3 Red Flags that could indicate you have a Payroll Problem

Updated: Apr 20



When we think about space missions, we tend to think of rockets taking off from launch pads. We rarely think about the testing and fail-safes that go into giving the mission the highest possible chance of success.


Even after the rocket has been designed, built and taken to the launch site, there’s still a lot to do. They start at T-24hrs and run through checklist after checklist, looking at everything twice via two different checks from two different people.


They do this because the result of a failure is so catastrophic for rockets. However, there’s a lot that we can learn from that practice that would be really beneficial for the safety of our own businesses.


When a rocket fails, it tends to blow up and its payload suffers the same fate. Payroll doesn’t usually do that; in fact, it can be completed with the incorrect results and there’s a good chance that no one will even notice. In some ways, it would be good if the error did cause some dramatic reaction because at least then it would set off some alarm bells.


The problem with payroll is that it usually fails silently. There are occasional exceptions to the rule – for example, if the whole system crashes or falls victim to a ransomware attack – as with the recent UKG issue at the end of 2021. Even then, sometimes the most damaging kind of failure that you can have in any system (and not just payroll) is a silent failure, where it doesn’t complete correctly but looks, to all intents and purposes, as if it did. It’s a ticking time-bomb and when it goes off it might be much worse than had it exploded at the very start.


Fail-safes

I mentioned fail-safes earlier and most of us would have heard the term before but that doesn’t necessarily mean that we fully understand the concept. The idea behind a failsafe is to make sure that, when something fails, the system goes into a safe state. It can then be accessed, allowing the operator to fix whatever failed and then safely restart it. However, payroll doesn’t have a failsafe.


A great example to bring this to life is natural gas. Back in the day, there was no way of telling if there was a natural gas leak, because it didn’t have an odour. That meant you could be gradually overcome by the gas and die, or light a cigarette and blow yourself up, because you didn’t know that gas had leaked into your environment.


That was obviously unacceptable and so, gas providers needed to come up with a solution. They landed on the idea of adding a chemical called mercaptan which gives the gas a smell like rotten eggs. That smell acts as a big red flag, alerting people to the fact that there’s a problem. If they smell that distinctive odour, they know that gas is escaping and they need to take immediate action to avoid a catastrophe.


Payroll needs something similar. So, what’s the mercaptan of payroll? It’s no good waiting until people tell you that you paid them incorrectly, because that’s like waiting until the house blows up. It would be much better for you to smell the gas.


Three Red Flags That Can Indicate Payroll Problems


1. Inconsistent Payrolls

The first red flag that indicates that something’s wrong is when payroll takes too long, or you have inconsistent pay runs. If your payroll team consistently take two days to finish a pay run window and then suddenly it takes three days, this is a clear red flag that something may be wrong. It could indicate operational problems such as timesheets being filled out with the wrong data or manual workarounds being performed incorrectly. It certainly suggests that there’s some issue throughout the whole end-to-end process and not just the execution of the pay run.


2. Too Many Manual Processes

Knowing whether you have too many manual processes begins with knowing exactly what it is that you do. If you’re having to follow a bunch of different manual processes every time you run payroll, it’s going to delay execution and increase the potential for mistakes. One or two manual processes are normal and acceptable. However, if your payroll team is performing 25% of the processes manually, that is an indication that there’s a high chance that something could go wrong.


It can help to bring in someone who’s independent to help you to identify this because the people who are doing the work tend to not even think about those manual processes. They won’t recognise them as being extraordinary because they are so used to them. If you smell that mercaptan for long enough, it might start to seem normal!


3. Inability to Point to Progress

If you can’t look at your payroll process and identify something significant that you’ve adjusted and improved over the past 2 months, that can indicate that you have a problem. It might show that you’re not looking critically at what you’re doing and constantly making improvements to ensure that payroll is as efficient and accurate as possible.


Payroll is like a living organism, that changes all the time.

Because of the above, your payroll team needs to be making changes to stay up to date with it. In fact, it’s a good idea to set a KPI for your payroll employees to report a significant improvement that they’ve made every couple of months.




How to React to the Red Flags


Now that we are aware of some of the red flags that can herald problems, I can provide you with ways to proactively address these warning signs.


1. Inconsistent Payrolls

Of course you can’t react to this red flag if you’re not measuring the length of time it takes you to complete a standard payrun window in the first place. It’s not enough just to determine whether you paid on time.


Any process, payroll included, works within a certain range. What tends to happen is that the process deteriorates over time and, if you’re only looking out for it to suddenly breach a certain threshold, you can miss out on the fact that it’s gradually trending away from it’s mean.


Don’t just wait until you have a mismatch. Look for a departure from the standard and act early so that you can deal with the issue before it becomes a bigger problem. You can also track every aspect of payroll separately because it may be that it’s all consistent except for a single factor, like timesheets. You’ll then know where to focus your efforts to increase your consistency and remove room for error.


Thresholds are good but tracking trends is better. It’s not about exceeding a certain threshold but rather that you’re slowly getting worse over time or that there is huge variability. Consistency equals control, so variability from week to week can be another sign that something’s not quite right.


2. Too Many Manual Processes

This builds on from the last point because these manual processes are often the reason for variable and inconsistent payrolls in the first place. On top of that, anything that’s manual comes with the added risk of human error. The modification may have been overlooked or just not done correctly.


There is also another problem. If someone changes roles or moves on, the person who takes over from them won’t usually do things in the same way. Thorough documentation can help with this but they’ll still be very different people.


That’s why, aside from documentation, your better option is to do what you can to cut down on the number of manual processes. The more you can automate, the more efficient your payroll process will be and with less room for error.


3. Inability to Point to Progress

The goal here isn’t just to fix the problem, although that’s obviously a decent starting point. It’s even better to empower your team to fix their own problems. Build a culture in which people feel responsible for their roles and their function at the company. That way, you’ll start to see ongoing improvements, instead of just waiting for things to break.


Note that in this context, breaking doesn’t have to be something as immediately obvious as a rocket exploding. Instead, it can be that your system has made the really damaging error of underpaying people.


A negative culture is one where staff feel as if they don’t have the ability or the authority to improve processes. In addition, if payroll is understaffed and over-capacity, workers are just under too much pressure to think and act proactively.


Getting Some Help

The challenge of spotting and reacting to these red flags is that most organisations don’t have the staff or the in-house expertise to tackle it effectively. Consider a situation where there is a rodent problem. Most companies don’t have a rat-catcher on staff because they’d just hire a pest control company instead.


This is why specialist companies exist.


Even if you have someone in-house who’s going to lead these projects, they’ll benefit from mentorship from someone who is trained and experienced in the area, and who does nothing but that special task each and every day. It’s counterproductive to just throw someone into the deep end and expect them to get on with it.


It’s much more effective to bring people in from outside the company - and that’s where we can help.



Businesses can email contact@agilexperts.com.au or call 1300 287 213 for free first-step advice on how to ensure your payroll processes can safeguard your payroll compliance. Follow us on Linkedin or sign up here to receive our articles direct to your email inbox.




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