May 2024

The Benefits of a Well-Defined Global Compensation Strategy

What is a Global Compensation Strategy?

A global compensation strategy refers to a comprehensive approach adopted by multinational organizations to manage and administer compensation and benefits for their employees across different countries and regions. This strategy aims to ensure consistency, fairness, and competitiveness in compensation practices while accounting for local market conditions, regulatory requirements, and cultural norms.

Key components of a global compensation strategy typically include:

Salary structures: Establishing standardized salary ranges or bands that are applicable across various locations while considering factors like cost of living, market competitiveness, and currency fluctuations.
Benefits packages: Designing and implementing employee benefits programs that align with local regulations and address the diverse needs of the workforce, such as healthcare, retirement plans, and leave policies.
Incentive schemes: Developing performance-based incentive plans or bonus programs that motivate employees to achieve organizational goals while accounting for regional differences in performance metrics and target-setting.
Pay equity: Ensuring fairness and transparency in compensation by addressing disparities in pay based on factors like gender, ethnicity, or job role across different geographies.
Compliance and governance: Establishing robust processes and controls to ensure compliance with local labor laws, tax regulations, and reporting requirements in each country of operation.
Communication and transparency: Providing clear and consistent communication to employees about their compensation packages, including how compensation decisions are made and the rationale behind them.

What are the Benefits of a Competitive Global Compensation Strategy?

According to G-P’s 2023 Global Growth Report, 95% of professionals believe that global companies have an edge over their competitors, largely due to offering better pay and benefits. However, only about a quarter of organizations provide retention bonuses to attract and keep key talent.

Here are a few benefits:

Staying Ahead of the Competition

Employees seek more than just a market-rate salary; they want to feel valued. A global compensation strategy ensures that companies provide competitive salaries and benefits packages tailored to specific regions, helping to attract and retain top talent.

Helps Maintain Compliance

Compensation laws differ from country to country, and global companies must adhere to local employment regulations in every location they operate. A robust compensation plan helps navigate key factors like minimum wage, equal pay legislation, and income taxes, thereby avoiding fines, litigation, and other regulatory penalties.

Ensures Competitive Remuneration

Millennial workers, currently in their late 20s to late 30s, are drawn to jobs that offer more than just a basic salary. Research indicates that millennials prefer to earn significantly above the minimum wage and expect an annual raise of around 5% to support their growing families and lifestyle needs. By offering competitive remuneration, companies can attract and retain the best talent in this demographic.

Control Costs

A fair and structured compensation strategy helps companies stay within their employment budgets. It provides hiring managers with a clear framework for making salary and benefits decisions, ensuring that the company remains competitive without exceeding its allocated budget. This balance is crucial for maintaining financial health while offering attractive compensation packages.

Ensures Fairness and Equity

The gender pay gap and pay discrimination based on cultural differences are significant issues globally. For instance, in the US, the gender pay gap has seen little or no improvement over the past 22 years, with women earning only 82% of what their male counterparts make for similar roles and experience.

In India, women earn 23% less than their male colleagues. Additionally, pay discrimination based on cultural differences is another major issue. According to The Australian, men from ethnic backgrounds earn 16-20% less than their Anglo male counterparts, while women from ethnic backgrounds receive 36% less pay. First Nations women experience the largest pay gaps.

A global compensation strategy ensures that all employees receive fair pay based on their talent, experience, and education, irrespective of their cultural background, race, gender, or ethnicity. Many countries have laws to promote pay equity, such as the Equal Pay Act of 1963 in the US and the Equal Remuneration Act in India, which mandate equal pay for equal work.

To sum up, by adopting a global compensation strategy, companies can not only comply with these regulations but also foster a more inclusive and equitable workplace

Attract and Retain Top Talent with a Trusted EOR Partner.

A competitive compensation strategy enhances talent recruitment, retention, and overall employee performance. With a reliable EOR partner like Procloz, your company can efficiently plan, hire, and manage global teams, regardless of entity status. As the global Employer of Record, Procloz serves as the legal employer of your team members. We reduce the time, cost, and risk involved in managing global HR, global payroll services, benefits, and much more.

10 Common Payroll Risks to Watch Out For

Not Having a Payroll Risk Management System in Place

Enterprises with hundreds of employees spread across multiple locations, using various payroll systems, running multiple monthly payroll cycles, and experiencing high attrition rates often encounter payroll fraud.

The ACFE Occupational Fraud Report 2022 indicates that payroll fraud accounts for 9% of asset misappropriation schemes, with a median loss of $45,000 per incident.

Payroll fraud remains a persistent risk, typically taking 18 months to detect after it begins. Additionally, small businesses without documented payroll policies and those relying on spreadsheets for in-house payroll processing risk human errors and security breaches, leading to non-compliance.

What are the 10 Common Payroll Risks?

Payroll risk is a reality for organizations of all sizes and industries. Here are some common payroll risks:

1) Ghost Employees

It is a kind of payroll fraud resulting in overpayments, typically executed by a payroll team member. This occurs when a terminated employee remains on the payroll, and the fraudster redirects their salary to their own or a third-party account. Illegitimate payments or bribes can also be masked as salary payouts.

2) Timekeeping Fraud

Inadequate supervision, remote working, or manual timekeeping can lead to employees inflating their billable hours. The added hours are usually small enough to evade cursory reviews but benefit employees on hourly wages or are eligible for overtime pay.

3) Proxy Attendance Punching

This form of timekeeping fraud involves an employee clocking in and out for a coworker who is not present. If unchecked, it can become widespread. Mitigation methods include tight supervision, strict penalties, and biometric attendance systems.

4) Wrong Categorization of Employees

Misclassifying contractors, part-time, and full-time employees can lead to payroll tax and benefit miscalculations. Intentional misclassification to reduce costs constitutes payroll fraud. The 2020 National Employment Law Project report found that 10-30% of employers misclassify employees as independent contractors, saving up to 30% on payroll and related taxes.

5) Security Breaches

Payroll information contains sensitive data like tax identification and bank account details. Poor security measures or cyberattacks can lead to data leaks, risking identity theft or financial fraud. It can also result in payroll transactions being routed to incorrect accounts.

6) Fraudulent Expense Claims

Employees may claim reimbursement for fictitious or inflated expenses or tag personal expenses as business-related. Duplicate claims or out-of-policy reimbursements can occur. Companies with many field agents or traveling employees are particularly vulnerable.

7) Reliance on a Single Employee

Over-reliance on one person for payroll tasks is a common control deficiency, especially in smaller organizations. If one person handles adding/removing employees, entering time and pay rates, approving payouts, and reconciling bank statements, process errors and fraud can go unnoticed. The absence of this key person can also disrupt the payroll function.

8) Compliance Errors

Payroll involves complex tax calculations and adherence to various labor laws. As these regulations change, the payroll process must adapt to avoid non-compliance penalties and litigation.

9) Payroll Data Loss

Storing payroll information in physical documents or on individual devices risks damage, data corruption, or loss. Regulations require secure storage with adequate backups and disaster recovery mechanisms.

10) Poor Downstream Data

According to the latest EY Global payroll survey, poor source data is a major challenge for payroll functions. Without structured data governance, data entering the payroll application may be inaccurate, incomplete, or inconsistent, leading to payroll mistakes and non-compliance.

Now that we’ve identified several payroll risks, let’s explore strategies to effectively prevent them.

Risk Management in Payroll

Effective payroll risk management requires a structured approach. Here are the steps to implement a sustained payroll risk management function:

1) Identify Risks

Conduct a comprehensive AS-IS assessment of payroll processes, IT applications, and third-party partners to identify potential errors or frauds.

2) Prioritize Risks

Rank risks based on their probability of occurrence and potential impact. For instance, using manual timesheets without supervision presents a high probability and severe impact for timekeeping fraud.

3) Define Response Strategies

Based on the prioritization, determine appropriate responses: eliminate risks where possible, enhance risk controls where elimination isn’t feasible, transfer the risk to an outsourcing partner, or tolerate the risk within acceptable limits.

4) Monitor Risk

Continuously monitor error and fraud rates through automated reports and conduct regular forensic audits to ensure ongoing risk management.

Final Words

Payroll challenges are increasing, particularly with the emergence of the gig economy, remote work setups, and flexible scheduling. These factors expose enterprises to greater risks of payroll errors and fraud in global payroll services.

According to PwC’s Global Economic Crime and Fraud Survey 2020, companies that proactively invested in fraud prevention control programs experienced 42% lower response costs and 16% fewer fines and penalties.

To address these challenges, HR leaders need to foster cross-functional collaboration in developing an enterprise-wide payroll risk management strategy. Additionally, leveraging automation can be instrumental in effectively tackling these issues.

Different Types of Payroll Taxes to Know in the US

What are Payroll Taxes?

Payroll taxes are financial liabilities imposed by the federal or state government on employers. These taxes are calculated as a percentage of the wages paid to employees listed on the firm’s payroll. The amount is deducted from the employees’ wages before they receive their pay.

Payroll taxes serve as a significant source of revenue for the federal government, helping to address fiscal deficits. However, they are considered a regressive form of taxation, meaning they take a larger percentage from low-income earners compared to high-income earners.

Now that we’ve got a grasp on payroll taxes, let’s take a closer look at the different types of payroll taxes that make up this system.

Types of Payroll Taxes in the United States

In the US, payroll taxes are a specific category of taxes that employers must manage and remit. However, it’s essential to distinguish between payroll taxes and other employment taxes, as the two terms are often mistakenly used interchangeably. Here’s a breakdown of the various types of payroll taxes associated with payroll:

1. Social Security Tax

Social Security tax is a fundamental component of the Federal Insurance Contributions Act (FICA). It is a shared responsibility between employers and employees, each contributing 6.2% of the employee’s wages, totaling 12.4%. This tax is applied only up to a specific income cap, known as the Social Security wage base, which for 2024 is $168,600. The revenue collected supports retirement benefits, disability insurance, and survivor benefits.

2. Medicare Tax

Medicare tax, another part of FICA, funds healthcare services like hospital insurance. Both employers and employees each contribute 1.45% of the employee’s wages, making a combined total of 2.9%. Unlike the Social Security tax, there is no income cap for Medicare tax. Additionally, there is an extra 0.9% Medicare tax for employees earning above certain thresholds ($200,000 for single filers, $250,000 for married couples filing jointly). Employers must withhold this additional tax from employees’ wages but are not responsible for contributing a matching amount.

3. Federal Unemployment Tax (FUTA)

FUTA is an employer-only tax that supports the federal unemployment compensation program. The standard FUTA rate is 6% on the first $7,000 paid to each employee annually. However, most employers receive a credit of 5.4% if they pay state unemployment taxes, reducing the effective FUTA rate to 0.6%.

4. State Unemployment Tax (SUTA)

State unemployment taxes are also primarily employer-only taxes, although some states require contributions from both employers and employees. These taxes fund state unemployment benefit programs. The rates and wage bases vary by state.

Explore more about the future of payroll solutions, including the integration of predictive analytics and automation, to get a better

Other Employment Taxes

Federal Income Tax

This tax is withheld from employees’ wages based on their earnings and withholding allowances. The amount varies according to the employee’s earnings and filing status.

State and Local Income Taxes

Similar to federal income tax, these are withheld from employees’ wages and vary by state and locality.

Self-Employment Tax

Self-employed individuals, such as freelancers, contractors, and small business owners, pay self-employment tax, which combines both the employer and employee portions of Social Security and Medicare taxes. The total rate is 15.3%, with 12.4% for Social Security (up to the wage base) and 2.9% for Medicare. They are also subject to the additional 0.9% Medicare tax if their income exceeds certain thresholds.

Now, let’s understand this better through an example:

Example of Payroll Tax Calculation

To illustrate the practical application of payroll taxes, consider Gemma, an employee at Black PLC with an annual salary of $60,000 as of March 31, 2022. Her payroll tax contributions would be as follows:

Employee’s Contribution:

Social Security: 6.2% of $60,000 = $3,720
Medicare: 1.45% of $60,000 = $870
Total Employee Contribution: $3,720 + $870 = $4,590

Employer’s Contribution:

Social Security: 6.2% of $60,000 = $3,720
Medicare: 1.45% of $60,000 = $870
Total Employer Contribution: $3,720 + $870 = $4,590

Total Contribution to FICA:

$4,590 (Employee) + $4,590 (Employer) = $9,180

Thus, a total payroll tax of $9,180 is remitted to the government on behalf of both the employer and Gemma.

Summing Up

Understanding the different types of payroll and employment taxes is crucial for compliance and financial planning. Employers must accurately calculate and remit these taxes to avoid penalties and ensure proper funding of social insurance programs.

For further assistance, consider collaborating with Procloz- a leading technology-driven company specializing in global payroll services, making it easier to manage your multinational workforce. Contact us today.