Payroll complexity remains a major challenge for multinationalÂ companies expanding into new international markets.
By Marta Chmielowicz
Payroll today is about much more than just payingÂ employees. It is about ensuring that their personal dataÂ remains secure while navigating ever-shifting legislationÂ and privacy regulations, unstandardized solutions,Â changes in workforce structures, and rapidly advancingÂ technologies. And when international operations areÂ added into the mix, the complexity of payroll can seemÂ even more overwhelming. In fact, according to NGAÂ Human Resourcesâ 2017 Global Payroll Complexity Index,Â the only constant in global payroll is constant change.
The report suggests that although payroll processes areÂ most complex in Europe, multinational companies nowÂ have to contend with myriad demands from country laws,Â work councils, and collective bargaining agreementsÂ throughout every aspect of their payroll process,Â including:
- Managing personal employee data. This includesÂ information like employee name, address, age, pay scale,Â tax code, bank account number, employment contractÂ status, and employee population type. The types ofÂ employee populations (such as blue collar, white collar,Â seasonal workers, and students) in a country and theÂ characteristics of each population group both influenceÂ payroll complexity significantly.
- Overseeing payroll-related data. This includes the dataÂ necessary to calculate an employeeâs net payroll amount,Â such as gross salary and additional benefits. Survey resultsÂ show that western European countries, including Belgium,Â France, Italy, and Germany, have a slightly higher numberÂ of parameters needed to calculate net payroll than otherÂ geographies.
- Running payroll calculations and keeping systemsÂ updated. The 2017 report suggests that while countriesÂ now perform payroll updates less frequently than in 2014Â (9.70 versus 12.33 respectively), this varies dramaticallyÂ by region. Overall, Asian and African countries typicallyÂ perform the fewest number of updates per year, whileÂ France and Italy each apply 20 plus annual updates to theirÂ payroll systems and processes.
- Reporting payroll data to government bodies. DependingÂ on the country, payroll declaration procedures varyÂ in frequency, number of data items, dependency onÂ government data, types of required payroll reports, andÂ more. Survey results indicate that Italy and France faceÂ the highest level of complexity related to governmentÂ reporting, with Canada facing the lowest.
While the study results show a general trend toward simplification in some of these areas from 2014 toÂ 2017, managing multi-country payroll correctly andÂ efficiently continues to require a detailed awarenessÂ of local payroll nuances and their associated risks. AndÂ with EYâs 2017 Global Payroll Survey suggesting thatÂ 55 percent of organizations are planning to expandÂ business operations globally in 2017 compared to only 35Â percent in 2013, organizations must learn how to contendÂ with these complexities and adapt to each countryâsÂ specific regulations with solutions that are scalable andÂ sustainable.
âDeveloping a global payroll strategy that will direct theÂ organization toward a solution that will fit their needsÂ today but also scale and fit the needs for the futureâand being able to execute that strategy effectivelyâisÂ often the biggest challenge to successful global payrollÂ realization,â says Pete A. Tiliakos, principal analyst of HROÂ at NelsonHall.
Choosing a Payroll Strategy
When developing a global payroll strategy, TiliakosÂ says that there is no one-size-fits-all approach. Instead,Â companies need to evaluate whether they should adoptÂ a standardized global payroll process or a localizedÂ approach handled through country-specific providers.Â There are a number of factors that help determine theÂ best strategy for sustained growth and compliance. TheseÂ considerations include:
- Risk. âAny payroll project, particularly a global one,Â comes with inherent riskâplanning and mitigation plansÂ are critical to success,â Tiliakos explains. âAdditionally,Â understanding the payroll risk profile (level of complexity)Â for the country being targeted will play a factor in theÂ strategic direction taken (e.g. insource versus outsource).â
To mitigate this risk, Ashok Bildikar, chairman andÂ managing director of Neeyamo, says that organizationsÂ must become aware of all compliance requirementsÂ in each region. Assigning a compliance officer that isÂ responsible for monitoring and managing all compliance-relatedÂ issues is key. âThe compliance manager isÂ accountable for sharing and communicating inputsÂ gathered from consultants, auditors, legal support, andÂ payroll providers on changes in rules among countriesÂ where they exist and among those that they plan toÂ venture into. Further, they will advise and govern inclusionÂ of these rules in contracts that are signed between theÂ organization and its payroll supplier,â he explains.
- Business strategy. Selecting a payroll strategy requiresÂ a significant understanding of the short- and long-termÂ goals of the business as well as itsÂ budget and level of commitment toÂ international expansion. According toÂ ADPâs Vice President for Global PayrollÂ Strategy for Multinational CorporationsÂ Ian Sparrow, âDetermining a strategyÂ for payroll should be based on mid- toÂ longer-term HR and strategic goals.Â There is a big difference between gettingÂ first employees paid and ramping upÂ for significant employee growth whereÂ process and tools become paramount.â
The best-fit payroll delivery solutionÂ depends heavily on the type of expansionÂ a company would like to execute.Â For example, opening a new officeÂ headquarters in one country brings aÂ different set of payroll requirementsÂ than simply placing a few temporaryÂ employees in a small satellite office.Â To ensure success, Tiliakos says thatÂ organizations need to place the goals ofÂ the growth initiative at the forefront ofÂ their decision-making process and alignÂ their payroll approach to best supportÂ that strategy.
The timing of the expansion is anotherÂ key consideration for HR professionalsÂ looking to establish a long-term,Â multinational payroll strategy. AÂ companyâs timeline for expansion canÂ vary widely from project to project,Â and is important in determining how toÂ handle the approach.
- Payroll delivery model maturity.Â Another important element that HRÂ professionals must evaluate as part ofÂ their payroll planning process is theÂ current state of their organizationâsÂ payroll delivery model in conjunctionÂ with the scale of the planned expansion.Â For example, a company that is justÂ opening its first representative office inÂ a new country may find that outsourcingÂ to a local provider that offers solutionsÂ that can integrate with those in theÂ home country is sufficient. However,Â companies that already have a strong,Â large-scale international presence would likely choose toÂ simply scale their existing payroll process.
âIf the organization has a mature delivery model of eitherÂ shared service centers globally or strategic outsourcingÂ arrangements (or a mix of both), then plugging in toÂ these mature models and extending them to includeÂ the country requiring service only makes sense,â saysÂ Tiliakos. âHowever, in the case where a long-term payrollÂ support arrangement is needed and the existing deliveryÂ model lacks maturity (e.g. outdated or disparate systems,Â decentralized payroll processes, etc.) or scale to supportÂ the new country, exploring a global payroll solution withÂ an outsourcing provider is likely the best approach.â
There are pros and cons to each of these approaches.Â According to Bildikar, companies that choose a localizedÂ approach eliminate the risk of cultural and linguisticÂ barriers and non-compliance with local regulations,Â but they also decrease their ability to scale for furtherÂ expansion. The lack of integration across global systemsÂ can negatively impact payroll reporting and visibility.Â âOrganizations with a need to ensure global complianceÂ across countries will face difficulties in consolidatingÂ inputs across local systems and satisfying reportingÂ requirements,â he says.
Adopting a standardized global payroll delivery solutionÂ can simplify vendor management, improve the easeÂ of scalability and access to data, and make the userÂ experience more consistent and positive. âWith moreÂ young and mobile assignees working in multi-locations,Â employees expect a common HR process and approach,âÂ explains Sparrow. âLocal solutions of course have meritÂ for local organizationsâwhere they work and actÂ autonomously from other affiliate companies and shareÂ no common process, tools, or reporting. But often, clientsÂ operating in multiple countries with local independentÂ provision still look for a more centralized reportingÂ structure to help with overall business analytics.â
Once organizations determine the best payroll strategy toÂ support their international expansion plans, the followingÂ three best practices can be implemented for optimalÂ results:
1. Standardize earning structures. According to NeeyamoâsÂ Bildikar, standardizing compensation structures acrossÂ global locations can benefit organizations with a multi-countryÂ presence by improving the ease of expansion intoÂ a new geography. âThis will further contribute to having aÂ standard compensation model across countries with a fewÂ minor exemptions to warrant adherence to complianceÂ norms and regulations,â he explains. âWhile this is aÂ highly recommended payroll strategy, companies that findÂ revamping their existing structure a challenge can chooseÂ to design a standard earnings structure and implement itÂ for the countries that they expand thereafter.â
2. Embrace technology. By leveraging todayâs technology,Â organizations can help payroll advance from a dataÂ processing function to a valuable reporting resourceÂ while supporting the standardization of the employeeÂ experience. âIn our experience both in HR and in payroll,Â depending on the scope of the engagement, 70 percentÂ of the activities can be standardized and fully centralizedÂ while the remaining 30 percent may need to be localizedÂ and partially centralized. Technology remains the keyÂ toward creating a centralized interface with the capabilityÂ to accommodate multiple languages and time zones andÂ support standardization and centralization,â says Bildikar.
By leveraging a platform that uses robotic processÂ automation, EY estimates that 65 percent of HR processes,Â including payroll, can be automated with as much asÂ 65 percent cost savings. By handling repetitive tasks,Â technology can save time that HR professionals can betterÂ spend by focusing on payroll processing and data integrity.
3. Make sure the solution is flexible. Regional variationsÂ call for flexibility. âIt is important that the solution can beÂ flexible enough to operate, can integrate cost effectively,Â and can bring services that support clients and are relevantÂ to their individual country needs,â says ADPâs Sparrow.Â âThis may include adding more HR admin/personnel typeÂ services, particularly where there is limited local companyÂ infrastructure for HR and payroll related activities andÂ limited resources available.â
Focusing on scalability and standardization, consistencyÂ of experience, and visibility into key data points will helpÂ HR professionals conquer the compliance and regulatoryÂ challenges that accompany international payroll. ForÂ organizations aspiring to elevate their business to a globalÂ level, having a robust payroll process is fundamental.
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