August 08, 2022
What is included in payroll costs?
9 Ways to decrease your global payroll costs
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Payroll costs represent a large chunk of a business’s overall expenses. For instance, an analysis conducted by Deloitte found that, for a typical Fortune 500 company, payroll expenses average between 50% to 60% of company spending.
International organizations with a global workforce are usually facing even higher payroll expenses because of the growing fees for international payments and the additional work it takes to comply with the different payroll regulations that apply in each country. Without strategic cost control, the expenses incurred to get your global team paid can quickly use up funds which were originally allocated to drive your global expansion forward, and decrease your business’s profitability in the long term.
While cutting down employee salaries isn’t an option, there are other ways to reduce your payroll expenses, notably when it comes to process efficiency. In this blog post, we’ll show you different strategies to decrease your global payroll costs.
Before taking any measures to lower your payroll expenses, it’s crucial to understand what these costs actually include. Payroll costs (or payroll expenses, whichever term one prefers) include the salaries and wages a company pays to its employees, as well as payroll taxes and any statutory and voluntary employee benefits.
The above-mentioned payroll expenses fall under the category of necessary business expenses and, therefore, can’t be reduced without risking losing your employees or becoming non-compliant with statutory labor laws. Of course, hiring foreign talent in countries where the cost of labor is cheap is one option of reducing the payroll burden on your business, but you’ll still have to pay payroll taxes, benefits and more.
However, in addition to these “normal” payroll costs, there are additional expenses linked to the payroll process, which can in fact be controlled. These controllable expenses in payroll include:
Labor and administrative costs for payroll processing
Payroll software and tools as well as costs for payroll outsourcing
Bank fees and foreign exchange charges for international payments
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Now that we know what payroll expenses are and where it’s possible to reduce existing payroll costs, it’s time to look at how to do this. Here are nine ways to minimize your global payroll processing costs.
Although we said earlier that employee salaries and wages aren’t among the list of payroll expenses where you can cut costs, there actually are ways for businesses to change their compensation strategy so that it works in their favor.
Businesses taking a remote-first approach need to revise their compensation model and choose a new strategy for setting salaries for remote workers. One possible approach is to base pay on employee location, which could allow you to save money compared to paying your global team the salary levels they would earn living near the company headquarters.
One of the downsides of working with a globally distributed team is having to process a growing number of international payments each month to get everyone paid. The problem is that SWIFT payments, which are the most common payment type used for international bank transfers, are notoriously expensive. One SWIFT transfer can cost up to 50 euros, depending on the number of intermediary banks that need to be involved in the process.
With a global team, bank service fees and currency exchange charges can quickly turn into a hefty expense each month. Luckily, there are many alternative pay methods for remote teams, including paying employees in Bitcoin or using a digital wallet like our multi-currency Lano Wallet, which allows you to send instant global payments to over 150 countries in more than 50 different currencies.
With the growing gig economy, freelancers and contractors have become a crucial part in almost any business. While freelancers can enhance your work team in many different ways (for example by providing external expertise), hiring contractors and freelancers is also a great way to lower payroll expenses.
Since contractors pay their own taxes and social security benefits and don’t get any statutory benefits such as paid annual leave, they cost the business a lot less than hiring a full-time employee. However, especially when engaging international contractors, you should make sure to carefully check each country’s regulations on employee misclassification to avoid any potential lawsuits, back taxes, fines and repercussions on your company’s reputation.
Overtime pay is often overlooked when considering payroll costs although it’s a major cost driver for payroll expenses. In most countries, overtime must be compensated at higher rates. Typically, overtime pay is anywhere between 150% and 200% of the employee’s usual hourly wages, depending on the amount of overtime and the time of day.
Businesses that manage to optimize their operations and reduce overtime can therefore lower their payroll costs significantly. If you realize that your global team is frequently working overtime, you should consider hiring another full-time employee to pick up the additional workload.
Your payroll data can provide valuable insights into overtime patterns and help you make better strategic business decisions. Read more on how to use payroll data for your business in our related blog post.
As we’ve seen, the cost of running payroll also includes the cost of paying the person who processes payroll for you, regardless of whether this person is someone in your company or an external service provider. The more human labor is involved in payroll processing, the longer it takes and the higher the processing costs.
An easy way to save money on payroll processing is to leverage technology to automate processes and data flows between different systems and avoid any unnecessary manual tasks. This can be done by integrating your HR and payroll software, and by using an automated global payroll platform like Lano. When outsourcing payroll to a payroll specialist, make sure to check their level of automation and integration.
Automating payroll processes will not only help you reduce payroll expenses by shortening processing times, but it can also save you a lot of money by reducing the error frequency in payroll.
Errors in payroll lead to additional work and expenses because payroll then needs to be recalculated before issuing an off-cycle payment - which, again, will cost money if it’s an international bank transfer. Reducing payroll errors is therefore a good starting point to lower your overall payroll expenses.
According to the Deloitte Global Payroll Benchmarking Survey, 30% of all off-cycle payments aren’t due to payroll errors, but to employment termination. Employee turnover costs businesses a lot of money, and not only because of the additional payments that need to be processed.
Estimates suggest that the cost linked to employment termination is equal to 1.5 to 2 times the employee’s (annual!) salary. This not only includes severance pay, but also other factors such as the cost of hiring, onboarding and training a new employee and the productivity gap between the former and the new employee.
Businesses trying to reduce their payroll expenses should hence improve their employee retention strategy. This can be achieved in several ways, such as providing your global team with an attractive employee benefits package, offering remote work options and taking your team on workations.
Payroll isn’t just about getting your global team paid on time. There are also many different rules and regulations to comply with in the process. For instance, many jurisdictions require employers to submit monthly payroll reports - some have even introduced legal obligations for gender pay gap reporting.
What’s more, withheld taxes and social security contributions for paid salaries and wages have to be submitted to the local authorities according to fixed schedules. Late payments and false reporting lead to fines and other financial penalties. However, they can be avoided by outsourcing payroll to an experienced service provider.
The last way of reducing your cost of processing payroll is to outsource it to a payroll service provider. Outsourcing payroll allows you to save money in several different ways. First of all, payroll providers are experts in their field, which means they have the necessary knowledge and experience it takes to run payroll smoothly and efficiently. Especially when entering new markets, you will be able to set up and process payroll a lot quicker with a local payroll provider than with your in-house team, who would first have to familiarize themselves with the local laws and regulations.
Second, their expertise will guarantee full compliance with payroll regulations and protect you from fines. Third, they usually operate with the latest payroll software which integrates with your other systems, allows for a maximum of automation, reduces payroll errors and avoids unnecessary work.
At Lano, we work with a global network of trusted payroll partners covering over 150 countries. Find the right payroll provider for your business without a hassle and set up local payroll in any new market in record time. Book a demo with our expert team to learn more.
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