HRM AND PAYROLL MASTERCLASS CONFERENCE

PARK INN HOTEL, SANDTON

CHARLES COTTER

6-8 APRIL 2016

Introduction

The Fundamentals of Payroll management and administration

Diagnosis and Analysis of current payroll/rewards management practices

Strategic Total Rewards Management (STORM)

Benchmarking, measuring and evaluating the impact of STORM

TRAINING PROGRAMME OVERVIEW (DAY 1)

TRUE OR FALSE?

Definition of Payroll/Rewards Management

Objective of Payroll/Rewards Management

Value of Payroll/Rewards Management

Criteria and factors for selecting an effective Payroll Management System

Types of rewards

THE FUNDAMENTALS OF PAYROLL AND REWARDS

MANAGEMENT AND ADMINISTRATION

Payroll Process Flow-diagram

The components of Total Rewards

The evolution of Rewards Management

Best Practice Rewards Management

THE FUNDAMENTALS OF PAYROLL AND REWARDS

MANAGEMENT AND ADMINISTRATION

The administration of the financial record of employees' salaries, wages, bonuses, net pay, and deductions. The process consists of calculation of employee salaries and tax deductions, administrating employee benefits and payment of salaries. 

Reward management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization.

Reward management consists of analyzing and controlling employee remuneration, compensation and all of the other benefits for the employees.

Reward structure usually consists of pay policy and practices, salary and payroll administration, total reward, minimum wage, executive pay and team reward.

DEFINITION OF PAYROLL/REWARDS MANAGEMENT

Reward management aims to create and efficiently operate a reward structure for an organization.

Reward management deals with processes, policies and strategies which are required to guarantee that the contribution of employees to the business is recognized by all means.

Objective of reward management is to reward employees fairly, equitably and consistently in correlation to the value of these individuals to the organization.

Reward system exists in order to motivate employees to work towards achieving strategic goals which are set by entities.

Reward management is not only concerned with pay and employee benefits. It is equally concerned with non-financial rewards such as recognition, training, development and increased job responsibility.

OBJECTIVES OF PAYROLL/REWARDS MANAGEMENT

From an accounting perspective, payroll is crucial because payroll and payroll taxes considerably affect the net income of most companies and because they are subject to laws and regulations.

From a human resources viewpoint, the payroll department is critical because employees are sensitive to payroll errors and irregularities.

Good employee morale requires payroll to be paid timely and accurately.

The primary mission of the payroll department is to ensure that all employees are paid accurately and timely with the correct withholdings and deductions, and that the withholdings and deductions are remitted in a timely manner. This includes salary payments, tax withholdings, and deductions from pay cheques.

Employee retention tool

VALUE OF PAYROLL MANAGEMENT

THE LINK BETWEEN TALENT ATTRACTION AND EMPLOYEE ENGAGEMENT

An effective payroll system should comply with the following criteria:

Security

Compatibility

Credibility

Flexibility

CRITERIA: SELECTING A PAYROLL MANAGEMENT SYSTEM

The major factors involved in a payroll management system include:

Accurate calculation of employees’ salariesDeduction of taxes to relevant tax organizations, such

as SARS All pre-tax deductions that are costs owed to third

parties (e.g. medical aid schemes or pension funds)Printing and distributing, or e-mailing of pay-slipsKeeping a record of all employees’ IRP5 certificates and

distributing them when necessary

FACTORS: EFFECTIVE PAYROLL MANAGEMENT SYSTEM

TYPES OF REWARDS

THE EVOLUTION OF REWARDS MANAGEMENT

PAYROLL PROCESS FLOW DIAGRAM (I-P-O model)

PAYROLL MANAGEMENT PROCESS

BEST PRACTICE PAYROLL/REWARDS MANAGEMENT PRINCIPLES

#1 Your organization offers competitive and market-related/above market-related remuneration packages to employees (prospective employees).

#2 Your organization adequately and accurately recognizes the knowledge, skills, competencies and experience of employees and rewards are sufficiently flexible and variable.

#3 Your organization applies fairness in payroll methods, procedures and practices for compensating, recognizing and rewarding employee contributions.

#4 Your organization applies equitable payroll methods, procedures and practices for compensating, recognizing and rewarding employee contributions.

#5 Your organization promotes transparency through sharing information about their payroll/compensation practices, pay rates criteria and how they are determined – especially at the managerial and executive levels.

DIAGNOSIS OF CURRENT PAYROLL/REWARDS

MANAGEMENT PRACTICES

#6 Your organization applies consistency (standardization) in the allocation of remuneration and rewards e.g. performance bonuses and incentives etc., thereby serving as a retention and motivation mechanism.

#7 Your organization’s applies objectivity throughout the performance management process, as the pre-cursor and chief determinant of performance bonuses.

#8 Your organization has an efficient, user-friendly and stream-lined job evaluation and job grading process.

#9 The value of payroll/remuneration and rewards offered by your organization is affordable (feasible) promoting business sustainability and continuity.

#10 Your organizations’ rewards system is effective in that it directly contributes to and enables the achievement of business management goals e.g. higher levels of productivity and performance.

DIAGNOSIS OF CURRENT PAYROLL/REWARDS MANAGEMENT

PRACTICES

Individual (Diagnosis): Critically evaluate your organization’s current rewards management structure against the 10 best practice criteria.

Group (Analysis): Identify gaps and recommend improvement strategies for these gaps.

SYNDICATE GROUP LEARNING ACTIVITY 1

Contextual introduction to STORM

The strategic imperative of Rewards Management

Defining the fundamental concepts

Creating/Developing a reward strategy

Implementing Strategic Rewards Management

STRATEGIC TOTAL REWARDS MANAGEMENT (STORM)

An effective total rewards strategy enables organizations to deliver the right amount of rewards, to the right people, at the right time, for the right reason.

Best Fit vs. Best Practice vs. Hybrid (integration)

Reward strategies must be anchored in business reality to be effective. Which means linking it to your business strategy, the needs of your employees as well as your organization.

Appropriate Total Rewards Framework

CONTEXTUAL INTRODUCTION TO STORM

“Effective reward is about finding the right reward programs for the strategic direction of your business.” (Tom McMullen)

Strategic reward management involves the formulation and implementation of an equitable reward system that is congruent with the organization’s strategic objectives.

The reward system must be congruent with the management style and other organizational systems, in particular, communication and decision-making. (Lawler)

To be effective, a total rewards package must tie together the organizational strategy, workforce strategy, and HR strategy.  Total rewards should align each employee with the organizational objectives.

THE STRATEGIC IMPERATIVE OF REWARDS MANAGEMENT

Strategic reward is based on the design and implementation of long-term reward policies and practices to closely support and advance business or organizational objectives as well as employee aspirations.

The concept of total reward encompasses all aspects of work that are valued by employees, including elements such as learning and development opportunities and/or an attractive working environment, in addition to the wider pay and benefits package.

Links between strategic and total reward

DEFINING THE FUNDAMENTAL CONCEPTS

COMPONENTS OF TOTAL REWARD STRATEGY

Holistic

Best fit

Integrative

Strategic

People-centred

Customized

Distinctive 

Evolutionary

CHARACTERISTICS OF TOTAL REWARD SYSTEM

Develop a business case for Strategic Total Rewards Management (STORM). Do the benefits outweigh the costs? Justify and motivate your viewpoint.

SYNDICATE GROUP LEARNING ACTIVITY 2

Advantages/Benefits:

Economic: Creates affordable and sustainable costs

Financial: Generates maximum return on the reward program investment

Strategic and Performance-related: Connects with the business strategy to create a high performance culture

Reputational: Supports the employment brand

BUILDING A BUSINESS CASE FOR STORM

Costs/drawbacks:

Management: Managerial apathy

Cultural: Organizational cultural resistance and readiness

Provision: The supply of resource-constrained rewards (across the board)

Weighting: Attempting to measure the comparative value of certain rewards

BUILDING A BUSINESS CASE FOR STORM

TOTAL REWARDS STRATEGY PROCESS FLOW

Step 1: Define the context and issues (environmental analysis)

Step 2: Set the total reward strategy (guiding principles and reward priorities)

Step 3: Set reward change agenda (status quo relative to desired end state)

Step 4: Implementation overview

Step 5: Design individual plans

Step 6: Implement

Step 7: Measure and manage

Outcome: A cohesive and comprehensive reward strategy that is both value-oriented and cost-effective and aligned with the organization's business strategy.

CREATING/DEVELOPING A REWARD STRATEGY (7-STEP PROCESS)

Benchmarking STORM

Annual STORM reviews

Best practice guidelines and principles

BENCHMARKING, MEASURING AND EVALUATING THE IMPACT OF STORM

Question: How do you know if your rewards program is offering the right levels of total remuneration to recruit and retain staff?

Benchmarking offers a useful tool to answer this question. Benchmarking aims at improving performance - a search that never ends. Therefore, benchmarking is not a single action but a continuous, cyclical process.

Performance Assessment

Performance Improvement

BENCHMARKING

5-STEP BENCHMARKING CYCLE

REMUNERATION REVIEW PROCESS

A clear, executable remuneration philosophy aligned with business strategy

Employee-centricity

Investment in front-line manager capability

Well thought-through decision-support data and tools

A continual process, not a one-off project 

5 KEY FOCUS FOR STRONG REMUNERATION EXECUTION (AON HEWITT)

STATISTIC: 24% of participants do not measure reward and recognition programme success.

Review your programs and rewards frequently to keep them aligned with corporate goals as well as employee expectations.

Measure the effectiveness and impact of your reward and recognition programmes.

Create a performance measurement framework so you can measure the impact of your reward and recognition programme.

Track the performance metrics that form the basis of your reward structure and conduct surveys to gain qualitative feedback from employees and supervisors.

IMPERATIVE: Measure your reward and recognition programme impact and improve based on your results.

EVALUATION GUIDELINES

METHODS FOR MEASURING REWARD AND RECOGNITION PROGRAMME SUCCESS

Explain the best practice methods and process that your organization will apply in the benchmarking, reviewing and measuring of your Strategic Total Rewards Strategy.

SYNDICATE GROUP LEARNING ACTIVITY 3

Defining payroll fraud

Payroll fraud statistics – Plunders and Blunders

Detection of payroll fraud e.g. ghost workers

Payroll fraud prevention strategies

Applying payroll internal controls, 3 types of control and the control process

Taking action against payroll fraudsters

TRAINING PROGRAMME OVERVIEW (DAY 2)

Payroll fraud involves an intention by a member of a business or organization to misappropriate funds.  Payroll fraud occurs when the fraudster causes the organization to issue a payment by making false claims of compensation.

Payroll fraud is most simply defined as employees cheating the payroll system at their place of employment in order to receive funds to which they are not entitled. 

DEFINING PAYROLL FRAUD

According to Sage HR & Payroll MD Anton van Heerden, payroll fraud is one of the biggest risks facing companies, with losses bigger than those of cash-in-transit heists. "The worst part about payroll fraud is cases often go unreported by the business, due to embarrassment. Instead of laying a charge against the guilty party, they're simply let go. Without prosecution, the fraudster will go to another company and do the same there, creating a vicious cycle.“

The only statistics available on payroll fraud in South Africa are dated 2011 from Alexander Forbes, who stated that payroll fraud costs South African companies more than cash in transit heists: R100 million is lost in SA annually to these heists.

More than 9% of workplace fraud in the Africa is associated with payroll fraud

It can take up to 36 months to discover a fraud scheme from the time it was first started

Payroll Fraud happens in 27% of all businesses

PAYROLL FRAUD STATISTICS - PLUNDERS AND BLUNDERS

Ghost workers

Time-sheet/Falsified work hours

Commission schemes

Workman’s compensation (IOD) schemes

Leave balance manipulation (that involve kickbacks or bribes within companies)

Re-imbursement fraud

TYPES OF PAYROLL FRAUD

Unusual fluctuations in payroll expenses or hours - anomalies in payroll records

Pay cheques to employees with minimal personnel records

Inadequate payroll checks and controls

Payroll users that either start work late or early to commit misappropriation of funds. Payroll users that conduct processes from home should also be a concern.

No correlation between number of pay cheques and number of employees

Signs of an employee living an overly expensive lifestyle for their earnings

Multiple employees that are not family members sharing an address or bank account

Having a member of staff unfamiliar with the payroll system check records

Payroll audits

PAYROLL FRAUD DETECTION – RED FLAGS

Forensic Accounting utilizes accounting, auditing, and investigative skills to conduct an examination into a company's financial statements.

This provides an accounting analysis that is suitable for a court of law.

FORENSIC ACCOUNTING

The main steps in forensic analytics are:

Step 1: Data collectionStep 2: Data preparation and examinationStep 3: Data analysisStep 4: Reporting 

FORENSIC ACCOUNTING PROCESS

Cross reference list of employees from payroll records to other sources

Review HR records for anomolies

Data mining resources

Identify employees with missing or duplicate master file information

HOW TO DETECT GHOST WORKERS?

4-STEP PAYROLL FRAUD PREVENTION STRATEGY

According to Sage (2015), the most efficient way to mitigate payroll fraud is with an impenetrable series of internal controls, which need to be constantly monitored and consistently applied.

Some methods to implement to reduce the likelihood of payroll fraud happening in your business: 

Automate payroll processing Separate payroll duties Monitor financial processes Screen payroll and finance employees Monitor employees for suspicious behaviour

PAYROLL FRAUD PREVENTION

Sage HR & Payroll MD Anton van Heerden suggests the following:

Access control: Controlling who can access what, and restricting what certain users can do on a particular system.

ID verifications online: Checking against the Home Affairs database to ensure IDs are legitimate.

Bank account verification: Verifying bank account details to ensure account number and account holder match.

Direct link to banking system: Instead of imputing an electronic file into the banking system, a direct link to the banking system can be implemented, ensuring no files can be tampered with en route.

PAYROLL FRAUD PREVENTION

Yolande Schoültz, risk and fraud management division manager at Sage VIP (South Africa) recommends the following payroll fraud prevention measures:

Advice regarding a payroll system:

Access control should be aligned to segregation of duties When checking and signing off the payroll, print your own reports Activate a “stop further entry” function after the payroll has been processed by the

administrators, but before checking Bank account and ID number validation and verification should be done Income verification should be linked to South Africa’s four major banks

Advice regarding the payroll, human resources and finance departments:

Segregation of duties should be clearly defined The bank statement should always be reconciled back to the payroll system A senior manager in finance should be responsible for payroll sign off

PAYROLL FRAUD PREVENTION

Internal control#1: Split duties between the person doing the monthly processing and the person doing the salary payments

Internal control#2: Bring about processes for change and adjustment to payroll systems 

Internal control#3: Implement checks and cross-checks to ensure the calculations are done correctly

Internal control#4: Reconcile actual bank account payments to the payroll system on a monthly basis 

INTERNAL CONTROLS

INTERNAL CONTROL PROCESS HIERARCHY

TYPES OF CONTROL

APPLYING THE CONTROL PROCESS

Segregation of duties between HR (employee record creation); payroll (prepares payroll) and cashier (disbursement of cash)

Direct deposit (eliminates possibility of cheque fraud)

Review of employee master data for duplicate names and identity numbers

Comparison/reconciliation between actual payroll and budget

PAYROLL SYSTEM CONTROLS

3-PRONG PAYROLL FRAUD PREVENTION STRATEGY

Detection: Identify the most common forms of payroll fraud in your organization.

Prevention: For each of these forms of payroll fraud, develop prevention strategies and/or counter-measures.

Control: Identify feedforward; concurrent and feedback types of control to mitigate payroll fraud.

SYNDICATE GROUP LEARNING ACTIVITY 4

TAKING ACTION AGAINST PAYROLL FRAUDSTERS

Develop and implement a policy for handling suspected dishonest and fraudulent activities, including termination and reporting to law enforcement.

Communicate such policy to all employees, agents, vendors, contractors, and other interested parties.

Develop and implement a code of ethics for employees, clearly defining acceptable and unacceptable activities.

Develop and implement codes, guidelines, and organizational policies designed to prohibit conflicts of interest. Consider requiring employees to disclose possible conflicts of interest involving other employees.

Require all vendors and contractors to agree in writing as apart of the contract process, to abide by the codes described in points above.

ZERO TOLERANCE – PROSECUTE ALL PAYROLL FRAUDSTERS

Creating a fraud awareness culture

Ensuring that you have appropriate guardians in your business

Be involved and understand what controls are in place

Review and monitor with an element of surprise

Reward compliance

Introduce controls and procedure certification

Employee rotation programs

PRO-ACTIVE MANAGEMENT OF PAYROLL FRAUD

Employee leave policy

Development of code of conduct/ethics

Fraud / corruption control plan

Review annual effectiveness of above-mentioned policies

Vendor tender programs

Consult annually with specialist to review your progress

Consider formal whistleblower arrangements

PRO-ACTIVE MANAGEMENT OF PAYROLL FRAUD

Describe your organization’s policy and procedure regarding payroll fraudsters.

What (disciplinary) actions are taken against perpetrating managers and employees?

SYNDICATE GROUP LEARNING ACTIVITY 5

Applying the payroll risk management process

Defining quality assurance

Applying the P-D-C-A cycle as a means of continuous improvement of payroll process and system

Minimizing and correcting payroll errors e.g. overpayments

Complying with BCEA (Section 34)

Analyzing and applying case studies

TRAINING PROGRAMME OVERVIEW (DAY 3)

ILLUSTRATION: PAYROLL RISK MANAGEMENT PROCESS

PAYROLL RISK MANAGEMENT PROCESS

Step 1: Payroll Risk Identification

Step 2: Payroll Risk Analysis

Step 3: Payroll Risk Prioritization

Step 4: Payroll Risk Response

Step 5: Payroll Risk Evaluation

PAYROLL RISK MATRIX

PAYROLL RISK RESPONSE STRATEGIES

Apply the 5-step risk management process to payroll management and administration.

SYNDICATE GROUP LEARNING ACTIVITY 5A

Quality assurance (QA) is a way of preventing mistakes or defects in manufactured products and avoiding problems when delivering solutions or services to customers; which ISO 9000 defines as "part of quality management focused on providing confidence that quality requirements will be fulfilled".

This defect prevention in quality assurance differs subtly from defect detection and rejection in quality control and has been referred to as a shift left as it focuses on quality earlier in the process.

Quality assurance comprises administrative and procedural activities implemented in a quality system so that requirements and goals for a product, service or activity will be fulfilled.

It is the systematic measurement, comparison with a standard, monitoring of processes and an associated feedback loop that confers error prevention. This can be contrasted with quality control, which is focused on process output.

DEFINING QUALITY ASSURANCE (QA)

2 PRINCIPLES OF QUALITY ASSURANCE

Make sure all employee details are correct

Conduct regular, ongoing audits

Institute a transparent payroll policy

Seek employee input to improve payroll process effectiveness

Don’t ignore payroll requirement deadlines

Know payroll tax policies and rules

Review your reporting process

MINIMIZING PAYROLL ERRORS

Section 34 of the Basic Conditions of Employment Act 75 of 1997 (BCEA) regulates deductions that an employer can make from an employee's remuneration. The general rule is that a written agreement is required from an employee prior to any deduction being made from their remuneration.

However, Section 34(1)(b) of the BCEA permits an employer to make deductions from an employee's remuneration if required or permitted to do so in terms of a law, collective agreement, court order or arbitration award. This allows for a deduction without the need for a written agreement or compliance with the further limitations on deductions for loss or damage imposed in Section 34(2). 

When deductions are made for other for reasons, as contemplated in Section 34 (1) (d), the Act is clear and states that any deduction should not be more than 25% of the Employee’s remuneration. However, there is no requirement by the Act that a deduction as contemplated in Section 34 (5) (a) should only be 25% and not more. Thus the full amount of overpayment, made in error, can be recovered at once.

CORRECTING PAYROLL ERRORS – SALARY OVERPAYMENTS (BCEA)

The BCEA specifically addresses deductions in respect of damages.  Section 34 (2) permits an employer to deduct from an employee's remuneration for reasons related to loss or damage provided the employer complies with the following prior to a deduction being made:

the damage must be as a result of the fault of the employee; fair procedure must be followed in that the employee is given fair opportunity

to make representations why the deduction should not be made; the total amount of the debt cannot exceed the loss or damage; and the total deduction does not exceed one-quarter of the employee's

remuneration in money.

The BCEA also specifically deals with the recovery of any overpayment made to an employee. The statute permits an employer to deduct any such overpayment unilaterally. Whenever an employer is permitted to apply set-off it is not limited in any way as in the case of recovering damages in compliance with section 34 (1)(a) and (2).

CORRECTING PAYROLL ERRORS – SALARY OVERPAYMENTS (BCEA)

Describe the procedure/s to minimize payroll errors and the process of correcting overpayments.

Describe how you can apply the P-D-C-A cycle as a means of continuous improvement of the payroll processes and systems within your organization.

SYNDICATE GROUP LEARNING ACTIVITY 6

A Surrey bookkeeper who committed more than £20,000 in payroll fraud has been sentenced to 15 months imprisonment.

Judith Auclair, 60, regularly submitted PAYE tax returns to HMRC on her employer’s behalf. However, she began to add false employee details to the company’s payroll and claimed they were owed tax refunds. She then paid the money into her own bank account.

Auclair falsely claimed £17,254 in tax refunds and pocketed a further £4,927 of tax and National Insurance contributions which had been falsely deducted from other employees’ wages between April 2009 and March 2012.

Auclair also paid herself £14,223, falsely stating the money had been used to pay for goods and services.

After a director became suspicious and the company’s accountant asked for its tax records, Auclair resigned from her job in December 2011.

Auclair was arrested on 7 March 2013 on suspicion of fraud. However, shortly after her arrest she transferred a further £3,398 from her employer’s bank account into her own account.

She was later charged with fraud by false representation and being knowingly concerned in the fraudulent evasion of income tax. She pleaded guilty to 15 fraud charges.

CASE STUDY 4: SURREY BOOKKEEPER

Review the four case studies. Describe what payroll fraud detection, prevention and control lessons can be extracted from these case studies? Try to relate each case study to the Fraud Triangle.

SYNDICATE GROUP LEARNING ACTIVITY 7

Andrew Firth http://www.slideshare.net/rushmoregroup/payroll-fraud (accessed 3 April 2016) – Case Studies 1-3

http://www.dorkingandleatherheadadvertiser.co.uk/Surrey-bookkeeper-jailed-obtaining-37k-tax-fraud/story-22980825-detail/story.html (accessed 3 April 2016) – Case Study 4

http://fspbusiness.co.za/articles/accounting/use-these-4-internal-controls-to-prevent-payroll-fraud-7977.html (accessed 3 April 2016)

http://www.labourguide.co.za/most-recent/1900-employer-deductions-from-employee-remuneration (accessed 3 April 2016)

http://www.sage.com/za/newsroom/sage-hr-and-payroll/2015/06/01/sage-pastel-payroll-and-hr-5-ways-to-detect-and-prevent-payroll-fraud (accessed 3 April 2016)

ACKNOWLEDGEMENTS

Summary of the key learning points

Questions

Conclusion

Good luck with the implementation of effective payroll management and administration processes and strategies.

CONCLUSION

CONTACT DETAILSCharles Cotter

(+27) 84 562 9446

charlescot@polka.co.za

LinkedIn

Twitter: Charles_Cotter

http://www.slideshare.net/CharlesCotter