Understanding the Basics of Payroll, Compensation and Employee Benefits

Understanding the Basics of Payroll, Compensation and Employee Benefits

Payroll, Compensation and Employee Benefits are among the foundational building blocks within an organization to support your human resources - the people that work for you.  Effective and efficient management of those functional areas can be significantly improved, or compromised, depending upon the company’s level of understanding of those functions. Your use of reliable data from those areas is key to supporting informed decisions and becoming a world class organization.

 

Payroll

The Payroll department, their role and use of their resources to support the payment of your employees for their services, has evolved significantly over the years. The old archaic methods of processing payroll using the manual one-write system and hand-written cheques have all but disappeared in favour of automated and computerized payroll processing solutions. Payroll will continue to be among the largest expenses within an organization.   It is also one of the most scrutinized areas of the business.

 

Function of Payroll in organizations:

  • Pay employees on time and accurately.
  • Send government agencies their share of employee and employer portions of timely remittances such as taxes, government pension and employment insurance premiums.
  • Work closely alongside the accounting department to ensure funds are in the accounts to support those payments.  

 

Who does the Payroll?

Payroll encompasses many tasks and accountabilities that most employees and the organization’s management may take for granted.   It’s a highly-detailed process that doesn’t just happen without the meticulous and tedious work by the Payroll Administrator. 

 

Role of the Payroll Administrator:

Their tasks include managing salaried and hourly wage amounts, overtime calculations and all of the various earnings and payroll deduction elements.  Ensure payments are made using direct deposit to the correct employee accounts, or creating cheques in some circumstances with precise timing.

What is necessary for smooth processing of Payroll in organizations?

Accuracy of all data and timely access to information is crucial to meet regulatory and compliance reporting which Payroll is also responsible for. Missing or inaccurate payments by Payroll to any of their internal or external “customers” has consequences. Access to reliable and accurate data to support accurate payroll processing and payments is critical within your business operations to avoid missed or incorrect payments. Payroll data impacts Compensation and Benefits of employees which is why it is so important to get it right.

 

Compensation

Compensation is another key area of your business which is closely dependent upon Payroll and Employee Benefits.  People sometimes think isn’t Compensation just another word for Payroll?  Well, not exactly. There are many monetary and budgetary elements that are involved with compensation planning and processing to reward employees for their hard work and service.

 

So what does compensation department really do?

  • It does compensation planning
  • It makes decision about employee pay increases
  • It creates rules for giving out additional incentives based on meeting of criteria

 

What does compensation planning involve?

Compensation planning involves finalizing criteria on which employee compensation, benefits, bonuses, pay increases and incentives will be based on. Compensations are usually based on the size of the organization, the nature and ongoing success of the business and the extent to which they may offer additional financial incentives to attract and retain their talented employees. Compensation planning, analysis and the decisions to support it involves proactive preparation that may include participation of various stakeholders among multiple departments.

Employee pay increases are based on cost of living adjustments, merit awards or performance-based reasons.  

Employee bonus decisions are also part of pay increases and are usually made after the budgeting process surrounding their calculation. Approval of bonuses is typically a multi-step and collaborative process before payments are finally issued.

Additional Incentives: Compensation can also include additional incentives such as profit sharing, or new employee referrals. Here are some more examples of incentives that are decided in compensation planning:

  • Allowances to help cover costs such as personal vehicle use, work clothing or safety-related equipment.
  • Allowances to bridge additional costs for living and working in remote areas.  
  • Sales people within an organization typically earn a large portion of their income through a commission-based program. This form of compensation may be straightforward based on simple percentages, or may be a highly-complex formula with a variety of dependencies.
  • Earnings above a base salary can be based on both the individual and company based performance over certain time periods.

 

Compensation, and its supporting processes, take on extended forms such as the review and approval for the reimbursement of certain expenses that an employee incurs while on the job.  These may include expenses for work-related travel and accommodation, or tuition reimbursement for taking approved training courses, for example

 

What makes compensation successful?

The dependencies upon having access to reliable and timely data to make strategic decisions are crucial within this key area of your business.

 

Employee Benefits

 

What are Employee benefits?

Employee benefits are actually a form of insurance to offset costs for health-related care and support for a company’s employees.  Benefit insurance companies provide benefit plans to organizations for a negotiated fee. These fees, or premiums, are based on the number of employees, the scope of their coverage for benefits and the history of the employees’ benefit usage within the program. More commonly, the costs are often shared between the employee and employer depending upon the organization’s choices to provide employee benefits to their workforce as part of their overall compensation package. The overall cost of these plans – traditional or complex, will vary and may be paid for entirely by the employer.

 

What kind of employee benefits organizations provide?

Employers usually provide some kind of benefits from the following three types:

  • Traditional benefits: Many organizations provide a traditional benefit plan to help cover the employee’s expenses for basic health-related and dental costs, vision exams and eye wear, in addition to some level of disability coverage and group life insurance.  
  • Complex Benefits programs: More elaborate benefit programs may be crafted and offered to employees that may include Health Spending Accounts, coverage for prescription drugs or travel health insurance.  
  • Employees taking paid time off: This is provided in the form of paid vacation where employees may take a specific number of days or weeks off work each year.  The paid time off may be determined by a number of factors such as the regulatory minimums for paid vacation, the employee’s length of service, or the employee’s position in the company for example. Paid time off for illness and various types of paid leaves of absence may also be included in the employee’s benefit package as part of their total compensation program.

 

How are employee benefits administered?

Managing the employee eligibility and enrollment, the costs for these benefits and submitting regular payments to the benefit insurance companies, is an administrative task that relies on accuracy and attention to detail.  The method of administration for these benefits varies among organizations, with some companies relying heavily upon their internal payroll and accounting systems to support the program.  Others may outsource a portion or all of their benefit programs to 3rd party benefits administrators.

Regardless of the process and resources used to administer the benefits program, there is some level of administration typically required at the employee level. Payroll is closely tied to benefits administration, particularly among those benefit items where earnings and deductions need to be accurately calculated, captured and reflected on the employee’s pay statements.

 

Data: Connecting Payroll, Compensation and Benefits Information

Payroll, Compensation and Employee Benefits – each of these functional areas are closely associated with each other and are reliant upon the access to and use of accurate data to effectively sustain these critical processes within your business. .  The accuracy and reliability of your data used and shared among these key processes is critical to ensure employees are paid accurately and on time, additional compensation is accurately budgeted for, and employee benefits are cost effective for your organization.

Depending upon the nature of the business and its complexities, this data which payroll, compensation and employee benefits relies upon may be fed from multiple sources. These sources often include other systems and databases, hard copy data files and data from among various functional units provided within your business.

Within smaller organizations, each of these areas of responsibility may fall under payroll. Among larger and perhaps more complex organizations, these three functional areas – payroll, compensation and employee benefits, may be managed by different people, departments and multiple systems altogether.  These areas or departments may interactively communicate and effectively utilize their data to support the organization’s decision making activities.

 

What mismanagement of Payroll, Compensation and Benefits data looks like? 

 

Any payroll administrator will tell you there are strong dependencies on accurate data to pay employees, analyze and plan compensation and provide your employees with health benefits. However, due to the multiple sources from where data originates and inefficient business processes in organization, there are many areas for error that result in inaccurate information. Some of the reasons for this are:

 

  • Payroll may input data into an off-the-shelf payroll system or accounting package. 
  • Payroll may also receive data contained within spreadsheets or time capture systems.
  • Hard copy sources of data may also be routinely input and included within the pay period processing and payment to your employees.
  • Existing compensation-related data may be sourced and analyzed from a variety of internal systems, including payroll, your accounting system, operations or your human resources information system (HRIS).  
  • Spreadsheets are often used as the middle-ware tool to aggregate the data for analysis and compensation planning for within programs described earlier.
  • Employee benefits data is often contained within a variety of sources and means of storage. This ranges from hard copy enrollment forms, to reports from benefits insurance companies, and earnings and deduction elements within your payroll system.  
  • Spreadsheets and other electronic documents may contain additional data used in the administrative tasks to support your benefits program in terms of eligibility, enrollment, life event changes and the payment of the program’s costs.

 

In many organizations there are several types of systems, data storage methods (both manual and electronic), and most often a redundancy of same-data input among multiple systems that is the cause of poor HR information. 

 

What is the quality and reliability of your organization’s data?

Quality or the integrity of data, in simple cut-and-dried terms, is often described as either ‘bad’ data or ‘good’ data.

Bad data – What is bad data and how is it represented?

Examples of bad data includes that which is inaccurate, unreliable, or outdated

  • Inaccurate data may be attributed to calculations which were not configured correctly in the first place.
  • Bad data also includes that which was incorrectly keyed into a system or spreadsheet.  
  • Unreliable data may originate from a database which is perhaps behind on its maintenance, may be corrupt, or may have been fed from another source of information with keying errors.  Data that is missing, misspelled, contains inconsistent formatting, or comes from an unreliable source will always be suspect
  • Outdated data may result from simply not receiving up-to-date information from other departments or individuals due to weaknesses in your data collection process or gaps within your workflow activities.

 

What are the consequences and negative impacts of using bad data? 

Consequences of bad data used in your organization include:

  • Inaccurate payroll – missed or incorrect payments
  • Compliance and regulatory challenges – audits resulting in penalties and fines
  • Business risks – increased expenses through benefit overpayments and oversights
  • Lost opportunities – unreliable data to analyze compensation for making strategic decisions
  • Security of corporate information - loss or corruption of business-related and employee data
  • Low morale – impacting management and employees tasked with supporting these processes

 

Good Data

On the other hand, some terms to describe the ‘good’ characteristics of quality data may include accurate, reliable, consistent, timely and secure.

  • Accurate and reliable data is that type of information which you have every confidence is correct.  
  • Good data is consistent and properly formatted to be efficiently used within your internal systems and confidently presented within compelling management reports.
  • Good data is up-to-date, without having to question when the information was last recorded or verified.
  • Good data is accessible and available on a timely basis to the resources that need the information for processing, reporting and analysis.

 

What are the overall advantages of using and maintaining good data?

Good data gives an organization following advantages:

  • Confidence in its accuracy for processing of payroll, compensation and employee benefits
  • Fewer resource requirements to manually verify and recheck data for accuracy
  • Greater efficiencies within your compensation analysis, planning and budgeting
  • Presentation of real-time, accurate and consistent data within management reports
  • Integration and data exchange opportunities with your other business solutions
  • Increased business opportunities leveraging the use of reliable data to support decisions

 

What’s the Solution?

Building upon the basics of payroll, compensation and employee benefits, and discussing the effects of using ‘good’ or ‘bad’ data to manage those processes, what are you using to support those processes in your organization?   What’s the solution?

 

To achieve efficiencies within their payroll and human resources operations, many organizations have implemented Human Capital Management (HCM) solution.  This is a computerized system which may support virtually every aspect of the organization’s human resources and payroll functions. Many of these business solutions have been designed to unify all of the key processes described earlier and also well beyond payroll, compensation and employee benefits.  Through the use of a unified and closely-integrated solution, organizations are able to leverage the high quality and integrity of the supporting data managed within these solutions for efficient, reliable data processing and reporting.


HR & Payroll systems can make or break your business! 

In this ebook find out how your organization is impacted by HR systems and the differences between HR professionals using software tools to help them versus those who still rely on manual processes.

A better way

 

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