Benefits & Comp 5 min

The Payroll Performance Metrics You Need to Track

April 23, 2020

As management legend Peter Drucker once said, “If you can’t measure it, you can’t improve it.” This philosophy has grown into an essential tenet of business management as leaders everywhere develop key performance indicators (KPIs) and track their results over time. These KPIs work best when they align with specific processes and challenges. Whether you’re with a small business that’s just starting out or a growing business looking to improve, these key payroll performance metrics will help ensure your organization’s payroll process allocates resources correctly while fully supporting your employees.

What are the Most Important Payroll KPIs?

Payroll KPIs are payroll performance measurements that analyze the relative cost of the payroll process while also indicating whether that process is fully accurate. Payroll inaccuracies do more than bleed company resources—they can also lead to tax-related fines and strong employee dissatisfaction.

After shoring up your company’s foundation with an accurate payroll process, payroll KPIs then act as tools to measure payroll performance—a cost-benefit analysis of your company’s compensation-related expenses.

Payroll Performance Metrics: Number of Errors/Accuracy Rate

A payroll admin has to account for a lot of variables to ensure an accurate payroll, including the following:

  • Differences in salary type (salary, hourly, commission, contractor, etc.)
  • Accurate time tracking for hourly compensation
  • Application of different leave categories (PTO, maternity, sick leave, bereavement, etc.)
  • Tax and fee payments at every level (federal, state, county, municipal, etc.)

When it comes to running payroll, perfection matters. The people in charge of payroll need to find every error and correct them as soon as possible to avoid serious consequences. Every other payroll performance KPI depends on the accuracy of your payroll data. Before you can use other KPIs to analyze the full effects of your payroll performance, you need to ensure that your current payroll process is reliable.

How to Measure This Payroll KPI

Keep a running tally of payroll errors per pay period. For a long-term payroll accuracy percentage, divide the number of payroll runs with errors by the total number of payroll runs.

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Payroll Performance Metric: Overtime

When you are sure your hours have been counted correctly, you can then move to the next efficiency indicator in your people-related expenses: overtime. While it’s important to ensure your employees receive compensation for the time they work beyond their official working hours, it’s also important to ensure that poor communication or technology mistakes don’t lead to an inefficient working environment with extra overtime costs on top of everything else.

If you find your employees are consistently posting overtime when you measure payroll performance, this could be an indication that a team or department needs to revisit their personnel needs. Are there performance measures the team can take to be more effective or productive? Or is productivity maxed out, necessitating a new hire?

How to Measure This Payroll KPI

Add up the total overtime cost paid out, then analyze payroll cost by department and team.

Payroll Performance Metric: Time to Run Payroll

Even with the best software tools, it takes hours to work through every step of the payroll process. Measuring how long the payroll process takes lets you know the expenses involved and helps you find new efficiencies.

Here’s a concrete example: one BambooHR customer used to spend an hour every pay period driving to FedEx to mail physical paychecks to her out-of-state employees. She had to edit time logs for her delivery drivers who couldn’t be at the office to punch the physical time clock, and the situation got even more complicated when the time clock got fried in a lightning strike.

She saved many hours when she implemented BambooHR and BambooHR Time Tracking, letting her onsite employees punch in with mobile devices and integrating with her payroll provider.

How to Measure This Payroll KPI

Have those in charge of payroll submit the hours spent for each payroll run, including the time spent reviewing data and fixing payroll errors. Track this measurement to see how seasonal variations such as summer, holiday breaks, and flu seasons affect the time spent processing payroll. If variations lead to a drastic increase in the time to run payroll, it may be worth revisiting your processes for calculating and recording these variations.

Payroll Performance Metric: Cost of Payroll/Cost per Payroll Payment

Completing the measurements for the three meaningful payroll metrics listed above lets you sum up the total monetary cost of payroll errors, overtime paid out, and salaried hours for those preparing payroll. This should also include the cost of any software services you use, whether you handle payroll in-house or outsource it to a professional employer organization.

How to Measure This Payroll KPI

Tracking this metric over time lets you see how payroll expenses correlate with your company size, number of employees, pay schedule, and other employee-related decisions.

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Payroll Performance Metric: Labor Expense as a Percentage of Total Revenue

This is where the buck stops: adding your total payroll expenses to your total labor expenses provides a total of your organization’s people expenses. Many companies use labor expenses as their main payroll benchmarking metrics and attempt to keep them as low as possible. However, it’s important to note the relationship between spending money on payroll performance improvements and the decrease in time and cost to run payroll. Understanding these intricate balances can help prevent small budget-saving measures from leading to large time and cost increases—paying for software may be an expense that leads to a much larger ROI in speed and accuracy.

How to Measure This Payroll KPI

Take the total cost of the payroll process, add the cost of your full compensation package (salary, employer benefit contributions, etc.) Divide this figure by your total revenue to find this percentage.

Mastering these payroll performance metrics gives your organization solid footing for making foundational decisions for your employees. When you have a solid, reliable payroll process in place, payroll professionals can deliver results that keep employees free to focus on their work and leaders free to focus on the future.

Brian Anderson
Copywriter

Brian Anderson is a copywriter with BambooHR, a full-service, cloud-based HR management software. His work explores employee engagement, total rewards, recruitment strategies, and how core HRIS software connects with every aspect of HR.