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ASSESSMENT OF THE PAYROLL SYSTEM OF A SELECTED BUSINESS PROCESS
OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
by
December 2016
ASSESSMENT OF THE PAYROLL SYSTEM OF A SELECTED BUSINESS PROCESS 2
OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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Chapter 1
The Philippines Business Process Outsourcing (BPO) industry has edged out India
as the call center leader of the world. BPO is now the biggest contributor to the
Philippines gross domestic product. Also called the IT-BPM (Information Technology and
and financial backroom services); it is the countrys fastest growing industry. More and
Based on the recent update of Bangko Sentral ng Pilipinas (BSP) dated June 26,
Process Outsourcing (IT-BPO) Services showed that the total revenues of the industry
expanded at a robust rate of 13.8 percent in 2013 to reach US$15.3 billion, from the
previous years level of US$13.5 billion. All the industrys sub-sectors (namely, contact
centers, transcription, animation, software development, and other BPOs) posted positive
growth rates in revenues in 2013. The countrys Contact Centers, which remained the
global leader in voice-driven IT-BPM services, was the top revenue earner (at US$8.4
billion), accounting for more than half of the industrys total receipts. The sub-sector was
also the main driver of growth, contributing 6 percentage points to the total 13.8 percent
expansion in industry revenues during the year. The local IT-BPO industrys total
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percent and a total of US$7.9 billion compensation was paid, 16.2 percent higher than the
US$6.8 billion registered during the previous year. A total of 1,098 IT-BPO companies
were covered in the 2013 survey, an increase of 14.6 percent from 958 companies in 2012.
Source companies included those engaged in the operations of call centers, medical and
legal transcription, animation, software development and other BPOs. These companies are
members of the various IT-BPO associations and companies registered with attached
agencies of the Department of Trade and Industry, namely, the Philippine Economic Zone
communication skills of the workforce in the country continues to boost the IT-BPO sector.
The rapid growth of this industry is also driving economic development in a number of
cities across the Philippines, with Manila and Cebu now ranked among the worlds leading
IT-BPO hubs. The rapid growth of the IT-BPO industry is also creating positive
transmission effects for the rest of the economy, including for the commercial property
sector, with rapid growth in demand for commercial floor space, underpinning the
development of existing and new office parks in urban centers; this is based on the update
of Rajiv Biswas, an Indian Asia-Pacific Chief Economist within the Information Handling
Services (IHS) Economics & Country Risk Group in a Philippine Daily Inquirer article.
Also, the employment growth of BPO industry in the Philippines is projected to have 1.3
million employees in 2016 and is forecasted to increase continuously for the next
succeeding years.
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OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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Coefficients Co. Ltd. is one of the three BPO companies in Lucena City. It was
founded and started its operations in Lucena City in September 2011 with only two
employees handling marketing campaigns for Singapore clients. It is one of the Quezon
services. In 2012, they acquired two big client companies in the US who are both in the e-
company in Canada. They also gained a total of 15 logos in a span of one year. The
Coefficients Team attended a two-week product training for a tent manufacturing in Ohio,
USA. It started acquiring clients from the SEO and web development industries.
Coefficients Team personally met some of the companys clients in the US which helped to
strengthen business ties and to formalize business expansion plans. SEO clients companies
expanded their services with the help of Coefficients. They went beyond SEO and real
development. Context creation and context marketing are now their number one services.
They have started 24/7 operations as well. Coefficients found a new niche; they started
working for several writers, books authors and motivational speakers. They also provide
graphic designs, video editing, content writing and project management services to them.
Payroll is an integral part of all organizations, thus, payroll system plays a vital
role. It often involves several moving parts in a company. The management must follow
federal, state and local laws when hiring employees, offering compensation and
can be used to help them maintain payroll information. Most accounting software packages
offer customizable payroll modules that help business owners keep accurate records of
ASSESSMENT OF THE PAYROLL SYSTEM OF A SELECTED BUSINESS PROCESS 5
OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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employees. The accurate payroll system organizes all the tasks of employee payment and
the filing of employee taxes. These tasks can include keeping tracking of hours, calculating
wages, withholding taxes and deductions, printing and delivering checks and paying
employment taxes to the government. Business owners use payroll system to save time and
create structure in business operations. It saves time because they can repeat payroll tasks
in a timely manner as needed. Structure is also important due to the legal liabilities
involved with employee payroll. Furthermore, companies can face payroll audits from
government agencies. Each organization must present employee information and payroll
Several organizations view the payroll as merely a processing function. They fail to
recognize the importance of payroll and the mammoth effect it has on businesses. Hence,
having a good payroll system is important to the organization itself, and in terms of morale
need to feel assured that they can be paid on a consistent and timely basis. A late and
ignorant behavior towards the workplace. Given that employees form the base in all
terms of compensation package, it allows an employee to feel his net worth within the
company. Payroll is not limited to simply the peso and cents of an employees salary. The
total compensation such as salary, bonuses and benefits are incorporated into payroll.
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OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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Based on annual performance evaluations, employees are typically rewarded with a salary
increase or a fat bonus, or ideally, both. Employees who receive health insurance, life
insurance and pension benefits feel that they have a higher worth. In return, it might boost
upholding companys reputation, it ensures that its payroll activities adhere to the countrys
tax obligations and comply with employment legislations. The efficiency of meeting tax
obligations on time and upholding of legislative laws can further establish the company's
reputation as a stable employer. Moreover, the payroll department is not only responsible
for employees salary compensation, but it also plays an essential function in protecting the
accuracy and timeliness of payroll given to the employees. It also reflects on the
The human resource department feeds the compensation and employee information
while accounting department has the major role in processing payroll. The accounting
clerk computes the basic pay, overtime pay, employee benefits, applicable deductions and
net pay, which are reflected on the payroll register. The accounting function is also
responsible in reconciling the payroll fund and processing accounting entries, processing
cash received for benefit premiums and accounts receivable invoices on salary
overpayments for inactive employees, and maintaining earnings records for compensation
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Most developed BPO companies use computerized payroll system while
Coefficients Co. Ltd is executing a manual payroll system which is inappropriate for a
BPO company to have an obsolete payroll system. There are times that the management
encounters disputes because they have a different way of processing their payroll. The
payroll system they have is inconsistent which resulted to various discrepancies regarding
their employees just remuneration. Thus, the payroll process needs improvements to
The researchers aim to study the payroll process of Coefficients Co. Ltd. and come
up with an alternative payroll system that will help to provide accurate information.
This study aims to assess the existing payroll system of Coefficients Co. Ltd., a
Business Process Outsourcing (BPO) company in Lucena City, so that the necessary
terms of:
a) Data input
b) Data processing
c) Data output
3. To propose an alternative payroll system.
Conceptual Framework
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OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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Over a million employees are already employed in the Business Process
Outsourcing (BPO) Company. Thus, it is now one of the biggest industries in the
Philippines. With this kind of industry, effective and efficient payroll system should be
payroll system, the aspects affecting the payroll, the problems that arise by using the
existing payroll system. After analyzing this system, improvements could be made.
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To the Company itself,
The key benefit of payroll system is having the highest level of reliability on the
data. There are employees who do not care about attendance because their bosses are not
strict, or they rely on someone else to buddy punch for them, when left unchecked,
employees will continue to such action at the expense of the company. Hence, this study
will help to facilitate a better payroll management that will avoid disputes on the
compensation of employees.
HR department can determine the right way if an employee is trying to outsmart the
system by reporting false overtime hours. It will save a lot of time for HR clerk so he can
also tend to other important task. Therefore, this study will help the HR clerk to minimize
and even eliminate the complaints he receives about the salary inconsistence because it can
To the Employees,
This study is conducted to have a better service for the employees and less errors or
disputes on their payroll. It would bring the employees satisfaction for test quality and
efficient service. They will receive the just remuneration they ought to have.
To the Researchers,
The researchers will be able to acquire knowledge on the current payroll system of
Coefficients Co. Ltd. and the supposedly improved payroll system. This research is
ASSESSMENT OF THE PAYROLL SYSTEM OF A SELECTED BUSINESS PROCESS 10
OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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noteworthy to the proponent as he could share his ideas and technical know-how to readers
in the preparation for the degree. Having the degree, the researchers could deal with
This study could assist other researchers as a reference for interrelated research. It
will help the future researchers to gain more information as they can improve their ability
This study will focus on the assessment of the payroll system of Coefficients Co.
Ltd. The study will use descriptive interview as research design. An interview guide will
be used to facilitate the study; focused on the information gathering from the interview to
the top level management. The study limits the review of related studies considering that
this is the first research regarding payroll system of a Business Process Outsourcing (BPO)
The area of research, Coefficients Co. Ltd., will serve as a big help to fulfill the
Definition of Terms
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Business Process Outsourcing (BPO) is a subset of outsourcing that involves the
Human Resource is the people who make up the work force of an organization, business
Just Remuneration justifiable amount of money paid to an employee for work or service
rendered.
Manual Payroll System Manual payroll means that you, or another employee within
your company, calculate the payroll each pay period entirely on paper.
Payroll is a companys list of its employees but the term is commonly used to refer to
the total amount of money records of its employees salaries and wages, bonuses and
withheld taxes the companys department that calculates and pays there.
Peg is a small piece of metal or other material that is used to hold or fasten things or to
Chapter 2
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REVIEW OF RELATED LITERATURES AND STUDIES
The success of every business entity depends on the effective management system
including the payroll system. The business needs an efficient payroll process that will
other compensation. Some employees may be paid a steady salary while others are paid for
hours worked or the number of times produced. The concept of compensation goes beyond
payment for work done. It includes benefits that the worker receives for being with the
organization, for being employed over a period of time and for the rank or position held.
Employees in terms of basic pay and benefits and the importance of employees return with
their quality of work makes the compensation management a vital aspect in human
process through which compensation is transferred to employees and federal, state, and
local income and payroll taxes are withheld from employees checks. It is also through
payroll that any benefits costs borne by employees are withheld. While some employees
receive checks for net pay, it is more common, especially among large organizations, for
function. HR department feeds compensation data and benefits coverage (and employees
coverage choices) to payroll, which makes sure that all appropriate federal, state, local
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income and payroll taxes are withheld at the correct rate and that any deductions for
benefits are also withheld at the correct rate. Payroll usually has the responsibility for
keeping track of income and payroll tax rates and applicable salary levels. Payroll results
are fed back into general accounting system by payroll. Because the labor costs are the
largest variable costs for most organizations, it is critical for the for the organizations
financial well-being that payroll records are accurate and timely. Because the paycheck is a
signal of the employment relationship and many employees rely on their paychecks to
meet bills that are due, it is critical that the payroll system delivers accurate and timely
paychecks or bank transfers. Little will anger or demoralize an employee more than a
missing or inaccurate paycheck or transfer. In short, payroll is a transactional task that must
be flawless.
purchases labor or services rather than goods for sale. It is where the services rendered by
employees are processed in what we call the salary of employees during a given period of
time. Payroll system varies from one business to another as in the case of manufacturing,
service or trading firms. Different documents and departments are involved in this process.
It can be done through a series of departments that will perform their assigned task. The
following represents the payroll processing of some businesses: (1) Personnel department
prepares and submits personnel action forms; (2) Production department prepares two
types of time records such as job tickets and timecards; (3) Payroll department receives
personnel action forms and time cards as basis for the preparation of payroll register, the
paychecks are also prepared; (4) Accounts Payable department reviews the payroll register
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and prepares copies of a cash disbursement voucher which will be recorded in the voucher
register; and (5) Cash Disbursement department prepares a single check for the entire
Payroll process, at its most basic, is the process by which an employer pays an
According to Ferrer et al., the main purpose of a formal wage salary management
plan is to have a systematic method of payment to ensure that employees receive a fair
wage and salary for the work they perform. Salaries may be the same but one company
may pay on hourly basis plus piecework while the other may not. There are two methods
of paying salaries: (1) By the Time Worked; (2) By the Amount of Work Produced.
By the time worked, earnings do not fluctuate with the amount of work performed
or with the quality of output. Herewith, wages are computed in terms of unit of time. It is
common to pay workers by the day and the term day-work was adopted. In terms of by the
amount of work produced, earnings depend on how much work the employee completes or
on a related factor, such as the quality of work. Piecework salaries are determined by the
number of pieces produced or completed and each piece has assigned piece value.
The company must have a clear-cut wage and salary policy that will help the
organization have better relationships with employees and develop a more comprehensive
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Gross earnings are what employees receive as take-home, or net, pay. Deductions
are the reason for the difference. Some are required and some are voluntary. Required
deductions are for various taxes, such as federal, state or local taxes, Social Security and
Medicare. Tax tables are used to determine exact amounts to be withheld depending on the
type of tax and the individuals marital status, pay period, and withholding allowances
claimed. Voluntary deductions are usually specified by the individual employee. Savings
plans, union dues, medical insurance, life insurance, and charitable contributions are some
Many federal and state laws affect payroll work. It is essential that the payroll
workers understand the impact what these laws carry. They spell out the requirements for
withholding, reporting, and submitting money for taxes, both for employer and employee.
and disability benefits must be considered. Several of the laws have common goal: to
According to Olivar (2010), payroll system is the heart of Human Resource System
of an organization. The solution has to take care of calculation of the salary as per rules of
the company, income tax calculations, and various deductions to be done from the salary
based on the daily time record using the Biometric Attendance Record System, including
statutory deductions like Income Tax and Provident Fund deductions. The main focus of
the system should handle employees records such as employee list, attendance, bonus and
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Based on the Payroll Records & Procedures by Merle Wood, payroll systems can
range from handwritten documents to use of mainframe computers. While manual systems
may be adequate for small businesses, they are completely inappropriate for large ones.
For businesses that do not wish to perform their own payroll function, service bureaus are
Thus, payroll system involves everything that has to do with the payment of
employees right and just remunerations for their works performed. This includes keeping
track of hours, calculating wages, withholding taxes and other deductions, printing and
delivering checks, and paying employment taxes to the government. There are two basic
types of payroll system such as manual payroll and computerized payroll system.
According to Merle Wood, in the book Payroll Records & Procedures, the word
manual means by hand. Thus, in a manual system, payroll work is done by hand, but with
the assistance of a few office machines such as adding machines, typewriters, and
calculators. Manual payroll systems are used in more businesses than all other systems
employees. Thus, it is natural that the majority of such businesses would use a manual
payroll system.
Wood also stated that, a manual payroll system that greatly increases efficiency in
recording payroll data is the pegboard, or one-write, system. This system makes it possible
to enter employee payroll data in the payroll register, the earnings record, and on the
voucher portion of the payroll check all at one time. Pegboard payroll system is a kind of
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payroll process under manual payroll system for efficient and effective recording of payroll
The pegboard has a row of pegs or some other alignment device along one side.
The payroll forms used with the board are punched so that they fit over the pegs or
alignment device. The procedure for preparing a payroll is as follows: (1) The payroll
register for the period is placed on the board first and the date of the payroll is entered; (2)
The employee earnings record for the first employee is placed over the payroll register so
that the first blank line of the earnings record is over the first blank line of the register; and
(3) The voucher check is placed on top of the other forms so that the information line on
the voucher stub is aligned with the blank lines on the earnings record and the payroll
register. The payroll clerk then enters the appropriate data on the voucher stub of the check
using a ballpoint pen. The data is automatically reproduced on the earnings record and the
payroll register because the voucher stub has a carbon strip behind it and the earnings
record has a carbon-paper backing. (With some systems, both forms may be made of NCR
Moreover, there are payroll forms specified, the Standard Payroll Forms and
Custom-Made Payroll Forms. Under the standard payroll forms, it cited: Certain
information must be recorded in any payroll system, including each employees name,
marital status, number of withholding allowances, regular rate of pay, overtime rate, and
voluntary deductions. In addition, for each payroll period, a business must have detailed
information about the hours worked, earnings, deductions, and net pay for each employee.
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OUTSOURCING COMPANY: BASIS FOR SYSTEM IMPROVEMENT
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A business may design and print its own payroll forms for recording this information.
However, standard forms and record books that meet the needs of many firms are available
from stationery stores. One advantage of using such standard forms is that they provide for
a way to manually record payroll information efficiently, reducing the possibility of errors
or omissions.
In terms of Custom-Made Payroll Forms, Some payroll laws and regulations differ
from one geographic area to another. For example, a few states still do not have a state
income tax withholding law. Most cities do not have special taxes that must be withheld,
though some do. Also, company policies that affect payroll differ from business to
business. A similar situation could exist in an audio repair shop where employees are not
charged for service or minor repairs. The value of any service that the employee receives is
taxable income. It is a form of pay. By including such amounts in a column in the payroll
register, this record is established and is available for company management information as
well as for tax purposes. Besides making it possible to record unique needs, custom-made
payroll forms are attractive and functional. The custom-made payroll forms were
Electronic aids are used in the manual payroll system to compute the amount of
aid when a payroll is prepared manually because it can quickly and accurately add,
subtract, multiply, and divide amounts. In payroll work, an electronic calculator that prints
a paper tape is usually preferred to one that only shows the results of computations in its
display area. The tape provides a convenient way to verify amounts. Most firms use a
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rather simple desk calculator to perform payroll computations. However, more
In manual payroll system, the payroll clerk calculates the payroll each pay period
entirely on paper. Taxes, insurance and any other applicable deductions and additions to
each employees actual earnings are calculated. The advantage of using a manual system is
that it is very inexpensive, with virtually no start-up costs. However, the disadvantage is
whatever you save from the start-up costs will probably be eaten up by the amount of time
it takes to process payroll. In addition, it is very easy to commit mistakes when processing
payroll manually, and the penalty for the mistakes committed in the computation of taxes
can be costly. Therefore, a manual payroll system should be efficient to prevent errors in
three procedures and reports or outputs made by authorized personnel. First, the Human
Resource clerk will prepare a report on employees summary of work hours based on the
audited and approved time cards. Second, the organizations Accounting clerk will check
the work of HR clerk as basis for the preparation of payroll register. The payroll register
will contain the computation of basic pay, overtime premium, bonuses, taxes, benefits and
other deductions applicable to each employee. Third, the Treasury clerk will design the
companys pay slip based on the information reflected on the payroll register. He will be
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Every business, large or small, must keep detailed payroll records. Since employee
wages are a major expense for most businesses, management must watch payroll expenses
closely. Also, government agencies and auditors often need to refer to payroll records. And,
most important to the employees, paychecks are written based on information taken from
Keeping time and work records is a necessary activity for businesses. They can be
kept on a weekly, biweekly, semimonthly, or monthly basis. These records are designed to
gather information needed to determine amounts to pay for each payroll period. Time cards
are used with a time clock by workers to record when they arrive and when they leave the
workplace. Most often, time cards are used in businesses that employ a large number of
workers. Smaller businesses with fewer workers often use time sheets to record hours
worked. Time worked may be computed to the exact minute or to the closest quarter-hour.
Sometimes it is necessary to keep track of labor costs for specific jobs or projects. In other
situations, workers are paid according to their production or sales. Clearly, work records
Generally, day-to-day activities are recorded in the payroll register and the
employee earnings record. These are subsidiary records to a firms accounting system. At
the end of the payroll period, these activities must be brought into the overall accounting
system through a process of journalizing and positing. Keeping track of the money
involved in payroll work would be impossible without detailed records. Although the
primary accounting system for a business does not need every payroll detail, it does need
summarized payroll data in order to determine the current financial status of the business.
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All deduction information is a part of every employees earnings record. Any changes
should be made in writing by the employee. The person in charge of preparing payroll
checks must carefully review all individual deductions to make sure the proper amount of
The payroll register is one form of payroll record that is widely used. It can be
customized to fill the particular needs of a specific business. It must be absolutely accurate,
and entries must be readable. The use of an electronic printing calculator provides the
means to double-check entries made. To verify the accuracy, a procedure called cross-
footing is used. If certain combinations of column totals do not equal, cross-footing will
earnings record. A separate record is kept for each employee on an annual basis. This
record contains personal information such as name, address, marital status, social security
number, and date of hire. It also provides a complete record earnings and deductions
throughout the year, quarterly totals and a year-to-date total for gross earnings. This is
especially useful to determine when an employees earnings have reached the maximum
taxable amount for federal, state, or local taxes that may have earnings limit. Information
for entries is taken from the payroll register. This process is called posting, which must be
done without error. Any mistakes will be carried forward into many reports that are
generated from these records, making that information wrong. Any changes in the
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On the other hand, computerized payroll system basically performs the same
function as those performed manually by the payroll clerk. The important differences
between the two types of payroll system are the computers speed, accuracy of data, and
to do that, the computer requires the same information necessary in manual system. There
is a need to input information for each employee, it includes employee name, social
security number, address, marital status, number of exemptions, gross pay and withholding
for payroll taxes and other deductions. The employee master files are the basis for the
computerized payroll system which contains all data related to the payroll. The whole
payroll information is stored on a secure server, and the data is routinely backed up. The
on Microcomputers, payroll is one of the oldest and most common data processing
applications. It is an application that lends itself to the computer because of its repetitive
Hence, various companies use computerized payroll system to save time and to
Payroll is one of the major expenses of the company as it directly affects its
operations and various financial data summaries. A budget is a financial data synopsis that
prepares to monitor expenses, revenue and cash flows. The document generally comes out
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at the beginning of a period such as a month, quarter or fiscal year and enables
department heads to specify elements such as how much to spend, how to report negative
variances and how to rein in waste. Consequently, a budget involves the amount of money
to be spent by the company for their operations as well as the remuneration of their
employees.
Payroll accounts include salaries and wage expenses, payroll tax expenses and
expenses incurred by the employer for employee benefits. Assets decrease when a
company pays liabilities associated with payroll. It also decreases a companys planned
and actual expenses; as a result, it has a decremental effect on budgetary data. Payroll that
exceeds sales or earnings will cause a business to fail. When a business owner decides to
compensate the employees, he must review the budget and try to estimate the business'
income in order to determine what it can afford for compensation. The amount the business
can afford as budget for payroll will affect how many employees the business can hire, and
statement also referred to as a statement of profit and loss, report on income or profit or
loss. The cash flows pertaining to the compensation paid by the management to the
employees reflect to a balance sheet, the report often called as statement of financial
position. Financial managers and department heads help senior executives in pondering
payroll-related issues.
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Due to Business Process Outsourcing (BPO) industrys fast-paced nature with its
ongoing demand for manpower, numerous employees are employed in thousands of BPO
companies in the country. Each organization manages the entire operation of the company
including its payroll processing. Having a large number of employees, BPO companies
should have an efficient and accurate payroll which can be attained using a computerized
or automated payroll system. It is the appropriate payroll process for a BPO company to
eliminate possible errors and transparency across the organization; it creates effectiveness
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Chapter 3
RESEARCH METHODOLOGY
This chapter will present the methods and techniques to be used by the
researchers to gather data that will answer the current study. This will include the research
design, subject respondents, research instrument and the data gathering procedure.
Research Design
The researchers will use the qualitative method of descriptive research to obtain
information concerning the current status of the phenomena and to improve the present
The qualitative method of research will be utilized from the interview to the top
Respondents
The respondents of the study will be the top level management of Coefficient Co.
Ltd.
Research Instrument
The researchers will prepare a questionnaire for the interview with the top level
management or the owners of the company to obtain the necessary data needed in the
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study. The prepared interview guide will gather information that will supplement the
The researchers will assess the existing payroll system of Coefficients Co. Ltd
using a process flowchart. The prepared interview guide will be used to conduct an
interview with the top level management that will serve as a validation of the assessed
payroll system. After the assessment of the current payroll system, the researchers will