Companies may lose visibility and control over their existing payroll processes through time, staff attrition and merger and acquisition (M&A) activity. Companies that have centralised regional or global accounts payable (A/P) flows with one or two core banks, but continue to use multiple others to make payroll payments, miss out on the full benefits of consolidation. Treasuries should be looking to consolidate to achieve efficiencies.
It is increasingly vital for businesses to review their payroll and salary payment models to achieve cost savings, and more importantly, control, compliance and risk mitigation in human resources (HR), an area many view as a critical cost centre. Treasurers need to be in the loop to ensure the payroll is funded and processed appropriately and structured to aid efficiency. Market and regulatory changes, such as the adoption of single euro payments area (SEPA), with a 1 February 2014 migration deadline, is another key driver for companies to revisit their salary disbursement processes. A thorough payroll review should encompass internal and external systems as well as vendors, with a view to standardise, centralise or automate existing processes.
Figure 1: The Payroll Ecosystem.
The Payroll Ecosystem
Payroll includes a range of processes, such as gross-to-net calculations, payroll funding, payslip generation, salary payments, tax reporting and more. It doesn’t exist in isolation and often involves various departments outside HR, including external vendors.
The perspectives and needs of the various ecosystem players and stakeholders– such the treasury, HR, any shared service centres (SSCs), business units, third-party providers and of course the employees themselves – must always be taken into consideration if any upgrade and optimisation projects are undertaken.
Key Issues Faced by Multinational Corporations (MNCs)
Salaries and third-party payments such as pension contributions are sensitive by nature – there is little to no tolerance for errors – and complex due to each country having its own local legislation and market practices. For example:
- In the United Arab Emirates, registered companies that are outside the free zone, and even certain free-zone companies, must comply with the Wages Protection System (WPS) regulations.
- In Poland, salaries are standard payments, whereas in Sweden, there is a domestic payments service for salaries (Löner) which is unique to the market and offers features such as payment monitoring, specialised reporting and priority processing.
- In Russia, employers are required to pay taxes on wages no later than the day salary payments are made to employees, whereas in the UK, payroll tax contributions must be paid on specific dates and penalties are imposed for late payments.
With this mix of complexity and sensitivity, many companies in the past have been very cautious to change any aspect of their payroll processing. Even after undergoing M&A some companies continue running multiple processes and systems in parallel to avoid the perceived complexities of consolidating historic payroll set-ups. Indeed, it’s entirely possible that this happens in the same market.
Many MNCs have embarked on centralisation projects, such as moving A/P to a SSC and scaling down the number of bank accounts and bank providers to achieve efficiencies. However, if they keep payroll payments outside of scope, they would miss out the full benefits of consolidation, such as lower overhead costs, increased payment control and higher straight-through-processing (STP) rates, since multiple banks will still need to be used to settle salary disbursements.
Payroll Trends: Centralisation, Outsourcing, Payroll Factories, Collaboration, etc
There have been shifts in corporate needs and strategic direction in the payroll space in recent years. The topic of payroll centralisation is not new, but recently Citi has seen a surge in the number of MNCs seeking to execute this model regionally or globally, many through payroll and HR transformation projects. The decision to centralise is often reviewed in parallel with whether payroll and associated processes should be outsourced or kept in-house, and to what extent. Organisations are exploring other best practices, including a payroll factory approach, hybrid models and requests for collaboration between payroll providers and banks.
Often, companies start with an aim to contract with a single provider for their regional or global payroll processing. In recent years, several regional and global best-in-class payroll outsourcing companies have heavily marketed their ability to reduce and reliably project overhead costs by helping companies rationalise the number of contracts and providers they use for payroll across multiple locations.
For organisations looking to centralise payroll across multiple markets or business units, many are adopting the following best practices:
Figure 2: Payroll Centralisation Best Practice.
- Know your set-up: Review existing processes to assess strengths, weaknesses and how they interrelate.
- Develop a strategy: Explore best practices (insource, outsource, low-cost locations, key objectives) and evaluate solutions, providers and structures.
- Use strong leadership: A steering committee, executive support, subject matter experts and project managers all help during the execution phrase of a payroll optimisation project, as well as external resources if required.
- Manage expectations: Payroll transitions take time, a small headcount in a country does not necessarily mean an easy and quick implementation.
- Get senior buy-in: Broad support and a communication strategy with regular treasury, HR and finance kick-off meetings and updates will be critical.
- Prioritise transitions: A phased approach, for example by country, will facilitate your transition.
- Forge strong links: Your vendor or bank providers are critical as are your treasury, HR, finance and management relationships.
It’s important to bear in mind that there is no ‘one size fits all’ solution; at the end of a payroll project, some companies implement a different model than originally envisaged. There are several cases of multinationals having traded their global payroll centralisation plans for a cluster/regional approach.
Other companies, perhaps due to their decentralised nature or lack of budget for a full-blown transformation project, opt instead to operate a decentralised or local model for payroll processing and salary disbursements, leveraging local vendors and local protocols where available.
Another payroll trend is outsourcing, especially for smaller firms. Managing payroll in-house versus outsourcing it meets different business needs and each approach has its benefits and considerations. Captive payroll may be optimal for strategic functions where operational control is important. Where a superior employee experience is desired, an on-shore or ‘near shore’ in house solution may be most effective. For routine activities that have already been standardised, an outsourced solution can provide further cost savings and more predictable costs.
A mix of different models could provide more resilience and lower risk. There may be a need for a ‘hybrid’ model for payroll/HR, mixing in-house and outsourced solutions to serve different geographies and employee categories.
An increasingly popular solution with MNCs, the Payroll Factory approach leverages technology in the form of a multi-country payroll management software solution to achieve centralisation of certain payroll functions, such as payroll reporting and salary payments, while supporting a decentralised payroll operation model. This is especially relevant for companies who prefer to have payroll processed at a local country or cluster level by in-country teams or vendors.
Collaboration and an Example
I have seen many companies seeking collaboration between their payroll provider and their banking service provider for a smoother process for salary and payroll-related payments – for example, I have seen requests from Citi’s clients to work with their payroll provider to enable them to generate a Citi-accepted payment file, and requests for Citi to accept payroll payment instructions submitted directly from their payroll provider.
Indeed, I can think of one example where a technology giant with 50,000 staff and over 800 expats, went from an excess of 50 payroll providers and 100 contracts to just three providers (and contracts) in one transformation project, in which Citi worked with their consolidated payroll provider to integrate payroll with payment processing. This technology company chose to centralise their payroll operations and consolidate payroll providers at a global level, but there is no single ideal solution for all companies. Organisations should carry out their own strategic review and cross-functional representation to arrive at the ideal model that best fits their priorities and business structure.
A Framework to Define Your Optimal Payroll Payment Model
Payroll transformation projects are a good opportunity for corporates to review payroll funding structures and payment-related processing, and this requires close collaboration between treasury, HR and finance teams. When a robust payments solution has been put in place in-line with a firm’s payroll operating model, adding further countries and higher volumes to accompany growth is greatly simplified.
Companies can structure their ideal payroll payment model around their preferences in three key areas:
Operating model: how will your payroll payments be processed? In an in-house processing model, your company submits payment instructions and retains full control of payment processing, account ownership and commercial terms. In an integrated processing model, you allow your third-party payroll provider(s) to submit instructions on your behalf, while retaining bank account ownership, account structure and commercial terms. In an outsourced processing model, you fund a third-party company, which fully handles the payments. In this structure, you relinquish bank account ownership and commercial terms, and pre-funding is usually required.
Funding structure: how will your payroll payments be funded? Decentralised funding means you use local currency bank accounts across multiple countries, where local payment instruments can be used. A centralised structure allows you, where regulations permit, to fund multi-country payroll payments from a single currency bank account. Solutions such as WorldLink, Citi’s cross-currency payments offering, can be used to achieve this.
Preferred channel: how will your payroll payments be instructed? Centralised channels give you a single, standardised interface, across multiple countries, through which to issue payment instructions and receive reports via electronic banking or host-to-host connectivity. Decentralised channels, such as local market protocols, can also be used and typically work only for payments made within a single market. Multinationals will need to work with multiple systems, file formats and protocols that vary from country to country.
Figure 3: The Ideal Payroll Payment Model: Areas for Consideration.
Spotlight Example: Leveraging SEPA to Rationalise Payroll Payments
As European markets move towards the SEPA end date of 1 February 2014 for migration from local automated clearing house (ACH) schemes, shifting towards the mandatory SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) payment formats, the latter are of course increasingly being adopted for payroll payments. This migration provides institutions with the opportunity to rationalise bank accounts and relationships across the in-scope countries. The vision of some companies is to be able to send salary payments from a single euro bank account, wherever possible, potentially introducing efficiencies for those that seize the chance.
Legislation and market practice today: While many companies have already widely adopted SCTs for their euro supplier payment flows, and in some cases already have these funded from a central euro disbursement account, extra consideration needs to be given to if, and when, this can be done for payroll and tax payments, due to local market practices and legislation challenges.
In certain markets, it is a requirement or market practice to include a payment type identifier code for salary payments. One reason is to allow recipient banks to recognise incoming payments as salaries, which may be required to provide preferential banking terms to their customers. There are some countries where banks are already able to recognise the salary code (SALA) within an incoming SCT payment. There are others where banks generally are not yet able to reconcile category purpose codes, and the local ACH system remains, for now, the preferred mechanism for salary payments.
Tax payment existing practices also differ by country – in some, they are initiated by the payer whereas in others, they are primarily collected by the authorities through direct debits. Plans and processes for SEPA adoption in both scenarios – covering SCTs and SDDs – will vary by country and tax authority. Corporates treasuries should also be aware of the SDD mandate management challenge in some countries.
What does this mean and how will it evolve? Organisations may wish to evaluate the feasibility of making payroll and tax payments through SEPA, and whether this can be done from a central euro disbursement account, on a country-by-country basis. At Citi, we provide our clients with continuing country-level guidance on considerations for using SCTs for payroll-related payments. As countries define their plans to adopt SEPA en masse and with 1 February 2014 fast approaching, the requirements and practices that are in place today in countries will evolve to see increased SEPA adoption for payroll and potentially tax payments. There has been acceleration in SEPA adoption over the past few months and we expect this pace to continue.
Further Considerations for Using SEPA for Payroll
- Timing: The payment execution cycle for SCTs has been regulated as D+1 maximum cycle time. In early 2012, many organisations started to review SEPA for payroll as certainty of payment timeframes became a reality.
- Amount: SCTs are designed so that the beneficiary of the payment receives full value. Any charges by the beneficiary’s bank must not be deducted from the payment, but charged separately. The beneficiary should be charged the same fee to receive a domestic SEPA payment as to receive a cross-border SEPA payment. If charges are levied by the beneficiary bank, these charges should be agreed with the beneficiary, and the beneficiary should seek clarity from their own bank if there are any charges.
- Confidentiality: Bulk debits that result in a single posting for a batch of payments on bank account statements is typically possible for SCTs. This is suitable for payroll payments as it can help maintain the confidentiality of sensitive salary information.
- Payment instructions: For SCTs, the bank identifier code (BIC) and international bank account number (IBAN) are required in the payment instruction. Also SEPA messages between banks must be sent using the mandatory ISO 20022 XML messaging standard, and within the SEPA message and XML standards is a field entitled ‘category purpose’. This field specifies the high level purpose of the payment based on a set of pre-defined categories. SALA has been defined as the code to designate salary payments. It is advisable to use this codeword when sending salary payments. While at this point not all banks are recognising the codeword, usage and recognition will increase as SEPA matures.
- Acceptance: The vast majority of banks within the SEPA region are ready to send and receive SCT payments. Any financial institution that accepts euro ACH or direct debits, should be reachable for SEPA today within the eurozone. Prior to your implementation, Citi recommends running a check on whether beneficiary banks are SEPA reachable, and your bank may be able to help with this.
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