An efficient payroll process is one of the fundamental mainstays of every successful organization. Salary payments must be delivered on time if a company wants to establish long-term sustainability. An employee who hasn’t received his or her wages will not only be unhappy, but could potentially foment discontent among colleagues, leading to a broader decrease in morale and trust.
Organizations often find that the impediments to achieving accurate, timely payroll payments increase exponentially when they expand operations abroad. A company doing business internationally faces a host of potential challenges, including many factors that are outside of its control—from unstable governments and little banking infrastructure in regions like Africa, to highly restrictive legislative protocols like those across Asia. In global businesses, effective payroll processes require treasury officers to not only manage cash flows, but also prepare for foreign currency volatility, help plan corporate structures that optimize tax policy in the different jurisdictions, and ensure compliance with anti-money laundering laws.
Treasury needs to be running payroll-related due diligence around each country the business is entering. A global company that makes the mistake of applying the same approach to payroll funding for all the countries in which it has employees will most likely find itself in violation of local laws. Many countries have specific rules around how employees and taxes are funded, rules that don’t apply for other types of payments.
However, every multinational can—and should—establish a global strategy for its payroll payments. Instituting an international payments strategy will save an organization from having to track elaborate and highly individualized solutions for each of its regional divisions. Once the overarching strategy is in place, a company can adjust its process, where necessary, to meet each country’s local regulatory requirements without losing its core goals and principles.
Centralization, Decentralization, or Something in Between
Perhaps the most basic decision a company must make around its global payroll delivery is whether it will consolidate payroll activities into shared services or whether payroll services will be delivered at the country level. How payroll is delivered should be a major consideration when developing a global payroll funding strategy.
Many organizations already use global or regional shared service centers to deliver finance and human resources to business units around the world. The benefits of centralizing various global finance activities are well-documented; primary among them are the centralized function’s economies of scale and increased visibility for corporate management.
However, coordinating payroll funding within a single global function presents challenges as well. The farther a shared service center is from a payroll payment’s target destination, the more likely that centralized payroll management will lead to delays, due to issues like lack of knowledge among shared service center staff about local customs or bank holidays. In addition, most countries have their own banking formats and local requirements.
Understanding and complying with local regulations in a regional or centralized model can be difficult to manage. A local partner can help a company manage the idiosyncrasies of the country’s payroll environment. It can also alert the business if local laws change, so that the company remains compliant.
In laying the foundation for a company’s overall payroll strategy—and, in particular, in determining whether to centralize payroll operations—the corporate treasurer needs to consider these four important factors that affect the company’s ability to deliver international payments:
Where are your funds?
The first question to consider in constructing a global payroll payment strategy is what proportion of the company’s local operations have the ability to generate enough revenue within the country of operation to self-fund the local payroll. If the organization earns sufficient revenue within a country to pay the employees it has stationed there, that significantly reduces the complexity of delivering salaries via a local payroll function.
Local payroll payments funded by the company’s in-country liquidity eliminate the need for sophisticated cross-border payments and currency exchange, and also minimize the tax issues associated with moving money across borders. For a business unit that generates enough funds in-country to cover payroll liabilities, the most common solution is to have a local payroll team make salary and tax payments from a local bank account.
In contrast, companies that opt for a global payroll shared service center usually have the central group make cross-border payroll payments for all the divisions they serve, to maximize economies of scale and control. The shared service group may have to contend with different systems, banks, interfaces, processes, rules, customs, and levels of service in every locale it serves. Most companies desire a funding solution that matches their payroll process delivery model, and organizations typically move toward a regional or global funding solution as they regionalize or globalize payroll services.
Businesses that use a local team, making payments out of a local account, may or may not use a bank account dedicated exclusively to payroll. A division with enough local income to self-fund its payroll most likely has an existing banking relationship within the country, an account into which it deposits revenues. The group could use the same account to fund in-country payroll liabilities.
Payroll funding from a local bank account is usually the lowest-cost solution. Utilizing a corporate account in this way enables a multinational to avoid the compliance difficulties inherent in setting up another international bank account, as well as the fees associated with opening and operating a new account. However, using the general business account for payroll may open the organization to problems of wage visibility, particularly within small payroll populations. If accounts payable is managed by a division head who would not otherwise have access to information about salaries within the division, word may spread regarding differences in pay packets, affecting morale and staff satisfaction.
Alternatively, a company that establishes a separate payroll account in a country where it does business could outsource payroll management in that country, decreasing the likelihood that employees will discover what their colleagues are earning. Furthermore, decision-makers could select an outsourcing provider based on its expertise in local tax structures, reducing the compliance burden placed on the corporate team.
What does each country allow?
As companies continue to expand abroad, they must navigate more and more regulations with each new country of operation. Not only does every country have its own payment routing rules, in areas such as supporting documentation and tax IDs, but national legislation also dictates the options available when transacting employee payments.
Some countries, for example, require a company to have an employer-named account—a bank account held under the name of the legal entity within the respective country—from which to pay staff. Other countries do not permit cross-border payroll payment to pay liabilities (employee and/or taxes). Understanding the unique legal requirements in every jurisdiction in which the company does business is crucial in developing a viable, cost-effective corporate payroll strategy.
How big is your payroll population in each locale?
The size of your employee population should play an important role in determining your payroll strategy. An organization with 10 employees in a particular country might not want to invest the time and funds necessary to develop the infrastructure for in-country payroll. If the country’s regulations permit it, a cross-border payments process will often be the most practical strategy in this scenario. On the other hand, if the organization intends to expand substantially within the country, using a cross-border payments strategy will dramatically increase payroll complexity as the business grows.
Likewise, the more team members an international division includes, the more complicated management of all the payment routing details becomes. Establishing local banking relationships and developing compliance expertise may be the better option in countries with a large employee base, or projections of rapid growth, to ensure more accurate cash flow management and timely salary payments.
When will you manage your foreign exchange?
Foreign exchange volatility is an inherent challenge for companies embarking on global expansion. If any overseas business unit doesn’t generate sufficient funds to pay its employees locally, making payroll will require cross-border funds transfers. Corporate treasury will therefore need to take a proactive stance toward decreasing the effects of market fluctuations, to ensure that the company and employees are safeguarded against a drastic movement in their currency.
It is important to understand the organization’s ongoing budget, expenses, and exposures in each local currency well in advance of making international payments. Understanding these factors will help the corporate treasury team build the foundation for a sound hedging strategy that mitigates exposures on a monthly, quarterly, or annual basis. This is crucial for all business operations, obviously, but ensuring that the company has adequate funds for each payroll cycle in each country where employees are located ensures that employees will always be paid on time. In contrast, taking a reactive position and leaving complex processes to the last minute may put the company in a difficult position when payday arrives. Companies that need help can turn to technology and/or a third-party foreign exchange expert for help determining the best blend of solutions, including natural hedges of receivables and payables as well as hedging instruments with purchasing portions at spot.
Organizations that handle payroll through a globally centralized shared service center generally make payments from a single global bank. This model can be more efficient, and certainly increases visibility and control for corporate management. But managing compliance with complex regulations in many different jurisdictions can be challenging for the central group.
In addition, the concept of a true global bank has diminished since the 2008 financial crisis. Decision-makers need to understand a bank’s capabilities to deliver payroll within each country in which they have operations. Banks that work solely through multi-layer correspondence can cause delivery delays and/or can have issues in resolving payment investigations due to lack of local expertise. The ideal institution/payment provider will have multiple entry points providing local expertise and delivery through in-country accounts or network.
The challenges inherent in centralizing global payroll lead some companies—particularly those with a sizable workforce in each of several countries—to select a decentralized payroll service delivery model with either local payroll staff or a domestic third-party payroll provider, as well as a local bank that caters to each of their markets. Companies that choose a decentralized model do pay a price in terms of visibility and control. Efficiency can also be a challenge, as maintaining and reconciling multiple relationships in multiple countries can become a nightmare.
In some cases, companies have the option of a middle ground. Organizations that aren’t happy with either end of the centralization spectrum should consider managing payroll operations in regional hubs, using global or regional service providers and/or banking partners while maintaining a number of in-country payroll contacts to mitigate time delays.
Many companies work with a payroll provider to make local payments on their behalf. Not all payroll providers offer this service, and the approach is not without risk. Payroll providers that are managing funds on behalf of clients need to be fully vetted before the client allows them to manage its funds. In addition, not all countries allow third-party payments for payroll liabilities.
The key in choosing a path for your organization is to ensure that you’ve done your due diligence, and that whatever providers you use to deliver your payroll have a proven track record within the countries or regions in which you’ve engaged them.
Developing a Payroll Funding Strategy
Ultimately, there is no one-size-fits-all solution in developing a global payroll strategy. A company’s decisions must stem from its internal infrastructure, taking into account its growth plans, locations of operation, and the specific risks in each country where it does business.
There is, however, a way to minimize risks when expanding into international markets: Create an overall global policy that takes into consideration the company’s goals, its rate of expansion, the nuances of international payments, and where its sources of revenue are located. The corporate payroll payment strategy should describe the degree to which the company expects payroll functions to be centralized; establish the company’s global standard for payroll management resources (e.g., outsourced services, internal shared services, local payroll staff in different countries); establish whether payroll will involve cross-border payments; and describe whether the company expects to use local banks in each area, or to use a single global bank for payroll wherever the local regulatory environment allows it.
Companies should analyze their current situation to determine which model will work best for each country in which they have employees. The decision tree framework should look something like this:
- What is the strategic vision for this country—e.g., large expansion or just dabbling to test the market?
- Employee population—large or small?
- Does the country self-generate enough funds to support payroll liability?
- Does the business require a local bank account aside from payroll?
- Risk analysis: What are the controls necessary to secure funding?
- Local regulatory requirements: Do they allow cross-border payment or third-party trust?
- What are the local options: Is there a payroll provider that can make third-party payments?
- What is the company’s global treasury strategy for all payments? Is there an existing treasury strategy for other types of payments, such as accounts payable?
- Does the global treasury strategy support the needs of payroll?
- Should we handle payroll in-house or outsource?
- Do we want to hold local currency for this country, or is it too volatile?
A fully developed global funding strategy should include policies on how to manage the currency fluctuation risk. Finance and treasury must work with payroll to create the optimal solution for payroll funding and re-evaluate periodically as conditions change.
Global organizations working to develop a cohesive payroll payment strategy must balance the complex needs of both treasury and payroll. Including both functions in the creation of the policy will give the company a clearer understanding of the optimal payroll structure for the organization. It’s also crucial—and difficult—because a solution for payroll may create issues for treasury, and vice versa. Often, treasury solutions are designed without understanding the needs of the payroll organization, such as off-cycle payments or additional local legislation that applies to only employee payments. Sometimes when treasury is not meeting the needs of payroll, payroll staff have to find their own solutions.
Payroll should engage treasury early in the payroll delivery design process so the two teams can work through all of the payment challenges together. Knowing up front that payroll will need an alternative solution gives them the chance to negotiate or find another solution. An example of this is when treasury requires two sign-offs to make payments and there is a 24-hour turnaround time, but payroll needs to make a manual payment the same day to comply with local legislation.
It is important to make a payroll policy flexible in case the payroll and/or treasury function needs to deviate from the ideal state for unforeseen circumstances. As an example, the policy might provide guiding principles for a centralized model, but entry into Russia might require funds to be held within an employer-named account, requiring a more decentralized model for that country. If the policy is too strict, solving it proactively will be difficult. Establishing a policy with limited complexity but sound guiding principles, to reduce risks while being compliant, will set a secure foundation to closely follow whilst allowing the team to act when the ideal state cannot be achieved due to local regulatory requirements. Once payroll and treasury reach a high-level understanding, they will be in a position to adjust that strategy to fit fluctuating global markets, adapting to a multicultural and frequently unpredictable world.
Don Banowetz, CTP, is a regional director for Cambridge Global Payments. Banowetz has over 10 years of experience working in retail banking, commercial lending, and financial technology with a concentration on international treasury and foreign currency. In his current role as a regional director with Cambridge Global Payments, he oversees the Southern U.S. Region, and works nationally within key niches such as higher education, global payroll, and global mobility.
Tracy Micciche, MBA, is a senior manager in the HR transformation group at Deloitte Consulting LLP. Micciche has worked in human resources for the past 20 years, both as a practitioner and a consultant with a concentration in global payroll and HR systems. Her primary focus within the last decade has been helping clients solve their global treasury needs for payroll. She currently works for Deloitte as a senior manager, as a consultant in HR transformation.