The Payroll pandemic: Five trends disrupting accountability, transparency and pay

Dr Wesley Payne McClendon is Executive Director, McClendon Research Group and Distinguished Visiting Scholar, Victoria Graduate Business School. Wesley was previously Chief Strategy and Transformation Executive and Board Director at Gooroo (ASX-GOO); Managing Director and Professor, Edinburgh Institute (UK and Hong Kong); Partner and UK Practice Leader, Mercer HR Consulting (London); and Principle and Melbourne Practice Leader, Ernst & Young (Australia).

Dr McClendon is author of more than 25 articles including “Seven habits of leaders in crisis” and two books including “Strategy, People and Performance.” A third book, “Leadership, People and Culture Due Diligence in M&A, Integration and Restructure,” will be published later this year.

Once the outlier of back office functions, payroll has come to represent a core differentiator in managing discontinuous change in the new normal. In the midst of coronavirus-inspired social distancing, company bankruptcies and government bailouts, payroll is the next pandemic shoe waiting to drop. As COVID-19 continues to challenge the landscape on which people work, little attention has been given to reimaging the means through which people are paid. With the added complexities of new work rules, multiple worker-type relationships and a variety of technology-dependent remote workplace configurations, payroll systems and infrastructure need to reflect the requirements of a completely new reality.

Prior to the pandemic, out-of-date payroll systems, non-compliance, fraud and under-investment in training had already posed significant risks to organisations in general, and staff managing fiduciary processes, in particular. The global pandemic has only heightened the risk of exposure as strategic and operational focus has been diverted to organisations’ basic need to survive.

Adding insult to injury on the back of last years’ Financial Services Royal Commission report, the Australian public found out what insiders already knew: leaders lacked accountability and transparency in critical business areas. Following a series of Australian banking executive resignations at NAB, Westpac and CBA, and high-profile business and celebrity falls from grace, the lack of leadership accountability and payroll inadequacies has formed a dangerous and likely combustible combination.

The coronavirus has not only exacerbated the unpreparedness of leadership, but also exposed the unfit underbelly of the systems, processes and infrastructure necessary to support the enterprise in crisis. No matter whether the pandemic is comprised of bacteria, business practices or both, accountability and transparency start at the top. As former Westpac CEO Brian Hartzer confessed, "as CEO I accept that I am ultimately accountable for everything that happens at the bank."

The perfect storm: Watchout for big waves ahead
The combination of a pandemic, leadership and payroll can expose organisations to an unsuspecting perfect storm. Here are five trends that are likely to disrupt accountability, transparency and pay.

1 – Fraud and Diversion
Payroll fraud and diversion pose the greatest threat to the payroll ecosystem especially when focus and resources are diverted to a global pandemic. The Federal Bureau of Investigations (FBI) reported that between 1 January and 30 June 2019, payroll diversion increased by 815 per cent. In the past three years, fraud has exceeded $26 (US) billion dollar in losses. The majority of payroll fraud falls into one of three perpetrator categories – employer, employee or third party. PwC's 2020 Global Economic Crime and Fraud Survey revealed 37% of fraud was internal including 34% middle managers, 31% operations staff and 26% senior management.

Employer payroll fraud occurs when a company intentionally misclassifies employees as contractors or subcontractors to avoid costs. The process entails “ghost” employees, fake time sheets or maintaining ex-employee records to funnel salary payments into fraudulent accounts. Perpetrators create bogus suppliers and reimbursements, and authorise staff associates to provide services at inflated rates.

Third party fraud uses another person’s identity through a stolen or manufactured identity and personal details via mobile or digital breach. The Identity Theft Resource Center notes synthetic fraud – identity assembled from combined fake, stolen or assumed parts, and accounts for 85 per cent of identity fraud.

2 – Non-compliance
Through raids, audits and punitive measures, Fair Work Ombudsman campaigns have accelerated the speed of payroll compliance expectations. New legislation holds directors responsible for the execution of accurate administration of EBAs and application of Fair Work legislative frameworks. The pandemic offers no excuse.

Venerable restaurateur and MasterChef judge George Calombaris was exposed for underpaying staff by $2.6 million in March 2019, and a July ABC News article revealed a total underpayment of $7.8 million. After announcing the closure of his restaurant The Press Club, he made a court-enforced $200,000 contrition payment. On 10 February 2020, most of Calombaris' empire went into voluntary administration. Calombaris is just one of many examples of wide spread underpayment. Other landmark cases include ABC, Bunning’s, Caltex, Dominos, Grill’d, 7-Eleven, Qantas and Woolworths.

3 – Cost-Related Pressures
Cost-related pressures can impact corporate strategy, labour costs and staffing levels. In the frenetic process of pandemic survival, staff reductions can expose knowledge and process gaps, and increases an organisation’s risk in critical areas.

The knock-on effect can have unintended consequences for investment in and management of payroll systems. In particular, process due diligence and allocation of payroll staff as a ratio of business staff. Span of payroll control is strengthened when the ratio of payroll to business staff increases. Cost-related pressures can obscure the lens through which payroll is prioritised, managed and resourced.  

Top tier payroll systems can manage a ratio of 2000:1 staff per payroll person. The number of manual processes, complexity and industry drives factors determining payroll system management ratios. According to the Payroll Benchmarking Report, Australia’s payroll average ratio is 1000:1. 

The national payroll staff turnover is 12.67 per cent – slightly higher than 11.92 per cent in 2018. Overall employee turnover was 15 per cent in 2015 and 18 per cent in 2018 according to the Australian HR Institute - Turnover and Retention Research Report.

These trends suggest a directional relationship between payroll specific and general staff turnover. Combined, both trends could render any manual payroll system inadequate or worse, wholly ineffective.

4 – Outsourcing & Training
The decision to outsource or keep payroll in-house is fraught with structural, management and accountability considerations. Irrespective of crisis, outsourcing these functions is a time-efficient and cost-saving means of maximising utilisation   of resources. The 2019 PBR found 32.5 per cent of Australian businesses outsource payroll. Comparatively, the 2016 Australian Benchmarking Initiative reported 5 per cent of companies outsourced or offshored payroll. Payroll outsourcing trends are likely to continue increasing along with accountability and efficiency expectations.   

Training also drives outsourcing. Shared services functions, accounting, finance and HR have governing bodies adjudicating standards and competencies, and higher education institutions conferring degrees. Payroll is an immature science without extensive training qualifications, and the PBR report revealed that only 10 per cent of payroll professionals have a competency-based payroll qualification compared to 8.9% in 2018 and 6.2% in 2017. Only two payroll qualifications are in the Australian Qualifications Framework; certificate IV and a diploma.

5 – Leadership, Accountability and Transparency
Before the Royal Commission report was made public and the start of the pandemic, the leaders of Australia’s financial institutions had flown under the radar. Following the report’s release and the subsequent scramble to manage remotely, it became clear that many leaders had failed to adequately prepare for or lead through crisis.

A 2019 study published in the Payroll Whitepaper conducted by Lee Hecht Harrison (LLH) found 87.5 per cent of respondents reported that leadership accountability was a “critical business issue” in their organisations, and only 29 per cent were satisfied with the level of leadership accountability in their organisations. Satisfaction levels have slipped, with 2017 LLH data finding that fewer people thought leadership was a critical business issue (72 per cent), but more were satisfied (37 per cent).

Leadership accountability is more critical than ever, however, leadership isn’t limited to those at the top. It’s a collection of attitudes, behaviours and practices that supports and replicates accountability and transparency in a distributed hierarchy. As post-pandemic workforces become more diverse, gigged and increasingly connected remotely, leadership, accountability and transparency will need to be realised at all levels.      

Start the post-pandemic transformation journey now
As a starting point, leaders should consider payroll inclusive of any business transformation given its financial, compliance and risk management importance.  The ABS noted total labour costs accounted for 77.7 per cent of labour costs for all employers. Putting this cost reality at the top of a post-pandemic priority list can avoid potentially devastating short and long-term financial impact.

Strategically, repositioning payroll as an asset leveraging data, technology and automation not only to maintain accuracy and compliance, but also to reduce errors, risk and fraud in the midst of a pandemic as well as everyday business as usual. 

Operationally, refocus payroll value by defining competitive advantage in practical terms through technology, capability and human resources. Only 27% of participants in the PBR study have updated their payroll systems in 20 years. There is an opportunity to realise significant value and risk mitigation by leveraging outsourcing, automation and cloud technology before crisis exposes unforeseen circumstances.

To get started on the journey, here are three things payroll leaders can do right now.

1. Conduct a forensic payroll audit. Ensure changes to the HRIS master file are up to date and accurate, deleting data duplications, ghost and ex-employees. 

2. Develop a map of payroll processes, people and access to systems and controls. Include game theory scenarios that incorporate decision-making to explore outcomes based on change, choice and uncertainty. Replicate payroll processes from beginning to end for analysis, reconfiguration and execution.

3. Compare the possibilities of everything between the “current state” and “transformed state.” Identify opportunities for adoption, innovation and disruption specific to fraud, compliance, cost, outsourcing and leadership.