Tax system is the biggest payroll challenge
March 21, 2023
Six out of ten European companies identify the tax system as the biggest challenge in the payroll process. The updated Payroll Proficiency Index of European HR service provider SD Worx shows that several elements can either complicate or simplify the payroll process. The index shows how well European companies are handling their payroll processes based on six elements: legislation, technology, remuneration, in-house payroll expertise, staffing and external partners. Strikingly, only a third of European companies exclusively use cloud technology for their payroll, even though it does simplify the process.
The SD Worx Payroll Proficiency Index gives a detailed insight into how European companies are managing their payroll processes. Eleven new countries have been added to the Index, so SD Worx now offers an overview of sixteen countries altogether. There are remarkable differences between those countries, particularly in the use of technology supporting the pay calculations.
Poland in first place
SD Worx' inclusion of eleven new countries in its Payroll Proficiency Index has shaken up the top three countries with the smoothest payroll processes. Poland is at the very top with 71.70%, closely followed by Norway with 71.20% and Spain with 70.49%.
Germany (63.60%) and Denmark (63.45%) are lagging somewhat behind. France is in last place on the Payroll Proficiency Index with 63.06%. This is mainly due to its complex legislation and the impact that has on pay calculation.
57% of European companies see the tax system as their biggest challenge
The complexity of the legislation is indeed having a major effect on the payroll process. Smooth pay calculations are closely linked to how often and how quickly labour law changes in that country and what exception rules companies have to observe.
On average, 28% of European companies say the legislation is having a negative impact on payroll processing. This is particularly the case in France (42%) and Belgium (42%), followed by Austria (32%), Switzerland (29%) and Germany (28%).
In terms of legislation, 57% of European companies indicate that they see the tax system as their biggest challenge in the payroll process. The social security system (52%), the speed of changes in social security and labour law (48%) and the number of exceptions and special schemes (47%) at various levels are also posing significant challenges. The respondents also found that the complexity of the rules for wage components (47%) can make payroll processes more difficult.
Top five administrative payroll process challenges
The Index also highlights the administrative complexity of pay calculations. In almost all countries, the biggest challenges in this area mainly occur in the precalculation phase.
By way of example, the administration of attendances and absences (such as hours worked and overtime) seems to be a particular problem area: 45% of companies have placed this in their top five most complex processes. And yet the technology exists to easily manage this and these systems can be easily linked to the existing payroll software. Perhaps the problem is the latter: 42% seem to be struggling with data collection and access to or integration with other data sources. The administration of onboarding, offboarding and contracts (38%) and expertise processes (37%) such as expatriate pay calculations are also making the pay calculation processes more difficult. The complexity of the administration of pensions and insurance policies (36%), such as group insurance, also regularly require extra attention. Finally, one in three European companies are experiencing payroll process obstacles when the payroll department first interprets the data itself before they enter it.
Only one in three European companies are exclusively using cloud technology for their payroll
In terms of technology, access to payroll systems is a challenge for many companies. The index shows that less than a third of European companies (29%) are only using cloud technology to organise their payroll. At 44%, the Netherlands is significantly outperforming the average, followed by Finland (35%), Denmark (33%) and Sweden (33%). Spain and Poland are lagged behind, both with 19%. However, Spain, like Norway, appears to be catching up by moving from on-premise software to cloud technology.
One-tenth of the companies surveyed are combining cloud and on-premise software: payroll software that runs on servers at the companies themselves.
Almost half of European companies (44%) are exclusively using on-premise software. However, two-thirds do recognise the value technology adds in terms of the total cost of payroll processing. More commitment to cloud technology means more efficient pay calculations and therefore a lower price tag.
"The importance of technology in the payroll process should not be underestimated", says Tom Saeys, Chief Operations Officer at SD Worx. "Technology has a significant effect on data collection and integration with or access to other data sources. Hence the importance of cloud technology. Technology also plays an important role in meeting the increasing demand for flexibility. Less and less standardisation and more and more personalisation opportunities for employees are making pay calculations more complex. Technology is helping companies with that, so that's already a good thing."