Thinking About a Wage Payment Frequency Change? Start Here
A holistic business case for making a change in wage payment frequency or transitioning from current-to-arrears should be based on market data, as well as qualitative and quantitative cost-benefit analysis. Armed with the right data, organizations can build a strong platform for change that informs key stakeholders of the need for the change, justifies the change, and answers potential questions about the transition.
Why pay frequency matters
How frequently and how quickly an organization pays employees are critical decisions that impact the payroll team(s) and workers. For example, the frequency at which an organization pays employees can range from monthly to even daily and these decisions impact the payroll team in terms of the time and cost for payroll processing, along with impacting employees in terms of how quickly they receive and can use their earned wages. Organizations also decide to pay current (i.e., paying for days worked up to the day of payment) or in arrears (i.e., paying for work completed in the previous period), which also impacts payroll teams (i.e., adjustments and employee inquiries with current pay) and employees (also in terms of how quickly they are paid).
An organization may explore changes to pay frequency to standardize payroll, reduce the cost and complexity of the payroll process, or enhance the value proposition for both candidates and employees. When considering a pay frequency or current-to-arrears change, payroll teams often prepare a business case to educate internal stakeholders of the need for the change, following the steps outlined in this article.
Gathering data on pay frequency trends aids the business case for change
Understanding how other organizations manage payroll provides insightful context for building a case for change. The U.S. Bureau of Labor Statistics' Length of pay periods in the Current Employment Statistics survey outlines the pay frequencies by organizational size and industry. Organizations can leverage this data to inform their pay practices in industries similar to theirs.
The most common pay frequency cadence is biweekly, with 43% of organizations reporting that they pay their employees on a biweekly basis. The data indicates that larger organizations pay on a biweekly frequency. The survey also reveals that the construction, trade, and manufacturing industries, which employ a larger percentage of hourly or non-exempt workers, have a higher prevalence of weekly pay compared to other industries. Organizations that pay less frequently can use this data to justify making a change to more frequent wage payments.
Organizations seeking to pay employees more frequently can also note ADP's latest Potential of Payroll study, which underscores the trend for more frequent wage payment schedules. More than two out of five (43%) respondents in this study report planning to offer more frequent pay cycles over the next two to three years. These third-party studies illustrate leading pay practices that can be cited in a business case.
How to create a cost/benefit analysis for a change in pay frequency
Qualitative impacts
Robust business cases include a cost-benefit analysis (both qualitative and quantitative) for the proposed change in pay practices. Qualitative impacts, such as recruiting and retention. and employment brand can be just as important as a quantitative analysis.
For example, consolidating different pay groups into the same pay frequency or pay period can provide significant benefits for the payroll team, including increased efficiencies. Another important qualitative factor is the impact on recruiting and retention. For example, if the organization operates in an industry where weekly pay is predominant, more frequent pay is key.
Hard dollar impacts
A solid business case for change should include quantified costs and benefits of the proposed change. For example, if a client outsources its payroll technology and/or processing to a third-party vendor, the vendor may charge for the change in pay frequency or period. Another potential cost to consider is an advance or one-time transition payment to support employees during the gap period when transitioning to a new pay cycle. Organizations can quantify this cost when building the business case.
It is also important to examine the specific benefits and cost savings associated with the proposed change. For example, an organization that pays current typically manages pay adjustments in the following pay period (since current pay is based in part on estimated hours worked), along with fielding employee questions about those pay adjustments. If the organization estimates the number of hours that payroll spends per week processing pay adjustments and answering employee inquiries related to pay adjustments, calculates the approximate payroll full time equivalents (FTE) dedicated to these activities, and multiplies by the annual fully loaded labor rate of the payroll FTE, it can capture potential cost savings by moving to arrears pay and potentially avoiding time making as many adjustments/fielding adjustment-related queries in the future-state scenario.
Conclusion
Following the above process can help your organization build a compelling business case for making a change in pay frequency or transitioning from current-to-arrears. And when the decision is made to implement a change, be sure to also develop a communications plan to prepare and educate your workforce well in advance of the change's implementation.
Learn how to prepare your data, your team, and your systems for the best possible transition. Download your HCM Integration Planning Guide here.
