By Adam Livermore, Dezan Shira & Associates
Not so long ago, it was common for organizations in China to share input data for their monthly payroll with their payroll processing vendors through corporate email. It was also not unusual for those vendors to process their clients’ payroll using Excel sheets. Nowadays, the advent of secure FTP links to upload and download sensitive HR information has eliminated confidentiality concerns relating to data transmission. Payroll processing companies have also developed sophisticated systems to make payroll calculations and produce the reports their clients require. However, gathering input information remains a significant challenge.
The social insurance and housing fund systems in China are a good example of the complexities in payroll processing. Contributions need to be made on behalf of every employee, but they are administered at the city-level. Contribution percentages differ greatly between cities, and even within the same city’s districts. The housing fund, in particular, presents a challenge. In some cities, housing fund contributions from employers are considered tax-free when the salary of an employee is no more than 500 percent of the local average annual salary. In other cities, the tax-free housing fund contribution base is limited to 300 percent of the local average annual salary. By definition, the average annual salary of workers is different in every city in China. Even the timing of the release of updated statistics changes each year. For payroll processing companies, obtaining accurate and up-to-date information from every city is a continuous challenge.
A more fundamental challenge for third party payroll processors is that HR in China is not as advanced as it is in the United States or in major European countries. While HR managers tend to be administrators rather than communicators or strategists, the administration work is usually paper-based. Absence application forms, overtime application forms, and sometimes even salary payments themselves are handled on paper directly between the HR team and the employees.
When a company utilizes a third-party payroll processor to manage payroll, accurately consolidating and transmitting this information to the payroll provider is difficult and time-consuming. The likelihood for error increases as details are transposed from paper documents into Excel sheets and then consolidated. This can be more time consuming than the payroll processing itself.
Because of the difficulties involved in gathering and transmitting input information for the payroll process, many companies decide to keep payroll processing as an internal function within their local organizations. Although many managers recognize the risks and lack of efficiency inherent in using this method, there is not always enough incentive to consider switching to a third party payroll provider.
IT platforms provide the solution to these challenges. The largest MNCs have internal solutions. They spend tens of millions of dollars on comprehensive ERP systems that cover almost every aspect of their operations, often including HR. They can afford to do this because the sheer number of employees they have in countries like China justifies spending millions of dollars configuring their ERP system (typically SAP or Oracle). This is the ideal solution, as these companies are able to maintain all their operational information within one unified database.
Most multinational firms are not able to afford or justify internal solutions. Lacking the scale of the giants, they only have hundreds or dozens of employees in each of their Asian markets. Such companies typically operate ERP systems to manage their production, finance, and inventory. However, they seldom make the jump to managing HR within their global ERP system. If they do, the configuration costs are usually too high to include payroll calculations for employees in each market from the global ERP system.
Payroll processors are developing solutions for these companies by utilizing the “HR hierarchy.” The HR hierarchy is a map of the reporting lines within an organization, containing all employees and the positions they fill. Please note that an organization can be defined to be one corporate entity in one country or multiple corporate entities across multiple countries.
Once an HR hierarchy has been built within a system, day-to-day issues can be managed through the system. For example, once the reporting line has been defined it is easy for an application for annual leave made by a particular employee to be channeled to the appropriate manager for approval. The HR manager is automatically updated about pending approvals and can follow up with managers as necessary. This data may also be utilized by the payroll processing company as an input for the monthly payroll process.
Managing statutory and annual leave is often complex. Systems are able to handle complexity and the rules can be built into the system. From the perspective of the payroll processor, difficulties that obstruct information gathering from clients is removed through the provision of a system with an online interface for its clients to use. Once data is inputted into a system, it can be accumulated and then analyzed, which is almost impossible to do with paper records. Comparisons for internal purposes can also be made between employees, managers, and entities.
Payroll processors benefit companies in many ways. For example, many multinational organizations have expat managers that regularly travel globally. Sometimes they even manage multiple entities in Asia and are not physically based at one specific location full-time. The ability to go into an online system to make approvals for applications accelerates decision making and keeps the manager updated on the attendance status of employees at each entity.
Although the back-end of systems typically only operate in English, the interfaces which the employees see, and into which they enter data, can be displayed in the local language. This reduces misunderstanding and speeds up processes.
When problems arise internally or with the payroll provider, an audit trail is available for all stakeholders to see where responsibility lies for each problem.
Naturally, many complications emerge when setting up these systems and interfaces. One universal problem arises because every company has its own internal rules relating to the amount of annual leave, application for overtime, etc. Often when implementing a system to manage these processes, it is identified that the internal regulations are not sufficient to cover every eventuality. In such situations, companies need to redefine their HR rules and regulations (encoded in the employee handbook) before configuring the system. Other complications may arise if the local company does not have sufficient bandwidth for their internet connection or adequate server/network equipment. Nevertheless, once implemented across multiple entities, the savings generated by these system should be far greater than the implementation costs.
This approach is best for companies that cannot build a comprehensive internal ERP system across all the countries in which they operate. For the payroll processor, the main benefit of these systems is the fact that they provide a persuasive case to potential clients to use their services. However, the biggest benefits for the companies adopting systemized solutions may not be the greater efficiency of the payroll process itself. Rather, it comes from the increased speed of internal decision-making, and the ability to gather important HR data in a central location which can be analyzed to enable strategic decisions to be made relating to those entities.
About the Author: Adam Livermore directly manages Dezan Shira & Associates’ Dalian, Qingdao and India offices while leading the team providing integrated payroll processing services to clients across China, Vietnam, India, Hong Kong and Singapore. Adam has a particular specialization in the areas of Human Resources in China, relating to both the legal and administration aspects as well as possessing a comprehensive understanding of the key legal and accounting topics relating to foreign direct investment in China.