How pay runs, step by step

Pay runs as a repeating cycle. Hours and earnings are captured, deductions and tax status are kept current, payments are calculated and released, exceptions are paid by hand, the books are adjusted at period end, and employee questions are answered. Payroll staff own most of it. HR, managers and finance feed and check it.

The steps in order

1. Capture time worked. Employees record hours in a timesheet or clock system. Line managers approve them. A payroll administrator then loads the approved records into the payroll system before the cutoff. Salaried staff usually need nothing entered unless they took unpaid leave or earned overtime.

1. Keep earnings records current. HR enters new hires, leavers, pay rises and role changes. Payroll checks each change against a signed approval before accepting it. Most payroll errors begin here. A promotion letter arrives late, or a rise is backdated after the run has been locked, and someone has to work out the difference by hand.

1. Maintain deductions. Payroll holds the standing instructions for pension contributions, benefit premiums, union dues, salary sacrifice and loan repayments. The benefits team or outside providers send changes. Court orders for garnishment come directly from the courts and must be applied exactly as written, including the order in which they rank.

1. Track tax status. A payroll tax specialist or senior administrator watches for new withholding forms, changes of address that move an employee into another tax jurisdiction, and notices from tax authorities that change an employee's code. Missing one of these is quiet at first. It surfaces months later as an underpayment the employee has to settle.

1. Calculate, review and release payments. Payroll runs the calculation. A reviewer, ideally someone who did not enter the data, compares totals and individual results with the previous period and chases anything unusual. Finance confirms the funding. Treasury or an authorised signatory releases the bank file, and payslips go out to employees.

1. Issue manual checks. Some payments cannot wait for the next run: final pay for a leaver where the law sets a deadline, a missed payment, or a correction to a serious error. The payroll lead prepares these off cycle. A second person approves each one, and the payment is recorded so the next regular run does not pay it again.

1. Post period-end adjustments. Payroll works with a general ledger accountant. Together they accrue pay earned but not yet paid, reconcile the payroll clearing and tax liability accounts, reverse errors and post the journals. Year end adds employee tax statements and filings to the workload.

1. Respond to employee questions. A payroll helpdesk or HR shared service answers queries about payslips, deductions and tax. Many of these questions point back to an earlier step that went wrong, so the answers should feed corrections into the next cycle.

Where the handoffs break

The steps look tidy on paper. In practice the trouble sits between them.

HR and payroll often keep separate records that drift apart. Managers approve timesheets late or not at all, and payroll pays on estimates. Manual checks bypass the controls built into the main run, which is why they attract fraud and duplicate payments.

Period-end work is frequently squeezed by whoever has time. When the clearing accounts are not reconciled, small differences accumulate until nobody can explain the balance.

Questions to ask the people who run it

What staff actually do often differs from the documented procedure. These questions tend to expose the gap:

• What happens when a change arrives after the cutoff? Who decides whether it goes in?
• Which spreadsheets sit outside the payroll system, and who maintains them?
• How do you know a timesheet was approved by the right manager?
• Who checks the run before it is released, and what do they actually look at?
• When did someone last reject a payroll at review, and why?
• How are manual checks requested, approved and recorded?
• Who reads the notices that come in from tax authorities?
• Which deductions do you calculate by hand?
• What questions do employees ask most often, and what usually caused them?
• Which accounts are hardest to reconcile at period end?
• If you were away, what would stop working?

The last answer usually reveals where knowledge lives in one person's head. Any change to the process should start there.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.