Payroll is a critically important process for any business to master.
But payroll metrics are often overlooked.
Beyond being beneficial for measuring performance and identifying inefficient processes, tracking your organisation’s payroll performance metrics can help you establish whether or not you’re compliant with Australia’s complex workplace laws.
And with the Fair Work Commission clamping down on companies who are not compliant, you should be utilising all the tools out there to improve your payroll performance and ensure that you’re not subjected to heavy penalties.
This guide will provide the key payroll metrics that you should be tracking to ensure your payroll processes are running smoothly and that you're meeting all of your payroll responsibilities.
Payroll Metrics: What Are They and What Do They Entail?
Like key performance indicators (KPIs), Payroll metrics can be used to track payroll performance.
They allow you to determine whether you’re on the right payroll path for your organisation and highlight areas that may need improvement.
The main purpose of tracking payroll metrics is to identify inefficient and inaccurate processes. Payroll inaccuracies do more than bleed an organisation of its resources. Coupled with an inefficient process, they can also lead to non-compliance penalties and substantial employee dissatisfaction.
Unfortunately, many businesses don't realise that they're running an inefficient and inaccurate payroll process until it's been brought to their attention.
The result is often costly and severely impacts the business as an employer, especially with Fair Work’s naming and shaming policy.
You can identify potential issues before Fair Work comes knocking by tracking your payroll metrics and undertaking an annual payroll audit.
Key Payroll Performance Metrics Your Organisation Should Be Tracking
The Cost of Your Payroll Process (Including Payroll Software and Wage Costs)
The payroll cost metric allows your organisation to identify the total cost of running your payroll processes.
Most organisations will consider this metric one of their main benchmarking metrics and attempt to keep the cost as inexpensive as possible. However, you cannot analyse payroll costs in isolation of factors such as speed and accuracy.
To analyse the true cost of your payroll process, you need to consider the following factors:
- time spent on payroll processing and enquiries,
- payroll accounting costs, and
- wage costs for staff responsible for interpreting the ever-changing Modern Award pay conditions and inputting timesheet data into the payroll system.
There are two ways you can view this metric: as a percentage of your revenue or the cost per employee.
If you want to see your payroll costs as a percentage of revenue, divide your total payroll expenses by your total revenue.
On the other hand, if you want to know the cost of payroll per employee, take your total payroll expenses and divide it by the number of employees you ran the payroll for.
It may be “cheaper” to manage your payroll manually, but how much is the inefficiency costing your organisation?
Paying to automate the process through cloud payroll software may be an expense that leads to a far better return on investment when reducing payroll processing resources. For example, manual interpretation of Modern Awards and data capturing took five days each fortnightly pay run could now take you hours.
So, when using this metric to identify possible solutions, remember to factor in all considerations to get the best return on your investment. This is known as a cost-benefit analysis.
There’s a common misconception among many employers that overtime is a symbol of hard work. Unfortunately, that couldn’t be further from the truth. Instead, the amount of overtime that your employees are working could be an indicator of inefficiency.
If your staff can’t complete the work during regular office hours, you’re undoubtedly pushing up your operating expenses.
While it’s necessary to ensure that your employees are properly compensated for their overtime work, this metric will help you identify whether your overtime expenses are larger than they need to be.
If that is the case, you likely have an inefficient working environment.
Beyond that, having to spend time manually calculating overtime wages may indicate an inefficient payroll process.
The most efficient way to calculate this metric is to add up the total overtime cost paid out, then analyse payroll cost by departments and teams.
Time Clocked versus Time Worked: Time Theft
Paper timesheets are a significant culprit in payroll inefficiency.
Without even realising it, you could be spending an excessive amount of unnecessary wages due to time theft.
Employee time theft occurs in various forms, with the most common kind arising from buddy punching timesheets, dragging out for late finishes and unauthorised overtime.
Suppose you have six employees that round off their timesheets every other day by 15 minutes, and you pay them $28 per hour. If that’s the case, you’re paying for an extra 90 minutes per shift, amounting to $42 per shift. So you could be losing up to $4,500 each if they do that only twice a week.
If you have multiple shifts a day or even more employees, this number rises significantly.
So to keep on top of this, you would have to compare their actual time worked versus when they were rostered to work. Another metric would be to compare actual time versus the employee’s timesheet to ensure they haven’t rounded up their hours.
This will likely be a time-consuming exercise. So to reduce resources and improve efficiency, you may want to consider opting in for automated time and attendance software as a solution.
Staff Turnover Rate
Another factor that may be driving up your costs and diverting time resources could be excessive staff turnover.
You’re not going to be able to create an efficient work environment if you constantly focus on recruiting and training new employees.
So, it’s important to assess your staff turnover and see if there are solutions to fixing the current problem and preventing it from occurring in the future. A helpful metric for this would be the staff turnover ratio.
The best way to calculate the ratio is to divide the number of employees resigning from the workplace by your organisation’s total number of employees. If you want to reflect it as a percentage, you’ll simply multiply that by 100.
For example, if you’ve had 15 employees leave out of a total number of 165 employees, your staff turnover percentage will be 9.1% [ (15/65) x 100].
Payroll Data: Inaccuracy and Errors
When it comes to your payroll performance, you need to ensure that you’re doing it as accurately as possible to ensure 100% compliance.
An accurate payroll process means manually interpreting Modern Award pay conditions and cross-checking attendance against rostered shifts. Beyond that, payroll staff also need to ensure they’re identifying any possible payroll errors and remedying them immediately to avoid serious consequences.
To measure this payroll metric, you’ll need to run a tally of employee and payroll data errors each pay period and how long it takes to identify and remedy each error.
On average, it takes around 40 hours per month for every 100 employees in many Australian businesses that do not use cloud-based software solutions. That equates to almost 480 hours per year - which could be better spent elsewhere.
This is probably the most important payroll metric because if your payroll process is saturated with errors, none of the other metrics will be reliable or matter.
Cloud payroll software is designed to help with reducing errors and maximising compliance. Not only do they address immediate requirements, but it also helps mitigate risks of legal action or penalties if your payroll actions are not compliant.
Employee Leave Balances: Sick Leave and Annual Leave
According to a 2019 survey, employees take, on average, 11.2 days of unscheduled leave each year. Employee absence is therefore costing Australian businesses around $35 billion in wages and lost productivity.
That’s over $3,000 per employee - which shows you just how important it is to monitor employee absenteeism and leave entitlements.
For example, how often do your employees use sick days? How many vacation days do your employees use over their entitled four weeks?
This data is important to track because it’ll help you make the necessary adjustments to reduce the costs of absenteeism and improve productivity.
Most automated cloud payroll solutions offer built-in leave processes that track leave applications and sick days so that you can pull the data without having to spend a significant amount of time calculating this metric.
The cost of running a payroll cycle, the amount of overtime worked by employees and accuracy errors are just some examples of what can be tracked with specific software tools or manual calculations.
Tracking these metrics will help you identify potential areas where improvements may impact profitability for your company.
With each metric, there was a common cause for most of the inefficiency: manual processes. Beyond helping with remedying the inefficiencies, adopting automated cloud payroll software can help you accurately calculate these metrics without spending too much time gathering the necessary data.
With all your data on a centralised system, calculating your metrics can be done at the click of a button.
Pay Cat has decades of experience helping Australian businesses shift from inefficient payroll performance to a more streamlined digital cloud solution as experts in payroll solutions.
Here’s how cloud payroll works:
- NoahFace Time and Attendance
Employees clock their time using the NoahFace Time and Attendance system that syncs all data with your cloud payroll software.
- Live Timesheet Approval
No more manual entries or paper timesheet approvals. Supervisors and managers approve time and attendance on the go directly on the cloud payroll software.
- Automated Modern Awards Compliance
A collection of “rules” based on Modern Awards are implemented into your cloud payroll software that automatically calculates pay conditions (penalties, allowances, shift work, and more).
- Automated Payslips
Payslips are automatically generated that comply with the Modern Awards.
If you’re interested in moving from a manual payroll system to an automated cloud payroll system, get in touch with us today for a free demo.