Payroll processing is one of the most essential functions of a company, and yet if you ask any multinational how closely it is aligned with its payroll providers—across each and every jurisdiction where the company operates—you’ll probably be met with the sound of crickets.
Traditionally, many companies have relied on an in-house delivery model to service their payroll operations; but as multinational companies continue to expand the size and scope of their operations, many today are using numerous payroll service providers, sourced and managed locally in various parts of the world, each with their own separate systems. Absent any sort of centralized payroll process, most companies have no real sense of whether the payroll systems or vendors they use are as compliant as they need to be.
Human resource and finance departments at corporate headquarters have “no real visibility into how payroll is being processed in any given market,” Mary St. Cyr, a senior consultant with Towers Watson, says. This can also create a lot of costly tax and regulatory implications for the company, she says.
As multinational companies continue to expand into new and emerging markets, those risks increase exponentially, due to the lack of vendor governance, compliance, process standardization, and tax reporting obligations. “With individual local systems, the ability to manage the various relationships as well as bring all that data together into a single view is even more difficult,” says Jon Ziglar, managing director of international solutions at human resource services provider Ceridian.
One of the main drivers for outsourcing payroll is to bring on a vendor, whose core focus is to stay abreast of the various tax reporting and compliance changes globally, taking that compliance obligation off the company itself. Payroll service providers, however, are only as compliant as the company for which it serves. The individuals who are feeding payroll materials to these vendors also need to understand tax reporting laws “to make sure anything they’re doing is not creating a reporting requirement,” says Carolyn Gould, a principal at PwC.
For example, if HR gives an employee a gift card—or some other type of so-called “benefit-in-kind”—payroll can’t report what they don’t know about. “In a lot of countries, that’s a taxable event that needs to get reported in payroll as income that was provided to the employee,” Gould says. “That’s where we’re finding most of the compliance issues.”
Many companies are starting to address this problem by creating a cross-functional compliance group, with responsibility for keeping a master list of all potential benefits-in-kind that employees receive, what the tax reporting rules are, and making sure people know. “It needs to be a responsibility that’s shared across the functions, not any one individual,” Gould says. “This helps ensure that everyone understands the total scope of what is being provided to employees.”
Global Payroll Model
Advances in technology are also helping companies streamline their payroll operations. That’s where a global payroll model comes into play—a centralized tool delivered by a payroll vendor that consolidates disparate payroll operations for multiple countries by using a standardized system of record. Such a model helps companies deliver payroll services in a timely manner and in compliance with local rules and regulations.
The widespread adoption of a global payroll model is “still in its nascent stages,” St. Cyr says. “Very few employers are using it to its full potential.”
“Visibility is often times the key benefit realized by moving to a global solution from a local or in-house solution.”
Jon Ziglar, Managing Director of International Solutions, Ceridian
Over the last two years, however, that’s quickly started to change. “The globalization of human capital management solutions overall is an area that is growing leaps and bounds,” Ziglar says. Large companies looking to expand their global footprint, in particular, increasingly are looking to adopt a global solution over that of formerly localized solutions, he says.
The main driver for moving toward a global payroll model is to achieve the same level of functionality and controls across all their markets. “Visibility is often times the key benefit realized by moving to a global solution from a local or in-house solution,” Ziglar adds.
New payroll vendors and services are cropping up every day, so it’s important for the company to first determine its own needs before choosing what type of payroll service to implement. Some smaller companies, for example, may prefer to keep a lot of their payroll in-house, and only use a vendor to help make their HR department more efficient, while a large company with a high employee count in multiple countries will require a vendor with a “very deep and sophisticated technology platform,” Ziglar says, one that can provide enhanced reporting and analytics, automated processes, and a standardized delivery model.
Where Do I Start?
Jon Ziglar, managing director of international solutions for Ceridian, offers some helpful tips on how companies can start the process when moving toward a global payroll system:
Gain executive approval. Global change needs top-down support; bottom-up can paralyze a global project.
Establish the baseline. Understand what unique solutions exist in each country.
Understand your processes. Do you have unique processes and rules in each market? Where are the similarities? Where can you standardize?
Determine technology strategy. Understand what technology exists, and how/if it should be leveraged.
Select a partner. Select a partner that can deliver the right solution and can evolve with your organization over time.
The company also should have a firm grasp on where it can, or needs to, standardize its payroll processes. “There is often a large change management component to any global project, often larger than a client anticipates,” Ziglar says.
A centralized payroll processing system could also help companies on a coming difficult compliance requirement: the pay-ratio rule. The Securities and Exchange Commission is currently working on a requirement that all public companies would have to report the ratio of the compensation of their CEOs to the median compensation of their employees. A global payroll processing system would give companies a leg up on the calculation, which some have argued will be extremely difficult to put together from many systems.
It’s also advisable that the company goes out and speaks with a lot of potential vendors, advises Ziglar. Explain to them your current payroll model operations and challenges, “and then see how they’ll partner with you to solve those problems,” he says.
Also consider how much flexibility and scalability the vendor has to grow with the company over time to support evolving HR needs. Whatever system a company uses, “it needs to be able to manage 100 percent of data required for payroll,” Ziglar says. “Many vendors claim to enable global payroll, but their platforms are built for higher level HR functions like talent, not the more complex transactional aspects of HR such as payroll and time, which incorporate complex market specific labor rules, taxing authorities and entitlements to name a few. Without supporting 100% of the data required for pay, manual processes, and therefore opportunity for errors and poor reporting, persist.”
Another consideration is the company’s technology strategy, Ziglar says. “Do you have a global deployment of an ERP system that’s so engrained in what you’ve got going already that you know you need to keep that and build on that? That will many times inform the ultimate decision.”
Once a vendor has been selected, and the company is reading to make the leap to a global payroll model, be prepared to suffer some battle wounds. An effort of this magnitude requires buy-in both from senior executives and the in-country managers responsible for payroll. Some managers won’t want to move off the existing payroll system, because it’s working just fine, or they don’t want the head office to have the level of visibility a global solution provides."
The resistance that comes from the regional level “often can stall or kill a [global payroll] initiative,” Ziglar says. So getting the entire company on board will go a long way toward smoothing the process for implementing a seamless global payroll model.