the same menial tasks every month, dealing with correcting employee tax issues and errors. Meanwhile, third-party suppliers can take as long as two weeks to run their payroll for you. Long payroll cycles drain morale, lead to more errors and cost money, all of which can be avoided by slashing the time it takes to complete the payroll cycle. 

• What this metric tells us: Where time is being wasted on mundane or unnecessary tasks instead of focussing on more important and productive activities

• How to track this metric: Request that payroll administrators log and send information relating to total time spent on each payroll task. Tools like Toggle Track are excellent for this.

2. Cost of payroll

The real cost of taking care of payroll often goes unnoticed. The cost of payroll doesn’t only refer to the salaries of the people administering the payroll. It includes the total monetary cost of all payroll errors, the overtime paid out for dealing with delays, and the losses in human capital for staff leaving the company out of frustration for a process that keeps getting things wrong. 

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The labour cost of payroll includes the wages of everyone involved in the payroll process, including the staff who complete spreadsheets and send paychecks, IT support, payroll managers, and outsourced personnel.

• What this metric tells us: How much money is spent on running payroll and what can be done to refine the process and save time, effort and cash. 

• How to track this metric: Identify and add up the total cost of running payroll over a specified period. Alternatively, take the total payroll expenses and divide it by the number of payroll employees. 

3. Number of payroll mistakes

It’s no secret. Mistakes cost a lot of money. But they’re inevitable, especially when it comes to payroll, so the only real solution is to work to minimise them. Mistakes in payroll can range from a single incorrectly recorded number in an Excel cell, to neglecting to pay an employee. 

Managing payroll mistakes can be a tricky task, especially where the requirements are more complex. Larger companies with many employees will inevitably mean more errors. But this metric isn’t interested in how many mistakes in total are made, it looks at the rate of mistakes per employee, per pay period. In other words, a company’s payroll accuracy rate.

• What this metric tells us: How accurate and efficient your current payroll process is. Too many mistakes mean lost income, higher employee turnover, and more time committed to avoidable tasks.

• How to track this metric: Divide the number of payroll runs that include errors, by the total number of payroll runs. This gives you your ‘payroll accuracy rate.’

Company strategy metrics

4. Labour expense as a percentage of total revenue

Okay, so this is arguably the most important metric here – for most people at least. Determining how much your company spends on ongoing labour costs, such as salaries, benefits, and overtime, compared to your total revenue. This tells you a lot about how efficiently your business operates in its current team setup.

• What this metric tells us: It lets you track revenue changes when you hire new employees or give your team a rise. For instance, if you hired three new employees but you noticed that your revenue didn’t go up, it calls for further inspection. 

• How to track this metric: Take the entire labour costs (including salaries, benefits, payroll tools and services, etc.) and subtract it from the total revenue. You can also calculate the percentage of labour expenses as compared to your entire company earnings. Aim to monitor this metric regularly (for instance, every quarter).

5. Overtime

Managing overtime costs can be a minefield. As a variable expense that can fluctuate significantly depending on the needs of the company and even time of year, overtime can also be a subjective value that may become an avoidably large expense if not monitored and managed correctly. 

Irrespective of whether problems and mistakes are the fault of the payroll employee, or the third-party payroll provider, more often than not, payroll staff end up having to put in the extra hours to correct problems with payroll. 

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• What this metric tells us: Excessive overtime costs tell us that the payroll process needs to be revised to allow employees to do their work within regular hours. Overtime metrics also guide decisions around staffing needs and workloads. 

• How to track this metric: Establish overtime totals paid out per department or team, and then analyse each one on a cost-need basis.

Tracking payroll metrics effectively

While metrics are constantly changing and fluctuating, the information they give us tells us exactly how efficiently and effectively your existing payroll infrastructure is operating.

Software tools like Pento are designed around improving these key metrics. They streamline and turn your payroll processes into an all-in-one, cloud-based, automated payroll solution that handles your payroll needs. As a result, it lets you keep your most important performance metrics on the right trajectory.

They also immensely improve the time spent on payroll each month. For instance, Forecast now spends as little as three minutes to add new employees, while Good Monday dedicates just ten minutes to payroll each month.

What’s more, AI-driven automation reduces or even eliminates human error, taking the sting out of the cost of lost productivity and expensive mistakes. While paying for software may seem like a pricey solution, sweeter ROI’s resulting from improvements in speed and accuracy always pays for the initial expense itself. 

Summary

Payroll processing is a complex, yet critical function of any business. Due to its time-consuming, potentially expensive nature, it requires constant monitoring and evaluation. Effectively tracking key payroll metrics allows administrators to ensure that the operation doesn’t become a black hole function, sucking up time and money faster than the all-consuming cosmic phenomenon. 

So, pay attention to effectively measuring your payroll performance metrics. They’ll give the information you need to refine those payroll processes and improve efficiency, accuracy, and cost-savings. If you’re looking to improve your key payroll metrics and boost those KPIs, think about switching to an automated, cloud-based software solution, like Pento. After all, if you can’t measure it, you can’t improve it.