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Coping with a Globalized Payroll

by Don Banowetz | April 4, 2017

Rapid advances in technology over the last few decades have enabled businesses of all shapes and sizes to go global to find and develop new markets for their products around the world. But globalization can create new challenges of its own, and one of the biggest is how to manage a globalized payroll. Technology can also effectively address these challenges. Organizations often find 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 that are outside of its control— from unstable governments and little banking infrastructure in regions such as Africa, to highly restrictive legislative protocols such as those across Asia. “Payroll and tax challenges in emerging markets are considerable,” says Ruairi Kelleher, executive director at payroll and tax employment specialists Immedis in Dublin.

“In particular, the variances in local social security legislation can be particularly challenging for companies to get a grip of their cost structures and maintain (compliance).”

In these types of environments, effective payroll processes require treasury officers to not only manage cash flows but also prepare for currency volatility. They also need to help plan corporate structures that optimize tax policy in the different jurisdictions and ensure compliance with anti-money-laundering laws.

An international payments strategy coupled with automation 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.

Before a company decides what kind of system it wants to use, it has to be aware of the issues that can crop up in global payrolls, whether they are exchange rates, differing tax regulations or coordinating with finance for funding. Language barriers and important cultural nuances surrounding em- ployment in foreign countries may also affect the process.

There are four key pitfalls when navigating international payroll along with potential solutions through the information provided by human capital management platforms.

Lack of transparent rules and regulations

Every country has unique payment-routing rules and regulatory requirements, and the variations in information required for each country are numerous. With limited visibility into most countries’ activities, requirements have frequently been unclear, obliging companies to decentralize and work with in-country providers.

Moreover, in some countries, this information is compulsory, mean- ing an omission of even one item can equate to an incomplete payment altogether.

As a result, delays and investigations become inevitable, leaving the employee without a paycheque, an organization with significant manual overhead costs, and staff time wasted overall.

With significant advancements in payroll technology solutions, 56 percent of North American companies now outsource the hosting, maintenance and support of their payment technology in order to benefit from a more centralized model, accord- ing to a 2014 Deloitte survey of 58 companies in four global regions.

Risks of foreign exchange

Global organizations are no strang- ers to the inherent volatility of the foreign exchange market. With each currency affected by monetary, economic and socio-political issues in its country, businesses operating overseas inevitably encounter market fluctuations. It is part of the payroll manager and finance department’s role to navigate through these fluctuations, ensuring both the company and its international employees are protected from a decline in their currency.

One key to achieving this is understanding the exposure in local currency well in advance of making international payments, and mitigating these exposures on a month- ly, quarterly or annual basis before each payroll cycle.

Technology has better prepared the payroll manager to work with finance on the known exposures, determining the best blend of solutions for their needs, such as a natural hedge of receivables and payables, purchasing portion at spot, or using hedging instruments such as forward contracts.

Inaccuracy of manual  intervention

Deloitte’s survey also found that 70 percent of North American companies maintained their payroll in-house. However, allowing a department to manually key in employee information, set up payroll templates or personally execute each individual payment means errors are unavoidable. This is doubly true when organizing international payroll.

Communicating with numerous international banks and navigating complicated validation procedures require even more manual entry of complex information than domestic transactions, increasing the likelihood of costly human error.

What is the key to eliminating this expensive issue? Integration. The right payment technology or payroll solution will integrate directly with an organization’s existing enterprise resource planning (ERP) system or human capital management platform.

The solution should provide the tools to validate through an employee-facing gateway or through single file integration to the platform, with validation of multiple currencies and the flexibility to manage inter- national payroll through different bank accounts. A more straight- through process will reduce the number of errors by substantially decreasing the hours spent manually intervening with payment investigations or correcting employee information.

Hidden costs of international payroll

When branching out into new regions, payroll populations tend to be smaller. This can make the decision between establishing in-country banking versus a cross-border transaction more difficult. Open- ing, maintaining and reconciling an in-country account can be cumbersome, especially in emerging markets such as Latin America and Africa.

In addition, opening and operating new foreign bank accounts can present further expensive fees, and supplementary costs piled on by intermediary institutions that the bank deals with when processing international payments.

Cross-border transactions are easier to establish through a financial provider, especially with smaller populations. However, payroll managers are frequently surprised by expenses that have not been clearly defined, especially with significant pricing markups on foreign ex- change transfers. Once all these hidden fees have been extracted, the overall cost to an organization can be extremely hefty.

Today’s payment technology has the ability to bypass all these costly pitfalls. A reliable global payment solution provider will work with an organization to ensure transparent pricing, with no exorbitant foreign exchange fees built into the service agreement.

They will also be able to deliver payroll through numerous channels including SWIFT, Low-Value delivery and other in-country channels via a strong network of international banking relationships. Eliminating the need to create a new bank account, in turn, eliminates the need to work with multiple banks altogether, with each wanting a cut of the funds.

An automated, international payroll strategy can be an effective tool in dealing with the complexities of global payrolls so HR managers should be cognizant of the positives associated with an international, automated system.

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