Payroll Management: challenges and best practices
Discover how EPM can become your ally in effectively managing payroll costs and maximizing your organization’s performance.
In the complex landscape of Enterprise Performance Management (EPM), effective payroll management is a key component of a company’s overall strategy. Payroll costs often represent the largest financial investment for an organization, and their impact on profitability, productivity, and company culture is undeniable.
In this article, we explore the challenges companies face in managing payroll costs, the best practices for effective management, as well as the tools and strategies that help maximize organizational performance while ensuring efficient human resources management.
Payroll management at a glance
Optimize performance with a global view
Payroll management requires a comprehensive overview of all HR-related expenses in order to adjust costs and maximize company efficiency.
Automation and accuracy through EPM tools
Integrating HR cost management software not only centralizes data but also ensures accurate planning and efficient monitoring of payroll expenses.
Strategic agility in workforce management
Smart payroll management enables companies to balance profitability and competitiveness in the labor market while adapting to the challenges of each business environment.
Payroll management: what is it?
Managing an organization’s payroll is a component of performance management.
Payroll represents a critical indicator for both company management and strategy. It includes the total gross salaries and bonuses allocated to employees, as well as employer social contributions and benefits in kind. This cumulative amount plays a major role in company management by helping assess the financial impact of human resources on operational performance.
Efficient payroll management and the ability to forecast it are essential because personnel costs account for a significant share of a company’s operating expenses, directly impacting profitability and long-term growth capacity.
How can payroll management be implemented?
To effectively manage payroll costs, companies need a precise view of their actual expenses, both to comply with legal financial obligations and to create reliable forecasts. However, gathering all the required information is not always straightforward.
HR costs are multiple and scattered across different files and software solutions. Some costs come directly from payroll and are easy to identify, while others originate from invoices. Examples include:
- Payroll items not paid monthly, such as 13th-month salaries, bonuses, or vacation premiums, which must be provisioned monthly
- Costs related to health insurance and supplementary pension schemes
- Benefits in kind such as company cars, meal vouchers, or parking spaces
- Expatriate benefits such as housing assistance or school fee payments
What specific challenges do international groups face?
International groups operating subsidiaries across several countries face even more complex challenges. There are as many labor legislations as there are countries worldwide, making the global deployment of payroll management and planning software particularly challenging.
1. Social charges
Each country has its own social security and pension systems, which vary in complexity and structure. In France, employer social charges represent a very significant share of personnel expenses. Conversely, in the Middle East, employees do not contribute to pension funds but instead receive an “End of Service” payment when leaving the company, which they may use freely.
This amount must be provisioned monthly throughout the employee’s time with the company, and its calculation depends on complex rules, notably employee seniority, which naturally differ from one country to another.
2. Payroll periods
Payroll cycles also vary between countries. In France, employees are generally paid monthly, whereas in the United States and Canada, employees are often paid every two weeks, which does not align with calendar months.
However, accounting rules require costs to be recorded in the calendar month to which they relate. Companies must therefore determine which portion of these biweekly payroll periods belongs to the current month, the previous month, or the next month.
These differences make payroll management and achieving a complete and accurate overview of costs significantly more complex. This creates the need for centralized data management and the implementation of dedicated algorithms.
How to plan payroll costs?
Once a clear view of actual payroll costs has been established, companies can begin payroll planning.
Payroll planning is a strategic process designed to proactively determine workforce requirements and manage associated costs effectively. It involves forecasting, analyzing, and managing payroll expenses in order to achieve organizational objectives while remaining competitive in the labor market.
Many indicators can support payroll management, including:
- Average cost per FTE
- Revenue per productive employee
- Payroll evolution year-over-year
- Payroll growth rate by job category
- Ratio of temporary contract payroll costs to total payroll by month
- Comparison of overtime and additional hours
Analyses enabled by payroll planning
Steps to manage payroll effectively
1. Conduct a scoping study
Launching a payroll management project first requires a scoping phase. Companies must clearly define their challenges and objectives.
For example, poor visibility into actual payroll costs makes it difficult to produce reliable forecasts based on realistic assumptions.
A scoping study generally includes three steps:
- Assessment of the current situation, including pain points
- Definition of target objectives
- Drafting comprehensive specifications and proposing a project strategy covering functional scope, technical architecture, planning, and costs
2. Choosing an EPM tool
Selecting an EPM tool is a strategic decision. Every company has specific needs, and certain tools will address them more effectively than others.
The chosen solution should provide robust functionalities for workforce planning, benefits management, and scenario modeling to support informed payroll decisions.
It should also integrate seamlessly with payroll systems and other HR software already used by the organization.
Finally, user-friendly interfaces and the ability to generate customized reports are additional criteria that facilitate adoption and efficient use by HR management teams.
Deploying an EPM tool
Below are three applications enabled by EPM tools that provide effective solutions:
- Implementing an HR cost database — the HR Hub — which stores all personnel costs per employee, calculates monthly provisions, and manages variable personnel costs such as commissions and bonuses
- Payroll planning
- Consolidation of personnel expenses across international groups operating in multiple countries
The HR Hub
For calculating and analyzing actual personnel costs, EPM tools enable the implementation of a comprehensive personnel cost database referred to as the HR Hub.
The HR Hub stores all personnel expenses by employee, cost item, and month. Employee information such as name, seniority, department, or role can be loaded into the HR Hub from the employee master data system, such as payroll software.
The list of cost elements stored in the HR Hub is defined through configuration with HR controlling teams and may vary from one country to another, even if most major cost elements remain common.
Examples include:
- Base salary
- 13th-month salary
- Overtime
- Vacation bonuses
- Annual bonuses
- Commissions and variable compensation
- Social security contributions
- Health insurance
- Life insurance
- Employer contributions to transportation, parking, or meal expenses
- School fees for expatriates’ children
Part of these costs can be loaded directly from payroll systems. The HR Hub therefore interfaces with payroll software across different countries. Another portion of these costs, unavailable in monthly payroll, must be provisioned through accounting.
The HR Hub significantly supports HR controlling teams by calculating these provisions according to predefined rules based on the nature of each cost element. These rules and assumptions can easily be justified during audits.
Another major HR Hub function is the calculation of variable compensation, which generally depends on revenue. Whatever the calculation rule, the EPM tool can manage it. To calculate this variable compensation, sales data must be loaded into the HR Hub at the most detailed level possible, potentially down to receipt line items, while clearly identifying the employee responsible for the sale.
Once sales are loaded, the HR Hub calculates variable compensation and exports it both to accounting systems for monthly provisioning and to payroll software to trigger payment the following month.
The HR Hub therefore loads, calculates, and stores all remuneration components for each employee each month, including payroll elements, provisions for fixed and variable personnel costs, and reversals of previous provisions.
By aggregating all these elements by accounting account and cost center and making them available through dedicated reports, companies can reconcile HR and accounting views of personnel costs a task that can otherwise become a daily challenge for HR controlling teams.
Payroll planning
During budgeting exercises, payroll planning raises a well-known question: at what level of granularity should payroll forecasts be calculated?
Calculating payroll at employee level — the most detailed level — has advantages, especially when all actual costs are available within an HR Hub, as it may simply require budgeting salary increase percentages.
An alternative is planning at “position” level. A position represents a role within a department. For example, a department consisting of one manager, one senior analyst, and two junior analysts includes four positions.
These positions may be occupied by employees, in which case they inherit all associated employee costs. Each employee is therefore linked to a position within the HR Hub.
Planning at position level facilitates comparisons between actual and forecasted costs and helps justify discrepancies more easily.
Budget planning therefore consists of:
- Planning workforce movements such as opening, closing, or transferring positions
- Applying salary increase assumptions to calculate payroll costs by position
It is worth noting that planning variable commissions necessarily depends on sales forecasts. It is therefore useful to interface payroll planning applications with sales planning tools or Excel files used for sales forecasting.
Going further, EPM tools can also prove extremely valuable for sales planning but that is another story.
Workforce consolidation
As mentioned earlier, each country has its own labor legislation and therefore its own list of personnel cost elements.
To obtain a consolidated payroll view, international groups define aggregated cost categories such as fixed salaries, overtime, social contributions, 13th-month salaries, or variable compensation.
Detailed cost elements from each country are then linked within the payroll management application to these aggregated families, ensuring a consistent and consolidated global view.
EPM tools are naturally capable of handling multiple currencies and conversion into consolidation currencies.
Our partners in payroll management
In summary
Deploying an HR EPM tool addresses many of the daily challenges faced by HR controlling teams:
- It provides a complete view of HR costs at employee level, whether fixed or variable, while calculating accounting provisions and variable compensation based on sales
- It calculates workforce numbers and FTEs using common and auditable rules
- It simplifies reconciliation between HR and accounting views of HR costs
- It enables payroll planning by position and helps calculate and justify variances between actual costs and budget forecasts
- It delivers both a consistent consolidated group-level view and a detailed, country-specific view adapted to local requirements