Centralized vs. Decentralized Global Payroll: A Comparison

Nothing is more debated in the field of Human Resource than which between centralized versus decentralized global payroll is a better payroll system. It would be smart to first have a comprehensive understanding of the differences of these two systems before making a decision.

If it is your responsibility to handle the employee’s payroll in your company, you most probably have a lot of questions, including and especially the right approach to payroll. Are you stuck on wondering whether centralized payroll is better than decentralized payroll, or the other way around? What are the benefits can you get from either approach?

Looking for the perfect approach for your organization will never be an easy- peasy job. Luckily, Rivermate did the job for you. This article will help you understand more about the two approaches to payroll for you to decide which option is more suitable for your organization.

Decentralized Payroll Benefits and Advantages

A decentralized global payroll model incorporates multiple payroll teams inside an organization’s headquarters with outsourced in-country payroll management partners for every country where the company operates.

Based on a study by Deloitte, an accounting and consulting firm, only 13 percent of large-scale companies are employing the decentralized global payroll approach, while 60 percent of the respondents said that they are implementing the centralized global payroll approach. This may be because of its affordability.

Requires Only a Small Number of Resources

In centralized payroll, a company must have a dedicated department and staff to perform its payroll responsibilities. There ought to be a continuous investment allotted for the more technical facets of payroll such as hardware, employees, space, and software. In contrast, the decentralized approach avoids these issues. In this payroll approach, any employee who has an extra hour to spare can perform payroll management and tasks even if they are not assigned to perform Human Resources-related tasks. As a result, less resources, money, and time are required to accomplish payroll tasks in this system.

Cheaper Costs of System Transitioning

Transitioning from one system to another can cost a lot and hurt your company’s finances. With a decentralized payroll approach, it would be easier and cheaper to merge compatible accounting systems, especially when the issues concerning your information system and management structure start to arise. This benefit, in particular, is one of the significant reasons why more and more companies are upgrading and expanding with decentralized payroll systems.

Reduced Risks

One drawback with a centralized payroll system is when it goes down, employees will not be able to receive their monthly salaries or wages. If truth be told, this may just be one of the many risks your company might face if you subscribe to the idea of centralizing your payroll. In a decentralized payroll approach, however, when the system fails, the only employees whose salaries will be delayed are those served by that system, but all other employees will get paid.

In selecting the better payroll approach you need to keep in mind that your employees are working on getting paid so delaying the payroll due to a system’s failure can cause ripple effects, and these effects will most probably harm your company.

Improved Employee Records

Another good thing about decentralized systems is it comes with the benefit of better headcount management. In this approach, each employee can keep track of their record without the need to provide lengthy instructions. With this, you no longer have to assign a person or hire a staffer to perform this task. This does not just reduce your company’s expenses but also saves you a lot of time.

But then again, it is still your responsibility to set up an effective scheduling system for your employees. Additionally, if your employees are swamped with requirements, they may no longer have time to perform the payrolling assignments.

Real-time Response

A decentralized payroll system implies that the employees have better access to their paychecks, and a closer relationship with the people who issue these paychecks. This makes it easier for the employees to fix any issues concerning their paychecks that may arise. For instance, if the staffer tasked to count the employee’s working hours mistakenly tallied that the employee worked for 30 hours in one week, which should have been 34 according to the actual count, the employee can easily approach the staffer and raise this concern.

This benefit also comes with a bigger picture advantage in that more feedback and suggestions regarding the payroll system are lobbied toward the top management. For instance, one decentralized payroll office might observe that the workforce it employs may be better served when they are paid twice or thrice a month instead of weekly. The top management can then decide to make the tweak especially if the organization is still smaller and more flexible.

Centralized Payroll Benefits and Advantages

Many companies, especially large global enterprises, perform their payroll tasks using the centralized payroll system. In this approach, employers and senior executives have more control over their organizations’ costs and expenses which is advantageous considering it is their prime responsibility to handle any issue or concern in their company. The following are the benefits and advantages of the centralized payroll approach.

Secured Data

One drawback of a decentralized payment system is the lack of security of payroll data. This approach may stimulate errors in documentation, maintenance, technology purchase, knowledge loss, anda number of other consequences. Many companies utilizing a decentralized payroll approach have troubles providing solutions to these problems. But companies on the centralized payroll avoid these problems by imposing more security and control over payroll data.

Besides the better control and authority over your employees, a centralized global payroll approach can also reduce your organization’s cost and will likely produce high-quality products.

Organized Data

As previously mentioned, data associated with payroll have better security in the centralized payroll system. This is largely due to the fact that if your payroll system is centralized, your data will be more organized because it is stored in just a single system or place. As a result, issues such as duplication of data, the inconsistency of data, and wasted storage will all be avoided.

Better Access to Data

A well-organized centralized payroll system provides better and more convenient access to the data used across the organization in a single place. This means that all the staff, employees, contractors, and the entire workforce can readily access the database. This makes it both faster and easier to undertake organization-wide activities. Central planning and operation also allows compatible technology and skills to be introduced.

Moving Forward

Now that you have a better understanding of the benefits and drawbacks of both the centralized and decentralized payroll approaches, you can now have a more comprehensive analysis and discussion of the approach you think would best fit your organization. While it is true that either approach suits any company regardless of size or the industry it belongs, it is still wise to perform an extensive scrutiny on the perfect payroll approach for your organization.

For multinational companies, the challenges can come along with diverse regulations, languages, and currencies. This is why you have to be strategic in choosing a suitable payroll model for your company. Payroll global management plays an integral role in driving success to your organization. Hence, planning and handling these obstacles alone will be tough, and a single mistake in one department can harm the rest of your organization’s department.

Rivermate offers services and tools to help you plan and manage your payroll effectively without draining your pocket. Contact us to learn more about these services.