Payroll errors, inefficiencies leading to major financial losses for employers: Report

Organisations worldwide are losing millions of dollars annually due to “payroll leakage,” exposing deep inefficiencies in payroll systems and processes, according to a new report by UKG in collaboration with KPMG.

Defined as the “consistent, unintended financial losses within an organisation's payroll spend,” payroll leakage stems from a range of issues including system limitations, inefficient processes, fraud, policy deviations, timekeeping discrepancies, transaction errors, and compliance failures. The report describes leakage as a hidden but pervasive cost, often distributed across enterprises and therefore difficult to detect.

The findings, based on a survey of more than 300 senior global leaders, show that 38% of organisations report annual losses ranging from $1 million to $5 million due to payroll inefficiencies. Common causes include overpayments, duplicate payments, unauthorised transactions, and operational gaps.

The financial implications can be significant. According to the report, even a seemingly minor one per cent leakage in an organisation with 50,000 employees could result in preventable losses of $10 million to $15 million annually.

Beyond the monetary impact, payroll leakage also affects organisational trust and employee satisfaction. Public compliance failures can damage a company’s reputation, disrupt business continuity, influence stock performance, and erode confidence among partners and stakeholders.

The report points to structural challenges within payroll functions as a key contributor to the problem. Nearly half (46%) of organisations surveyed manage payroll for between 10,500 and 50,000 employees, while 25% handle up to 200,000 employees. Despite this scale, only one-third have 50 or more full-time payroll staff, and nearly a quarter rely on teams of just 15 to 24 employees to manage payroll for tens of thousands.

This imbalance, the report notes, creates a trade-off between cost efficiency and operational effectiveness, often leading to blurred roles, weak controls, and increased risk of financial and reputational damage.

While many organisations have adopted multi-vendor payroll environments, 74% according to the report, only 25% rate their vendor management frameworks as effective. Just 33% operate a fully global and standardised payroll model, highlighting significant gaps in consistency and oversight.

To address payroll leakage, the report recommends a shift towards standardisation, smarter automation, and a more strategic elevation of payroll functions. Improving data accuracy, strengthening compliance, and better system integration are seen as critical steps, alongside leveraging advanced technologies such as artificial intelligence and analytics.

However, the adoption of AI in payroll remains uneven. While 60% of organisations say they are comfortable with next-generation technologies, only 47% currently use AI or automation in production. A further 38% are still evaluating its potential, and just 10% plan implementation within the next year.

Key barriers include concerns around data accuracy and integrity, cited by 48% of respondents, as well as system integration challenges, reported by 34%.

Richard Limpkin, General Manager of Global Payroll Solutions at UKG, emphasised the strategic importance of modernising payroll systems, noting that payroll data can serve as a powerful source of workforce intelligence. “Employee pay is one of the most powerful levers multi-national organisations have to strengthen their financial health, elevate the employee experience, and operate with confidence on a global scale,” Limpkin said.

He added that payroll teams hold valuable insights that can enable faster and smarter decision-making, provided organisations invest in modern technologies and empower their payroll functions accordingly.

The report concludes that a phased transformation strategy, balancing foundational improvements with quick wins, will be critical for organisations looking to plug payroll leakage and unlock greater operational and financial efficiency.