What is a Payroll System?
What is a master data system?
What is a Human Resource Information System (HRIS), a Human Resource Management System, or a Human Capital Management (HCM) System?
How are they all different from each other?
What do they have in common?
In this article, you will learn everything you need to answer the first question. You will also find basic answers to the other questions, but for a more comprehensive, detailed picture of these topics, please follow the respective links.
Payroll systems are still a mystery to many in the industry. But they play a vital role in the HR IT landscape. So we are going to explore exactly what a payroll system is, and what it isn’t.
You will gain an understanding of how to select a payroll system in both national and global environments. We’re also giving you a rough comparison of current providers from all the payroll solution categories.
We hope you will find this article useful. But if you reach the end and still have questions, or you would like our help in choosing your payroll system, please feel free to contact us.
What is payroll?
Payroll is the generic term given to summarise payroll accounting and salary accounting. In German, we call it Entgeltabrechnung.
It’s the all-encompassing term to refer to the paycheque employees receive as their salary statement and the entire process that lies behind issuing the document.
Although there is a specific German word for it (Entgeltabrechnung), the English term “Payroll” is now widely used in many German-speaking countries due to the immense rise of anglicisms in the German language.
Why Payroll?
Without payroll accounting, your salaries, taxes and social securities don’t get paid. And your documentation is not legally compliant. That’s why financial accounting is mandatory for all companies in Germany.
What is the Payroll process?
Let’s divide the payroll process into 3 steps:
- Prepare all relevant employee data and documents.
- Calculate salary payments, taxes and social security contributions.
- Complete payroll via administrative tasks, like:
-
- Send notifications to social security institutions
- Month-end closing reports
- Money transfers
- Post relevant information to financial accounting (note: there is a difference between payroll accounting and financial accounting)
- Payroll transmission to the employees
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Payroll - key questions for the right software selection
Ensure cloud-based and efficient payroll
Who is Payroll?
There are a lot of stakeholders involved in the payroll process, making it quite complex.
Internal stakeholders include employees, the HR department and payroll professionals. But there may also be external payroll and tax advisors (or tax firms) involved too.
One or more systems are used by all these stakeholders to capture, manage, prepare and process employee data in payroll. And it’s not just the employees that receive the results. They are also sent to the relevant tax office and social security institutions.
Why a Payroll System?
As you have already learned, payroll is a multi-layered process with many participants involved.
In fact, Germany has one of the world’s highest and most complex payroll creation requirements, along with France, Italy and Belgium. Permanent changes in payroll tax and social security laws further complicate standardised processes.
On a global scale, payroll becomes an even bigger challenge. Each country has its own unique legal tax, payroll and social system structures. However, there are now both national and global agile solutions.
The main goal of a payroll system is to automate as much of the payroll process as possible.
Why?
To save cost and time, improve quality assurance and minimise errors.
What is a payroll system not?
There are many components that constitute a payroll system, making its definition ambiguous. However, we can tell you exactly what payroll systems are not. Payroll systems should not be confused with:
- HCM systems
- HRM systems
- HRI systems
- PI systems ( (PIS or personnel information systems)
- Master data systems
- Payroll offices
- Tax consultants
The goal of a payroll system is to automate the majority of the process, particularly the third step in the process (“Complete payroll”).
A good payroll system will also handle preparation and calculation, as well as possibly take care of some master data system functions, like time tracking and attendance.
Because payroll systems are the most regulated systems in companies across borders, they also serve as particularly good master data systems. And since payroll systems often offer the most interfaces, payroll vendors tend to become HCMS/HRMS/HRIS/PIS vendors. Likewise, tax advisors and payroll offices choose their own payroll systems to perform their work.
Note on the definition of a system: please do not equate the term system with the terms software or digitisation. A system involves many components, including software, hardware, people and processes. During the digitisation process, the goal is to replace analogue systems (paper, folders, etc.) with digital systems in a way that creates value.
How to select the best payroll system
Choosing a payroll system is complicated.
First, you need to make several important internal and strategic decisions around your payroll process. Then, you need to choose three to five of the best providers on the market based on arbitrary priorities. These payroll system providers are then reviewed against your must-have criteria, compared with each other and prioritised in a more detailed analysis before you can reach your final decision.
What’s more there is also a huge difference in the strategic criteria between national- and global-focused solutions. National solutions focus on automating the payroll process as best as possible. But global solutions involve coordinating unified and optimised payroll processes and data across borders.
Therefore, we will distinguish between two decision paths: National and Global.
Note: From the selection of global solution types such as the data overview or providers as intermediaries, the actual payroll system selection follows on a national level.
The first and most important question is: (Why) Is a payroll system needed?
When making this decision, there are three main options for consideration.
Option A: Manual
Bluntly speaking, manual payroll systems make no sense in today’s modern world. Even for single-person teams, it makes sense to implement software like Lexware, Lexoffice, WISO or Lohnfix. For a subscription fee of only 5-10 Euros per month, it is an incredibly affordable option and less complex than trying to manually create your payroll system.
Option B: System only
This option means you use a system solution, but continue performing complete company payroll internally using software. Modern payroll system solutions are very cost-effective and available for all company sizes.
Option C: (Partial) Outsourcing
The third option involves partially or completely outsourcing payroll creation to a payroll office and/or tax consultant. It might seem like a huge expense for your company at first, but the savings in working hours alone are often worth it. However, it should be noted that the correct provision of data cannot be outsourced. It is your responsibility to ensure a reliable master data system is in place to regularly export data as part of the preparatory payroll process. Because of this, it’s important to carry out a cost-benefit comparison between options B and C.
Once you have made your decision between option B or C, you must then decide on exactly which payroll system to choose. There are some vital aspects here that call for careful consideration. As you embark on your journey of evaluating and pre-selecting the right system, pay close attention to the following points:
- Process Holistics: think about the entire payroll process and how much of it should be integrated into the system. Ask yourself how many and exactly which of these steps should be outlined?
- Desired System Holistics: beyond just payroll, consider how many other HR functions you’d like your chosen provider to handle.
- Industry Specialisation: different industries have different requirements. Whether it’s construction wages or adhering to care-related regulations in regions like Germany, think about which of these things need to be covered by the system.
- International Scope: if your business operates globally, think about which countries require dedicated payroll solutions. It’s also advisable to explore potential synergies between regions.
These key strategic decisions lay the foundation for your pre-selection process.
Note for small businesses: the main criteria stated above are less relevant for you. Instead, focus on making the important decision between a PC/Site based license (approx. 10-25€ per user per month) or an employee-number-based license (approx5-10€ per employee per month). Employee-based solutions are available to any number of users. Licensing makes a big difference in cost for companies with more than five employees. You need to weigh up whether the interfaces, employee self-services and cloud solutions offered by employee-based licenses justify the costs. This depends on data synchronisation, accessibility and automation efficiency (usually only the case from 50 or more employees).
Based on the above strategic criteria, you can now pre-select between three and five appropriate providers.
It is crucial to organise the providers and their solutions based on your corresponding strategy. This creates the best basis for comparison. You can also assign a provider to several strategic categories (such as DATEV).
Although you want to select the best vendors that align with your needs, your solution research time should be kept to a minimum. We have gathered examples of the best software payroll systems below.
Once you have your initial list of providers, you need to check them for the most vital corresponding country-specific criteria, like legal compliance (DEÜV, GoBD, etc.) and coverage of special cases (construction wages, care, etc.). The best way to do this is to contact the providers directly with your list of most vital criteria and ask them to process it. This should be completed prior to investing any further time in deeper analysis and comparisons.
Subsequently, you should also request a demo and offer from the provider. This will provide you with the valuable opportunity to fully assess the vendor’s capabilities against the standard system criteria. This is particularly crucial for participants in less transparent aspects of the market. Common examples of standard criteria are:
- Pricing
- Design
- Complexity
- Interface support
- Support quality
- Future security and vision
Gathering all this information from your pre-selected list of vendors will help ensure you are making the right decision for your company.
HR Consulting
On a global scale, the question is not whether a payroll solution is necessary, but rather, which one to choose. There are four distinct categories of payroll solutions, each one important in shaping your strategic trajectory. While country-specific adaptations are possible, the main objective should always be the unified and optimised coordination of payroll processes across national borders.
Data Overview:
A data analysis system with open interfaces to connect national payroll systems on a global scale. Please note that independently managed national payroll solutions are still required with this solution. Therefore, it takes a lot of effort to coordinate interfaces. Plus, it’s also only suitable for existing global payroll structures. The costs are around 5 – 20 € per employee per month. Classic examples are the providers SAGE, SAP and ADP.
Intermediary:
Encompasses all aspects of data overview while also connecting with country-specific national payroll solutions, leveraging existing interface experiences. Country-specific solutions need to be acquired and managed separately. But interfaces have already been tested. Costs equal approx. 10-25€ per employee per month. Well-known examples include SAP and Workday.
Partner network:
Meets all intermediary criteria. Vendors also work in the background with country-specific solution providers. The cost of the global solution includes the cost of the country-specific solutions. Multiple systems are still used, but they and their interfaces are centrally managed by the global provider. The costs are dependent on the respective national solutions but are approx. 20 – 50 € per employee per month. Examples are SD Worx and ADP.
Employer of Record (EOR):
When providers utilise a network of third-party organisations to perform a significant amount of the work associated with hiring employees abroad. The concept of “Employer of Record” is the opposite of the German “Arbeitnehmer-Überlassung”.
In this case, it’s not the employee, but the employer, that is “leased” out for its own employees. An Employer of Record does not recruit, but becomes involved once a candidate has been chosen for the relevant country. The EoR is the registered employer for the employee and performs all administrative tasks like national payroll. They also ensure that you are compliant with the rules throughout the process. As the main employer, you continue to be the one to make decisions about compensation, position duties and terminations.
An Employer of Record (EoR) is the most expensive type of payroll solution available, costing approx. €300-€500 per employee per month, depending on the country. Successful examples include Papaya Global, Lano, Oyster, Globalization Partners, Deel and Workmotion.
Note: Professional Employer Organization (PEO) is a young term in the German-speaking world. A PEO goes beyond an EoR. For example, it may also offer strategic services, and can thus cover all the tasks of the original employer, depending on requirements. The terms PEO and EoR have often been used interchangeably. In our article, PEO is not discussed in detail because PEOs offer add-on services to the EoR service that are not relevant to a payroll solution.
When making your final decision on your pre-selected list of three to five providers, you must take note that the national and global standard system criteria listed above coincide (such as “design” and “complexity”), because an Employer of Record (see below) will also provide you with a system solution through which you will manage your foreign employees.
It is essential for you to compare all information from the providers to make your decision.
The Payroll System Comparison
For many companies, the software pre-selection is the most difficult step in the decision-making process for a system. But it should also involve minimal time investment. To help you overcome the first hurdle, we have compiled a list of providers or solutions with links and some standard criteria for each solution category.
Transparent vendors publish their pricing structure on their website and often offer free trial systems for immediate testing. Semi-transparent vendors publish only some information about their pricing policy and offer guided online tours in form of videos or presentations through the system. Prices and products of non-transparent solutions are only provided upon request. This makes software selection with non-transparent providers more time-consuming and complex.
We have provided as much information as is publicly available for the respective solutions. Feel free to use this table overview as a template for your software comparison with more criteria and solutions.
| Solution | Price | Product | Preis* | Design | Complexity | Countries |
| Employer of Record | ||||||
| Oyster | Transparent | Transparent | 350 – 650 € | Very good | Low | 180+ |
| Deel | Transparent | Transparent | 560 €+ | Very good | Low | 80+ |
| Papaya Global | Transparent | Intransparent | 600 €+ | Good | Low | 160+ |
| Lano | Transparent | Intransparent | 400 €+ | n/a | n/a | 150+ |
| Remote | Semi-Transparent | Intransparent | 250 €+ | n/a | n/a | 65+ |
| Workmotion | Intransparent | Transparent | n/a | Good | Low | n/a |
| Globalization Partners | Intransparent | Semi-Transparent | n/a | Good | n/a | n/a |
| GoGlobal | Intransparent | Intransparent | n/a | n/a | n/a | 50+ |
| Rippling | Intransparent | Intransparent | n/a | n/a | n/a | n/a |
| ADP | Intransparent | Intransparent | n/a | n/a | n/a | 200+ |
| Partner | ||||||
| Papaya Global | Transparent | Intransparent | 20 – 90 € | Good | Low | 160+ |
| Lano | Transparent | Intransparent | 15 € | n/a | n/a | 150+ |
| SD Worx | Intransparent | Intransparent | n/a | n/a | n/a | n/a |
| ADP | Intransparent | Intransparent | n/a | n/a | n/a | 200+ |
| Mediator | ||||||
| SAP Central Payroll | Intransparent | Intransparent | 6€+ | Ok | Hoch | n/a |
| Workday | Intransparent | Intransparent | n/a | n/a | n/a | |
| Data overview | ||||||
| Papaya Global | Transparent | Intransparent | 230 € pro Jahr | Good | Low | 160+ |
| SAGE Global | Intransparent | Intransparent | n/a | n/a | n/a | n/a |
| HCM+Payroll | ||||||
| Personio/DATEV | Transparent | Transparent | 25 €+ | Good | Low | DE |
| Emply/Paychex | Intransparent | Semi-Transparent | n/a | Very good | Low | DE |
| SAGE 100/XR | Intransparent | Intransparent | n/a | n/a | n/a | n/a |
| Specialists | ||||||
| DATEV | Transparent | Transparent | 15 €+ | Ok | Medium | DE |
| Hansalog | Intransparent | Intransparent | n/a | Ok | Medium | DE |
| eGECKO | Intransparent | Intransparent | n/a | Ok | Medium | DE |
| MA Licenses | ||||||
| Personio/DATEV | Transparent | Transparent | 25 €+ | Good | Low | DE |
| SAGE Lohnabrechnung | Transparent | Transparent | 5 €+ | Very good | Low | DE |
| Emply/Paychex | Intransparent | Semi-Transparent | n/a | Very good | Low | DE |
| PC Licenses | ||||||
| Lexoffice | Transparent | Transparent | 10 €+ | Ok | Medium | DE |
| Lexware | Transparent | Transparent | 25 €+ | Ok | Medium | DE |
| DATEV | Transparent | Transparent | 15 €+ | Ok | Medium | DE |
What is a payroll system?
What is a master data system? And then what is a Human Resource Information System (HRIS), a Human Resource Management System, or a Human Capital Management (HCM) System? And how are they all different from each other? And what do they have in common? In this article we would like to answer only the first question. As well as delineate the answer to the other questions. For a more comprehensive picture of the mentioned interface topics, please follow the respective links.
What is Payroll?
In Germany, Payroll is referred to as Entgeltabrechnung. It is the generic term and summarizes payroll accounting and salary accounting. It can refer to the actual document that employees receive as a salary statement, as well as the entire process that lies behind the issuance of the document. In the meantime, the word payroll has become widely used in German-speaking countries as an English synonym with the same meaning.
Why Payroll?
Payroll accounting is crucial for paying salaries, transferring taxes and social security contributions to the company and ensuring legally compliant documentation of both components. In Germany, therefore, financial accounting is mandatory for all companies.
What is the Payroll process?
The payroll process can be divided into three steps. In the first step, data preparation, all relevant employee data and documents are prepared. In the second step, the remuneration as well as tax and social security contributions are calculated. In the last step, various tasks follow, such as sending notifications to the social security institutions, the month-end closing, money transfers, postings to financial accounting (difference between payroll accounting and financial accounting) and transmission of the payroll to the employees.
Who is Payroll?
Many stakeholders are involved in this process, which adds to the complexity. In addition to employees, the HR department, and payroll professionals within the company, external payroll and tax advisors (or tax firms) may also be involved. One or more systems are used by these stakeholders to capture, manage, prepare and process employee data in payroll. In addition to the employees, the results are also sent to the tax office and the social security institutions.
Why a Payroll System?
As described, payroll creation is a multi-layered process with many participants. In an international comparison, Germany, France, Italy and Belgium are among the countries with the highest or most complex requirements for payroll creation. Permanent changes in payroll tax and social security laws further complicate standardized processes. Because each country across the world has very unique and individual legal tax, payroll and social system structures, payroll in a globalized context is an even greater challenge. Nevertheless, there are now national as well as global agile solutions. The goal of a payroll system is to automate as much of the payroll process as possible. Great cost and time savings, quality assurance and error minimization are the main reasons for introducing and using a payroll system.
What is a payroll system not?
Since the payroll process consists of many components, what defines a payroll system is ambiguous. However, some key points can be made about what a payroll system is not: Payroll systems are not to be confused with HCM systems, HRM systems, HRI systems, PI systems (PIS or personnel information system), master data systems, the payroll office or the tax consultant.
Summary
Selecting a suitable payroll system(s) and designing your own payroll process is one of the most complex topics in the HR world. Fortunately, the fluctuation rate in this segment is one of the lowest of all HR systems. Payroll systems are rarely changed because of the efforts associated with implementing them.
This makes it even more important to ensure your initial selection is particularly strategic and suitable for the long-term. If you have any further questions or need support for a more detailed system comparison, please contact us.
Key Take-Aways
In this article, you have learned:
- Definition of Payroll
- Definition and goal of a payroll system
- The 4 main strategic criteria of national solutions
- The 4 strategic categories of global solutions
- The Payroll Selection Process
Further articles and sources
Here we have compiled some further reading topics related to Payroll & Systems:
