The importance of payroll.

Is your company up to speed in getting salary into employees' pockets?

Companies' payroll departments face numerous issues that must be addressed to ensure that employees are paid, contractual obligations are met and tax and other withholding duties are upheld. For example, as most CPAs already know, the numerical change in dates associated with the new millennium poses a massive challenge to computer systems all over the world. Companies currently are struggling to diagnose and address the systems problems that are being created by computers' inability to handle computations involving years after 1999. At one multinational, CPA Patty K. Lake is spearheading an effort to ensure that the computer system remains programmed to pay 15,000 workers. This project is just one of many she oversees as the payroll manager for Pillsbury, the international food processing and marketing company.

TACKLING Y2K 

The Year 2000 (Y2K in computer jargon) challenge has the potential to affect organizations from governments to Mom-and-Pop stores. The issue stems from an economizing; move computer managers made in the 1960s. Since data storage space on hard disks was so expensive in those days, programmers were instructed to use only two spaces, instead of four, when a year was designated. Thus, both programs and databases used 97 instead of 1997. But as the year 2000 approaches, the computer that has only 97 in its database is unable to distinguish between 1997 and 2097. As a result, date-dependent data--especially those that span the two millenniums--will not be calculated correctly.

For example, the Y2K issue could affect whether or not people get paid if computer systems are confused by dates that don't make sense, and that's where Lake comes in. The CPA, who reports to the company director of financial services, oversees a division that includes payroll, accounts payable and risk management. She and a staff of 13 are responsible for payroll processing operations, payroll taxes and deposits and accounting.

To ensure that those operations continue to run smoothly, all of her division's Legacy payroll systems are in the middle of an upgrade that will expand their capacities--by expanding their date fields--to enable them to recognize years beyond 1999. "It's a massive project," Lake says. "We have had to extend every single date element in every company file, not only for payroll hut also for other company systems." The budget for the upgrade in the payroll department alone is $350,000.

"We started looking at Year 2000 issues about three years ago," Lake says. "The corporate Y2K strategy involves large cross-functional teams from all areas of the company. The payroll system solution was selected in 1995 by a small cross-functional team from human resources, HR information systems, benefits, compensation, corporate tax, pension, payroll and management information systems." The payroll system solution involves some equipment upgrades but focuses mainly on software changes.

Bringing the payroll department up to speed is only one of the many issues to be addressed in the company's Y2K project. Because her system interacts with about 100 other company systems, such as pension, benefits and the general ledger, "the various interfaces and how they will work are an even bigger concern than the upgrade to our own system," according to Lake. The Y2K payroll system upgrade is scheduled to be completed in June 1998, "but all of the company's many systems will be performing their updates at different times and using different translation tables. All of the interfacing units must make a conversion when each side makes its change." The upgrade also will alter how the company deals with outsiders, including the federal government, which receives tax payments from Lake's division."My advice to other payroll operations is to get moving," she advises. "At Pillsbury, this is proving to be an immense project. If you haven't started looking at Y2K issues, you're late."

ELECTRONIC TRANSFERS

Pillsbury's payroll division disperses a total of 1 million payments a year to various recipients. How can this be accomplished most efficiently? Greater automation is the clear answer. In fact, the systems' interdependence is the result of a thrust to automate as much as possible. Here are how some of the areas for which payroll is responsible are affected by the division's efforts to achieve that goal:

* Tax deposits. Pillsbury has been part of the government's electronic funds transfer payroll system since 1994, which means withholding amounts are sent electronically to the government when due. "We have found electronic funds transfer to be very successful," Lake says. "We can more accurately download from system to system and there are no checks floating around, no transmissions costs." In addition to its link to the federal government, the company uses electronic funds transfers in 46 states, including multiple local authorities. Although cost savings are not significant, "it's efficient, cheaper, more accurate," Lake says.

Using Epic, a new software program, the company has upgraded its method for routing withheld payroll taxes to their proper recipients. With the new system, "we no longer have to key in confirmations that taxes have been paid on time." The company had been transmitting tax deposits electronically for several years, but when it received electronic confirmations of deposits it was unable to download them electronically, so the confirmations had to be entered into the system manually. "The new system will enable us to download confirmations automatically without human intervention," Lake says, and that will save the department time and money.

* Wage attachments. Pillsbury's payroll department is responsible for a long list of wage attachments to be withheld from employees" checks when, for example, they owe money for student loans, for child support and in bankruptcies. Until recently, the company and every single plant handled this task separately, with a total of more than 20 people overseeing the process. "Not only was there a possible lack of confidentiality," Lake says, "but the company also had potential liability. If we didn't process the payments properly, we could be liable for them. We wanted to automate the process in order to simplify and tighten controls." To achieve that goal, the department added an automated wage attachment module from integral in the payroll system. With the new system, "there is no human intervention--the withheld funds go automatically to the proper recipient." The company was the second customer for this new software. It was difficult to implement because every jurisdiction, including every court, has different rules and procedures. Now that the system is up and running, though, "it's been wildly successful," Lake says, because it can adapt to each jurisdiction's changing requirements--and because the department now needs only one person to oversee this area.

* Direct deposit. The payroll department is encouraging employees to take advantage of the opportunity to have paychecks deposited directly into their bank accounts. Lake reports that over 95% of the employees in the corporate headquarters are on direct deposit but in the manufacturing units, where there are many union employees, only about 18% have picked this option. "We believe there are tremendous benefits to the employee for participating in direct deposit," Lake says. "The employees never have to worry about security or about their checks not being there on payday." In some of the company's most remote plant locations, the logistics of shipping paychecks on time can be challenging, she says. "But our collective bargaining agreement requires us to get the paychecks there, so we have to prepare them several days in advance now." To alleviate this problem, the company is engaging plant management and union help in promoting direct deposit as a benefit. Other advantages for employees include savings on check-cashing fees, confidentiality and time. Benefits for the company include knowing that its union contractual requirements are met and that people are paid on time. Also, there are cost savings for bank reconciliations that needn't be made, for lost checks that no longer must be reissued and for escheat costs when the company has to file unclaimed property with states if employees don't cash checks. However, those savings are not significant, and the company does miss out on interest on the float during the time when the money remains in Pillsbury's accounts before being withdrawn. "We feel the benefits outweigh the costs," Lake says.

* Tracking salaried nonexempt employees. These workers now submit time cards (union workers use swipe cards at plants) to track time and attendance. To expedite tracking of nonexempts' hours and to eliminate significant manual data-entry efforts, Pillsbury is exploring having them enter their time using their PCs, perhaps through the payroll department's home page on the company Intranet, which contains general payroll procedures and policies as well as other useful information.

THE PAYOFF

Although there are a dizzying array of innovations taking place in Pillsbury's payroll department, Lake and her staff believe they are crucial to the company's functions. "Our philosophy is that people enjoy what they do here and they want to make a contribution, but payroll is the ultimate reason they come to work." Lake's department is working to ensure that every recipient receives the proper payment in the most timely and efficient manner.

RELATED ARTICLE:

Problem: Ensuring that a multinational's payroll division continues to issue 1 million payments a year to various recipients.

Solutions: Greater Automation; Year 2000 upgrade.

RELATED ARTICLE: EXECUTIVE SUMMARY

* COMPANIES' PAYROLL DEPARTMENTS face numerous issues that must be addressed to ensure that employees are paid, contractual obligations are met and tax and other withholding duties are upheld.

* AS THE YEAR 2000 APPROACHES, computers that have not been upgraded will have trouble distinguishing between dates that span the two millenniums. As a result, a great deal of date-dependent data will not be calculated correctly.

* AT PILLSBURY, the international food processing and marketing company, CPA Patty K. Lake is spear-heading an effort to ensure that the computer system remains programmed to pay 15,000 workers. All of her division's Legacy payroll systems are in the middle of an upgrade that will enable them to recognize years beyond 1999. The budget for the upgrade in the payroll department alone is $350,000.

* ELECTRONIC TRANSFERS of payments is the solution to many other challenges the department faces. The payroll department relies on these transfers when it is working with tax deposits, wage attachments and direct salary deposits.

RELATED ARTICLE: Company Profile

Name: The Pillsbury Co.

Locations: 28 plants and sales offices in 46 states and 15 foreign countries.

Date founded: 1869.

Sales: $6 billion in fiscal 1996.

Number of employees: 15,000.

Form of ownership: Wholly owned subsidiary of the British conglomerate Grand Metropolitan PLC.

What we do: An international food processing and marketing company.

Our main customers: Supermarkets and food stores.

ANITA DENNIS is a Journal contributing editor.