Rachele Collins, from ADP's Strategic Advisory Services team, provides insight and industry data to help your organization in its consideration of whether the payroll function should align under the finance or HR departments.
As a leader in payroll processing and outsourcing, ADP is frequently asked many questions about payroll and what are "leading practices." (See recent blog on How to Structure and Staff Your Company's Payroll Function as an example.) Another such question is "Where should payroll report?" (e.g., to HR, to finance, or elsewhere). And, in true advisory fashion, the way I would answer this question is, "It depends."
In this article I'll review what the market benchmarks demonstrate and offer some considerations to deliberate when deciding what is best for your organization.
Consider these benchmarking sources that address this issue:
REPORTS TO FINANCE
A survey of global payroll by ADP of 1,100 respondents around the world indicates that 43 percent of survey respondents reported that finance functional leads manage payroll, with 33 percent reporting "other" and the remainder (24 percent) reporting HR.
SPLIT REPORTING TO FINANCE AND HR
A global payroll benchmarking survey by Deloitte of more than 1,400 respondents around the world found that survey data was almost split between HR and finance in terms of reporting structure: Thirty-eight percent of survey respondents said that payroll reported to HR, 36 percent to finance, 24 percent to shared services, and the remainder (2 percent) to "other."
REPORTS TO HR
A global payroll survey by EY of 128 respondents found that 57 percent of respondents currently report to HR (29 percent to finance) and another 49 percent felt that payroll should report to HR (33 percent to payroll).
What do we make of this?
Well, the answer is a mixed bag. Also, a general rule of thumb when reviewing benchmarking studies and surveys to keep in mind is that usually you prefer a response rate of at least 20 in order to report out on the data; the larger the data and the more diverse in terms of industry, size, and region, the more "representative" it is.
Taking the two highest response rate options from the survey research above (e.g., payroll reports to finance versus payroll reports to HR), let's further explore some considerations for each.
Reporting Structure Considerations
Payroll Reports to Finance
The truth of the matter is that payroll naturally "fits" within the finance function: It is a financial activity, involving the movement of money, just like other activities generally considered within finance, such as travel and expense, accounts payable, and accounts receivable. For example, nonprofit business process management advisory firm APQC includes payroll processing in its Process Classification Framework taxonomy under financial management.
In terms of skills, finance and payroll both share the same need for detail orientation, reporting, auditing, the use of technology and an emphasis on compliance and internal controls.
Analytics is another hot skill set: Both finance (in particular, with respect to planning, budgeting, and forecasting) and HR (in particular, with respect to strategic workforce planning and people analytics) have been working to scale the maturity curve for years. Payroll departments seeking to scale the analytics maturity curve would therefore be well-placed in either the finance or HR organizations.
The CFO is the guardian of money matters within the company, and as such, often has great sway in any kind of technology purchasing decisions, which may work in payroll's favor if it reports to finance. That said, HR has evolved into a strategic player with a "seat at the table" at many organizations and has its own say into key organizational decisions. In fact, according to a recent SHRM study on HR staffing and resources from 417 respondents, 61 percent of HR functions now report to the CEO, president, or owner of the company, which means that HR at these organizations has a voice.
Payroll Reports to HR
One of the biggest trends in the human capital world these days is the focus on the Employee Experience (EX). By reporting to HR, payroll will fly under the EX banner and potentially be more likely to focus on EX initiatives such as self-service, mobile, pay cards, and earned wage access. And where a department or function "sits" within an organization does, perhaps subtlety, send a message to the organization about what is important to the organization: Having payroll report to finance may signal that the organization is focused on the budget, cost control and efficiency; whereas having payroll report into HR may indicate that payroll is acknowledged as a key part of the overall employee experience.
Finally, many organizations these days are focused on "total rewards" programs for employees, which strategically manage employee compensation, benefits, retirement, and incentive programs. Payroll is a key part of total rewards programs with direct linkages from benefits to payroll via deductions, and therefore organizations with an emphasis on total rewards may consider locating payroll within the HR umbrella.
The table below summarizes some of the key considerations to think through with respect to reporting structure for payroll.
What is the "right" answer for where should payroll report?
The answer is that it depends: You need to do what is right for your company and your culture. There is no one "right" answer. And furthermore, payroll at some companies reports neither to finance nor HR, but rather directly to the CEO, to shared services or to some other function. And to add further nuances to this discussion, at some organizations HR reports into finance, and at others both functions may report separately into operations, shared services, or the CEO or payroll tasks may even be split up between finance and HR. There are many variations in reporting structure that can occur.
A solid practice regardless of where payroll reports — since payroll and HR are so interconnected — is to create a RACI chart (Responsible, Accountable, Consulted, and Informed) for key processes that intersect to ensure that there are clear roles and responsibilities and that there are clear and documented transitions at the process handoffs.
And from a systems perspective, if HR and payroll are using different software platforms, automated integrations are going to be key to prevent errors and rework. Ensuring both functions understand and speaking the language of the business can also help cross-departmental measures, as can building financial or cost Key Performance Measures for HR (such as cost per hire, revenue per employee) that finance will relate to.
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