The insight companies can gain from analyzing compensation is now a game-changer.
By Russ Banham
Not only are key payroll trends like globalization, the cloud, and data analytics gaining traction in 2014, they’re all converging in unique ways to bolster the strategic importance of the payroll spend in diverse organizations.
Many payroll providers are mining the unique data produced by their clients’ payroll runs to glean valuable insights into the effectiveness of these organizations’ incentive compensation plans, regional employee productivity, nearshoring and offshoring programs, and even talent management initiatives. This insight fosters better strategic decisions on where to best deploy company resources—labor chief among them.
In the case of global payroll services provider ADP, the rich data sets within payroll have guided the firm’s lauded development of the ADP National Employment Reports. Data scientists at ADP apply algorithms to transactional payroll information aggregated across the client base to make predictions on where the United States economy is headed.
“We initially started cutting this data regionally, and now are looking at employment by small businesses, franchises, and even nationally,” says Don Weinstein, ADP senior vice president of product management at its Roseland, New Jersey headquarters.
The firm’s most recent national snapshot indicates that private-sector employment increased by 139,000 from January to February, on a seasonally adjusted basis.
More Than You’d Think
Obviously, in the right hands, payroll data can be abundantly instructive—a veritable gold mine of information. Panning for this gold in the past was elusive, given the paperbound nature of payroll and the multitude of labor laws across geographies. But once this transactional data was digitized, it opened up a world of possibilities.
These newfound capabilities are apparent especially for large, global organizations. “Payroll providers can tap into a company’s pay data—assuming it is high quality, accurate data—and learn all sorts of things,” says Michael Custers, senior vice president of global marketing in the Atlanta office of NGA Human Resources, a global payroll BPO provider.
According to Custers, payroll accounts for roughly 75 percent of most companies’ total business expenses (just add up wages, payroll taxes, benefits, training, and so on). By comparing overall payroll costs to sales, profits, and other metrics in a particular region or across different job positions, companies can yield ways to generate more revenue per employee—increasing incentive pay where it will provide the biggest bang for the buck. “You can look beyond the transactional data into how your overall reward compensation strategy is actually performing,” Custers explains. “There is a repository of amazing insight here.”
This repository can be the foundation for a company’s talent management goals. By knowing that employees in a certain region are underperforming their peers in another region, even though the incentive compensation is the same across regions, it may indicate a need for more targeted employee training, better managers in a region, or a different rewards program.
“If your payroll process isn’t connected to other performance technology systems, you can’t provide an effective performance-based rewards program,” Custers says. “If the incentives aren’t driving measurable performance, this can have adverse bottom line consequences.”
Like NGA, ADP also is mashing up payroll data with talent management information to produce pay-for-performance calculations for clients. The firm analyzes current payroll data and compares it to past statutory reporting periods to show clients how the mix of compensation is changing, i.e., base pay versus variable pay. These changes can be contrasted with corporate performance in a specific region to indicate whether monetary rewards or non-monetary rewards are more effective in driving profits. “It gets clients really excited when we show them we can do that,” Weinstein says.
CloudPay is similarly mining client payroll data to help clients ascertain the productivity of specific employee groups across different regions of the world. The Salisbury, U.K.-based global payroll services provider compares the wages for a particular job position in, say, Budapest, to the revenue produced by the company in that country. It subjects other regions in which the organization operates to the same tests, and then compares the findings. “This information can guide vital decisions on where the company may want to grow and where it might want to pull back a bit,” says Sheri Sullivan, CloudPay vice president of global business development.
By further slicing and dicing this data for the client, it may discern a need to move skilled employees from one region to the next. It may even determine that particular nearshoring and offshoring labor decisions have run their course, and that more effective means of deploying labor are now required in different countries. “We can even compare the effectiveness of different types of employee benefits, by aggregating and integrating payroll data, benefits data, and performance data for comparison purposes,” Sullivan says. “You could never do that before.”
What other nuggets of information are buried within payroll? A lot, it appears. Since payroll data often contains an employee’s date of birth, ADP has been able to extract compelling findings suggesting that 19 percent of the U.S. workforce is nearing actual retirement age. “We don’t mean the typical statutory age of retirement like 65 or 66 years of age, but the age at which many people actually retire, which is closer to 60,” Weinstein explains.
Perhaps best of all, specialized payroll providers can aggregate all of their clients’ payroll data, and by applying unique algorithms, these data sets glean all sorts of industry-wide performance information. “A provider in a SaaS (Software-as-a-Service) environment can anonymize and amalgamate payroll data across many different companies in a vertical to obtain rich analyses on their overall (labor) costs versus performance,” says Karen Paterson, CEO of global payroll services provider Acrede. “We can then extrapolate from these findings to provide value-added consultative services.”
Clouds Above the Globe
The ability to provide this strategic value depends on the providers’ global breadth, data analytics capabilities, and cloud-based platform. Fortunately, each of these is a trend in payroll services.
Globalization of payroll is made possible by providers working with local client payroll staff and/or shared services operations. Despite differences in language, culture, and regulations across the business, the client is presented a snapshot of total payroll. “By consolidating payroll data and normalizing it, it thus becomes more understandable to the people in charge of global payroll for decision-making purposes,” Paterson explains.
Jon Ziglar, executive vice president and managing director, international, at Ceridian, says the Minneapolis-based global payroll solutions provider has seen a huge increase in demand for single-vendor global payroll services. “While the rest of HCM (human capital management) has been global for years now, payroll—because it is so transactional—was still stuck in the Stone Age,” Ziglar explains. “There were so many fields to fill in to maintain regulatory compliance in each market—all those different labor rules and hours tied to contract in each market—that it stymied globalization efforts. Because you couldn’t see the payroll data, you couldn’t do the analytics.”
As other parts of HR became global, the demand intensified for payroll to follow suit. “Companies wanted the efficiencies of running payroll on a single platform by a single provider taking care of all the integration issues,” says Custers. “The business case for global payroll was never the challenge—it was the complexity involved that was problematical. Companies often struggled and failed to reach the finish line, which is why a trusted third-party advisor is so important in this journey.”
This complexity is gradually being weaned out of the global payroll process. Assuming a provider can digitize disparate payroll data, collect and aggregate this data in the cloud, and then apply big data algorithms to these aggregations, client demands are being addressed.
Weinstein, for instance, says ADP’s global payroll business is one of the fastest growing parts of the firm. Even midsize companies are lining up as clients. “We’ve got many large multinational clients, but are now finding that companies with 50 to 100 employees around the world also have a significant need for our services,” he says.
He cites the example of a client in New England that is hiring a small number of employees in nearly every country in Europe. “They have no idea where to send the payroll taxes, much less whether to withhold the tax,” he says. “Other midsize clients are moving into Canada and Mexico, or spreading their wings overseas, and want to be sure they’re compliant. At the same time, they want to know if they’re driving performance with the right incentive compensation elements. That’s where we come in.”
Despite its promise, payroll data globalization is progressing slowly for many clients, as well as their service providers. “Change doesn’t happen overnight, not when a company says it has 65 separate payroll suppliers and wants to ensure compliance tomorrow,” Sullivan says. “While you can make sure their people are getting paid, it takes time to ensure data quality, eliminate payroll fraud, increase controls to comply with data protection laws, and so on. Once that is done, only then can you gain visibility into the data for decision-making purposes.”
Ziglar agrees the trek from merely paying employees to learning from this data takes time. “The important thing is that companies are beginning to understand that payroll is of critical strategic performance; after all, it’s the number one expense they have,” he says. “By focusing on this cost and how and where it is spent, you can learn all sorts of great things from it. But, it doesn’t truly become strategic until you can get visibility. That wasn’t possible a few years ago. It is now.”
Russ Banham can be reached at www.russbanham.com
The insight companies can gain from analyzing compensation is now a game-changer.