In order to improve or make something better we need to know how it is working today. That is the basis for the Six Sigma and other process improvement/optimization programs and methodologies that have been cycling through corporations large and small for the better part of the last three decades. And it makes sense; to make something better you need a baseline to compare results and see if the desired progress is being made.

In any process there are many things that are measureable, but which ones actually matter? Key performance indicators (KPI) are those measurements which, when taken together, get a reasonably comprehensive picture of a process, a department or a company. For instance, one KPI used by Wall Street is Stock Price/Earnings (P/E), this measurement helps show if a company is over or undervalued and therefore if it is a good buy. No measurement, KPI or not, taken by itself is sufficient to give you a complete picture, but several interrelated ones can.

If we accept that to improve a process:

  • We have to know at what performance level the process is currently working
  • We can define and measure variables that indicate the performance level
  • We have ready access to these KPI measurements to monitor progress

Many people look at the entire Human Resources department – Payroll, Benefits, Training, Compliance, etc. as being primarily concerned with people, and people are inherently difficult to measure in any meaningful way. The reality is that while yes, their primary focus is people, HR uses processes to perform their functions, just like the manufacturing or services departments. Just like those other departments, that means that a set of measurements can be devised to help determine the health and efficiency of the payroll department, or indeed any department in HR.

What to measure?

Then the question becomes: “What to measure?“ What is critical to one organization may not be important to another, but the idea here is to determine the critical areas in your organization and determine how measurements can be defined. One of the key factors in setting up these performance indicators is to have a transparent system in place so that each item is handled in a consistent way. In this way the human factor is not being monitored as much as the process that supports the interaction. For example, to meet the federal requirements of the Family Medical Leave Act (FMLA), payroll needs to have processes in place to review the application for eligibility and monitoring the leave if it is granted. Once the process is in place, then performance benchmarks like eligibility review turnaround time can be set and monitored on a monthly, quarterly or annual basis.

The trick to setting up KPI definitions for your Payroll department is to determine which processes are critical to supporting the organization’s employees. How can the processes and systems be improved to make employee’s experience with HR and by extension the organization better?

Here are some examples to get you thinking about prospective KPI definitions for Payroll:

  • Total payroll compared to last period
    – The ‘appropriate period’ is adjustable to your specific instance; it merely needs to remain stable once set.
  • Percent (%) of new employees
  • Percent (%) of terminated employees
  • Cost per payroll per 100 employees
  • Total payroll to gross revenue
  • Average assets per employee
  • Percent (%) of manual payroll payments
  • Number of payroll transactions
  • Cycle time to process payroll

This is just a small sampling of all the possible metrics that can be measured. Some of these KPI are specific to the payroll department, while others apply to the company as a whole.

Customize your KPI definitions

Looking through the list above, you may decide that some (or all) don’t apply to your company and that’s all right. Your company may have different needs or criteria that are more important to measure. For instance, if you are using a payroll processing company, then the ‘Cost of payroll per 100 employees’ should be defined in your contract with the processing company and may not need to be tracked.

In fact that brings up an important point: using a payroll processing company makes almost all of these KPI’s easier to calculate. That’s because almost all of them will either be explicitly in the reports you receive after each payroll run or easily derivable from those reports. If you are still doing your payroll in-house then you may have to create the necessary reports manually in order to get the data you need.

In either case, once you have the data you can use it to compare against both your target numbers and past performance. If you are already meeting your goal for a particular KPI, then you’ll just need to glance at the current value to ensure that you are still in the green. However, if you are below the target, then you can compare the current value to those in the past to confirm that you are making progress and that you are making it fast enough. If not, then you’ll have the numbers and the data to do something about it.

Some people might say that using KPI’s to measure something as complex as payroll or HR simplifies too much. While it is true that there is some simplification, it also removes all of the distractions, allowing you to focus on the critical information. We believe that by using KPIs to monitor payroll processes provides a win-win-win for the payroll team, the employees, and the organization as a whole.