Payroll processes get complicated as soon as an organization expands across borders.
It’s not just a case of managing multiple local providers and disconnected systems or navigating complex and ever-changing regulations. International expansion can also cause businesses to lose payroll visibility and silo data, which impedes future decision-making.
Payroll managers can’t overcome these issues alone. It’s up to CFOs to support payroll — traditionally a company’s largest expense — with technology investment when expanding across borders. It’s also up to them to develop a comprehensive payroll plan as part of any cross-border strategy.
To help, we examine five key elements that every CFO should know to build a robust payroll plan as part of a global expansion strategy.
Automating the global payroll process with technology
Speed matters when hiring and paying international employees. Payroll can be a laborious process when you have to manually calculate and process it for every individual country and delays in setting up payroll can mean companies miss out on the best talent.
Technology is a CFO’s friend here. Software can be used to automate the process of calculating payroll and moving data between systems, thereby removing the need for spreadsheets and ensuring a more accurate process, too.
For example, CFOs can use a global payroll platform like Payslip to transition from manual legacy processes to AI-powered end-to-end automation: from pre-payroll data inputs right out to post-payroll payments and reporting.
Technology can also be used to accelerate the rate at which organizations hire foreign workers, ensuring competitors don’t swoop in and take the best talent.
Payroll departments are already using self-service portals that let employees view and update personal information online, says Heinrich Swanepoel, head of growth at PaySpace. “Employee self-service portals can also improve accuracy and reduce the risk of errors, as employees can review and correct their information.”
AI and machine learning technology are coming to the fore, say Wojciech Kupny and Lisa Orton, global compensation and payroll services leaders at Vialto Partners. “The likely result of this is that employers will be able to provide employees with standard answers to a set of standard questions, depending on each individual’s professional situation. The crucial result of this is that payroll and HR teams will save huge amounts of administration time, releasing them to focus on more engaging areas of their roles.”
Staying compliant in local markets
Complying with local laws is the biggest issue that faces any company expanding to international markets. “The main things that a company needs to think about as it grows internationally are the laws and regulations that apply to onboarding and paying people in each and every country that they plan to hire,” says Robin Gandhi, chief product officer at global payments provider Nium.
Complexity increases with every country you expand into, and it grows exponentially, says Ragu Bhargava, the cofounder and chief executive officer of Global Upside Corporation (GUC). “Every country has its own patchwork of local and national regulations, with each representing a potential risk. Different jurisdictions have different processing times and varying tax structures — and these tend to change constantly. Noncompliance with payroll and labor laws in other countries often means severe penalties, which can be a major setback.”
The cost of failing to comply with local laws can be significant.
In an EY study of 508 companies with between 250 and 10,000 employees, 14 percent of respondents said they had payroll-related litigation issues in the past year. Those companies received 32 legal complaints on average, each of which was settled at an average total cost of $3,200 plus 29 hours of internal time.
Companies aren’t just putting money at risk by not complying, either. Nearly half (44 percent) of companies experiencing payroll litigation issues had to reduce employee headcount.
Accounting for payroll inconsistencies and disparities
It is just as important to think about how and what you pay international employees as it is to make sure you abide by local laws when doing so.
“Maintaining minimum wage requirements, holidays, paid time off, and certain traditions like extra pay or bonuses at the end of the year are all factors to keep in mind when managing international payroll,” says Alexandre Diard, CMO at PeopleSpheres. “Additionally, countries have different time zones and pay periods, one running payroll might not look like the other. While it may be normal to pay bi-weekly domestically, perhaps workers expect weekly pay internationally.”
However, the biggest issue companies face is compensating cross-border employees fairly and avoiding the fallout from perceived inequalities. Pay inequality between expats and locals can be a contentious issue for multinational organizations, writes the team at AGS Relocation. As an example, they point to a European FMCG [fast-moving consumer goods] company that released an Asia-Pac personnel budget forecast where 70 percent was spent on 7 percent of employees — all expats.
A common solution is to maintain internal pay equity across the globe, write Aon’s Derrick Neuhauser and Kavita Maharaj. “However, this can have the opposite effect, as country-by-country purchasing power will result in pay inequality. A country leader living in a locale with a lower cost of living will be enriched by such a program. The pay inequity is only exacerbated by annual and long-term incentives that are generally allocated as a percentage of base pay.”
They suggest that companies develop equality within a geographic location instead. Locally benchmarking salary and total compensation is a more harmonized approach.
“This also will filter down to all local employees, creating a competitive compensation arrangement that will aid in retention and align with a company’s business strategy,” Neuhauser and Maharaj write. “This type of approach is also preferred when the local labor market is undergoing dramatic change and adjustments are needed in real time.”
It’s an approach Spotify adopted in February 2021, recalibrating salary bands by country rather than city or region.
CFOs must have the functionality to analyze global payroll data to benchmark effectively and identify where and to what extent disparities exist. This includes being able to see reports of your total workforce as a whole, as well as analyzing trends by location and employee level.
Working with local providers
The best way to ensure compliance with local laws and tax regulations is to work with domestic service providers, namely employers of record or professional employer organizations.
An employer of record (EoR) is an entity that legally employs staff on behalf of your business. It takes on most employment tasks and liabilities, handling payroll and tax while also saving clients time and money.
There are several benefits to this kind of arrangement.
“The main advantage of using an Employer of Record is in preventing compliance issues,” writes Panna Kemenes at Wise. “Non-compliance can cost you in heavy fines and penalties. An Employer of Record prevents these unnecessary costs. They have local expertise across many countries. This provides you with current information on local employment laws, preventing issues. And even if you run into compliance issues, your Employer of Record is the one who is legally responsible.”
EORs also help companies to:
- Improve employee morale.
- Save time.
- Reduce costs.
- Access more and better talent.
Professional employer organizations (PEOs) work in the same way as EORs in that they reduce compliance risks by handling paperwork and keeping you abreast of statutory changes in individual markets. The difference is that you enter into a co-employment agreement.
“Through this contract, you can designate which international employment duties you delegate to the PEO and which you prefer to handle yourself,” explains Max Freedman, a contributing writer at Business News Daily. “No matter which tasks you contractually assign to your PEO, you’ll remain responsible for day-to-day employee management and all salary negotiations.”
Centralizing data to improve decision-making
Accurate forecasting is essential to the success of the finance department. In fact, building predictive models and improving scenario analysis capabilities is the top priority for almost half of finance leaders, according to research by PwC.
CFOs need data and lots of it to make decisions that positively impact the company's long-term health — and that means they need a way to collect and centralize global employment data. We recommend choosing a global payroll platform that provides a holistic view of data across every country, making it easy to create reports, audit trails and accurate forecasts.
The ROI of adopting such a platform can be significant, because they help CFOs assess the profitability of future foreign offices. “One of the most impactful areas that we’ve seen is the layering in of job costing information against the costs of payroll,” says Insperity’s Dave Wallis.
“When a company can map their payroll dollars to projects, product lines or G/L accounts, they can clearly see how the supporting workforce costs impact the profitability of those accounts. And based on that assessment, they can better determine whether it makes sense to expand the workforce associated with that account, or to invest them in other areas of the company’s business.”
Learn more
The CFO’s role expands far beyond financial oversight. Their control over finances means they can provide HR and payroll staff with the right support to overcome the intricacies, complexities and compliance issues that come with building a global workforce.
But even they can’t do it alone. That’s why leading CFOs trust Payslip’s global payroll control platform to give them the tools to manage, automate and analyze the global payroll process. Learn more by booking a platform tour today.
Images used under license from Shutterstock.com.