BUSINESS TECHNOLOGY

Payroll – Definition, Calculation, And Interest

what-is-payroll

An HR department’s main objective is controlling human resources costs. Managing, analyzing, and controlling human resources costs is essential for a company’s excellent profitability. What costs should be monitored to keep a watchful eye on human resource budget management? One type of indicator can be observed in particular: this is the payroll. But what is payroll? How to calculate the payroll, and what is the interest behind it? We explain everything you need to know in this article.

Wage Bill Definition

What is the definition of payroll? Payroll corresponds to the sum of gross remuneration and bonuses a company pays its employees during the year of the exercise. Employer contributions are not taken into account in calculating payroll.

The notion of payroll is found in the company’s income statement under “Staff compensation.”

Payroll is instrumental data for better managing your business and knowing the weight of your workforce on your turnover. This is data that is also closely monitored by companies, which can rely on it to create added value and motivate their employees.

Payroll Calculation

Several payroll calculations are possible, depending on what you expect from the analysis. In addition, depending on whether you are the manager or the accountant of the company, you will need to calculate different payrolls.

  • You can calculate the “classic” payroll:
  • Salary margin = gross salaries + bonuses paid + overtime

Note that employer contributions should not be taken into account in this calculation. This payroll calculation reflects what all of your employees cost over their actual working time.

  • A chartered accountant will instead calculate the accounting payroll:
  • Accounting payroll = gross salaries + bonuses paid + overtime + employer charges + provisions for paid leave

This calculation of payroll also considers employer contributions and paid holidays, providing a better overview of the total costs represented by employee compensation.

  • Finally, a business manager will tend to calculate the budgetary payroll, which will be used in particular to establish his provisional budget:
  • Budgetary payroll = gross salaries + employer’s charges + severance pay + provisions for paid leave

This payroll calculation considers severance pay but does not include employers’ contributions. For a manager, calculating the budgetary payroll helps him constitute the provisional budgets. He can anticipate salary increases and the budgets that will be required, and he can then establish a recruitment and remuneration strategy.

What Is The Point of Calculating The Payroll?

The payroll is a concept that should not be overlooked. Calculating payroll can help you develop a compensation strategy and adjust your recruitment needs. In addition, by relating the payroll to your turnover (and therefore by calculating the payroll rate), you can know the weight that your payroll represents on your turnover. And this data is precious because it allows:

  • To compare its payroll to the average of other companies in the same sector of activity.
  • To better visualize its economic model.
  • To develop its long-term strategy: sales target to be achieved, hiring and compensation strategy, etc.

The payroll rate, therefore, corresponds to the percentage that your payroll represents concerning your turnover. Thus, a ratio of 20% means that for €100 of turnover achieved, the company bears €20 of payroll.

The payroll rate varies significantly from one sector to another. For example, in the industry sector, it is relatively low, and it is a sector that will have large expenditures related to raw materials and investments. Conversely, the rate is relatively high in the tertiary and service industries, which is a sector that tends to use a lot of human resources.

Manage Your Payroll

The amount of payroll will depend on the number of employees you have and the salary scale. Keeping a watchful eye on remuneration and the amount of payroll is essential. The payroll can quickly represent up to 80% of the company’s expenses. It’s a high cost and often the most considerable cost to the business.

Summarize

By calculating the payroll, you have an overview of the share of the budget represented by employee compensation. You can then set up remuneration strategies, anticipate human costs, and how the percentage of the budget devoted to human resources will evolve.

A company needs to monitor the evolution of its payroll carefully. The payroll can quickly become a high cost for a company. You must therefore follow and analyze this indicator to seek to optimize it. The goal is to find a balance between the valuation of employees, the workload, and your company’s profitability.

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