Pay attention to pay cycles

HR Magazine, Nov, 1998 by Carla Joinson

When SCT Corp. of Malvern, Pa., decided to look at its payroll operation several years ago, one of the practices it scrutinized was its use of dual pay cycles. Some of the company's employees were paid biweekly, others semimonthly.

"Our financial people raised the question of better efficiency if we could move to just one pay cycle," says Jeff Cottle, general manager, human resources.

"We did a benefit analysis and discovered something interesting: Employees paid biweekly "found" two extra paychecks a year during the months that contained three paychecks. Because their budgets were usually built around two paychecks each month, that extra check twice a year was something they looked forward to and didn't want to give up," Cottle says. "In the end, we decided not to make a change."

WHY USE A CYCLE?

"This is an area where the tail wags the dog," says Paul Dorf, managing director of Compensation Resources Inc. in Upper Saddle River, NJ. "The reason for a pay cycle is based on a) tradition, b) whoever the payroll vendor is and what the software dictates or c) a contract.

"The emotional aspect of changing a pay cycle and having to communicate this to employees is very high," Dorf says. "I've seen gutwrenching discussions about going from a weekly to a biweekly pay cycle, usually with concerns about how people who live hand to mouth will survive."

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He notes that financial people prefer biweekly to weekly pay cycles, in order to save on the number of checks cut each month. Additionally, fewer checks lead to other efficiencies in administrative tasks such as inputting data. "However, saving money is not always a viable reason for a company to change its pay cycle," he says.

"Though payroll cycles are not something you want to change frivolously, certain situations may present opportunities for you to consider a change," says Gary Omura, managing principal of Omura Consulting Group in Santa Clara, Calif.

The timing of your company's pay cycle should optimize cash flow, take advantage of bank interest opportunities, accommodate regular business and financial report cycles and use financial staff efficiently. Extending your current pay cycle from weekly to biweekly, for example, can save supplies and reduce administrative workload, while changing from semimonthly to biweekly can make overtime easier to compute.

"When you look at changing payroll vendors or software packages, or if your company merges with another, it will make sense to consider your payroll cycle at the same time," says Omura. "If your company is going through financial difficulties, changing the pay cycle can cut costs. This may hurt morale, but it also shows that the company is doing everything it can to keep going."

Additionally, your company's Year 2000 compliance initiatives may indicate a need to look at your payroll software. Changing your pay cycle to accommodate a new system's functionality may prevent expensive customization.

REASONS FOR RHYTHMS

Different pay frequencies have advantages and disadvantages.

Weekly cycle. According to Doff, a weekly pay cycle is often part of a union contract or a traditional practice.

This cycle benefits lower-paid employees who may have trouble staying afloat without weekly cash. Also, employee overtime falls neatly into the parameters of the workweek.

The primary disadvantages are the high cost and administrative burden of processing a weekly payroll.

Biweekly. "If you look at the salary and time of the people involved, computer time, reports you might run, the cost of direct deposit and supplies, the true cost of processing a check can range from $1 to $10," says Nola Wills, director of payroll training at the American Payroll Association in San Antonio.

"By going from 52 to 26 paychecks a year, companies can cut their check-processing expenses in half." She points out that overtime for nonexempt employees still will fall within a convenient work cycle for ease of computation.

This cycle works very well for both exempt and nonexempt employees, since they can divide their household expenses into middle and end-of-month obligations. Additionally, the two "extra" checks a year created by the biweekly schedule are appreciated by employees.

Semimonthly. This pay cycle saves even more money, since only 24 checks are generated annually for each employee. The company also does not have to bother with accruals at the end of its fiscal year for pay periods that overlap consecutive years.

"But when you pay twice a month," points out Doff, "you get 2.16 weeks in each pay period. This can create problems for managing overtime payments." Wills adds that calculating overtime based on an out-of-synch pay schedule can eat up any savings you might see from using a bimonthly cycle.

Monthly. Employees can face both practical and psychological hurdles with a monthly paycheck. "When you pay this way," says Omura, "you almost always pay the third week of the month - which is payment in advance [for the remainder of the month]. Otherwise, you'll have employees waiting longer than a month to be paid for their work."