Key Performance Indicators Improve Payroll Analysis, Processes

Key performance indicators help payroll professionals analyze data, meet objectives, and improve processes, two payroll experts said June 22.

KPIs are quantifiable indicators of progress toward an intended result, said James Medlock, payroll compliance educator at Medlock and Associates.

“Improving processes starts with four steps,” he said during PayrollOrg’s 2023 Virtual Congress. “Measuring the process, identifying what improvements we can put in place, reviewing on a periodic basis the status of those processes, and adapting the processes for enhancement.”

Payroll professionals should develop a KPI dashboard to track KPIs and measure progress, said Mark Thorton, payroll tax supervisor at Southern Company. Dashboards can be made using Microsoft Excel or other similar software programs.

“A KPI dashboard really provides a powerful visualization of the progress that we make toward different thresholds or targets that we may have,” he said. “Successful dashboards will provide the key data that is required by our audience.”

Payroll professionals should follow a four-step process when making dashboards, he added. They must identify its purpose, set expectations for its use, audit and organize the data that will be inputted, and then determine how the dashboard will display and visualize the data.

Once created, KPI dashboards can assist payroll professionals and teams by tracking errors and calculating an accuracy rate, Medlock said. An accuracy rate is calculated by dividing the number of payroll transaction errors in a certain time period by the total number of transactions occurring during that same time.

For example, assume a payroll office is calculating its accuracy rate on payments for a pay period, he said. During the pay period, the office made 654 payments, 11 of which contained errors. This would result in a 98.3% accuracy rate.

By using KPI to track the types of errors made, payroll professionals can also identify failings in their current processes and modify them accordingly, he added. Two common types of potential errors worth tracking include off-cycle payments and tax notices.

Off-Cycle Payments

Off-cycle payments are payments that are not made on an employer’s regular pay cycle, Thorton said. An off-cycle payment caused by a payroll miscalculation might require the employer to made an additional payment to an employee using the employee’s normal payment method.

However, if an off-cycle payment is not required, many employers prefer to make the correction on the employee’s next regular payday, he added.

“We want to track all the data associated with these off-cycle payments so we can identify areas for improvement,” he said. “To get an overall picture of our resolution of paycheck errors, we want to track the payments we make outside our normal payroll cycle, as well as the time it takes to resolve the issue.”

Using KPIs to track off-cycle payments can help payroll professionals identify the causes of the payments that need to be addressed, he said.

“By tracking the reason for the additional payment, we can identify issues for further research in a root-cause analysis,” he said. “This analysis will be particularly helpful when it comes to resolving issues that lead to these errors in the first place. Ideally, we’d like to see the number of off-cycle payments staying pretty low or decreasing over time. If we see that number increasing over time, that’s not a trend that we’re going to be happy with.”

Tax Notices

Another KPI for payroll professionals is minimizing tax notices, Medlock said. A decrease in tax notices can indicate that payroll professionals are accurately and timely withholding, depositing, and reporting taxes.

Additionally, minimizing tax notices prevents tax penalties, he said.

“Reporting the withheld taxes and the taxable wages again vary depending on each jurisdiction’s rules,” he said. “While some may only have a quarterly reporting, others may only have annual reporting. Each jurisdiction has their own rules and because of these jurisdictional rules, we have to be careful to avoid penalties by complying with all of them.”

Employers that receive tax notices should respond to them immediately, make any necessary payments, and explain why penalties should not be assessed, he said. At the same time, payroll professionals should track the date notices were received, the issuing agencies, the periods of time covered by the notices, the issue of each notice, and the amount of the potential penalty.

“This will help us identify potential issues on how we’re handling the withheld taxes from the employee’s pay and the depositing or reporting of those taxes,” he said.