A (corporate) triple-A player talks about payroll
Diverse forces are focusing unusual attention on ADP (ADP), the company that administers corporate payrolls covering 16% of all private sector workers in the U.S. With jobs in the news, the company’s monthly employment report moves markets. The Affordable Care Act makes employers aware of exactly how many full-time and part-time workers they have — or want — under the law’s complex definitions. The historic financial uncertainty creates especially interesting tension for the four companies (ADP, Exxon Mobil, Johnson & Johnson, and Microsoft) that still hold triple-A credit ratings. ADP’s CFO, Jan Siegmund, talked recently with Fortune’s Geoff Colvin about the rise in low-paying jobs, whether being triple-A is still worthwhile, getting value from endless data, and much else. Edited excerpts:
Q: Jobs are a very hot topic, and you have exclusive access to a trove of data from 600,000 employers. What’s it telling you about the state of employment in the U.S.?
A: Unfortunately, for the last three to four months we’ve seen a slowing of employment growth. We believe the tax-rate changes had an impact. Anticipation of health care reform may impact hiring decisions, and the reemergence of payroll taxes may also.
Many of your clients are small employers who are not well prepared to deal with the Affordable Care Act. What concerns are you hearing from them?
Employers with fewer than 50 employees don’t have to fear anything because they’re not required to offer health care coverage. What we see anecdotally is that companies right at the edge of 50 do have concerns. We see it also in the hiring numbers — hiring was particularly slow in the segment of 30 to 50 employees. We don’t publish the data, but we feel there may be a trend.
The training sessions we offer our clients around the Affordable Care Act are the highest attended ever in the history of anything we’ve offered. The government regulations that are coming out make the payroll system the system of record, so it’s a natural thing for us to be in the center of the discussion.
I’ve noticed that many small employers don’t realize that their employment levels this year will establish whether they’re subject to the Affordable Care Act next year, so how many people they’re employing for how many hours right now will be critically important.
Exactly right. How do you calculate part-time workers? It’s more complicated than one thinks. Then if you think about reporting requirements to the health care exchanges, eligibility confirmation, wage-level verification, W-2s to include premium valuations in your annual reporting, special notices, penalty submissions, and so forth — it’s an endless list of very mundane things that have to be done where we hope we can offer best services.
In certain industries — hospitality, restaurants, and, somewhat ironically, even health care — a lot of operators have many part-time employees and may be right at that threshold of 30 to 50 employees. They’re really concerned about the Affordable Care Act. What impact do you see it having on them?
We’ve analyzed this specific topic in quite some detail. When you look at the spread between part-time workers and full-time workers in particular industries like hospitality and travel, and health care to some degree, those companies will face significant increases in their health care costs. They either have not offered health care before or are worried that part-time workers are becoming eligible for health care. We’re working very hard to create systems so that an HR operation can manage those costs and make the right decisions to contain the future impact of increased benefit costs.
What trends are you seeing in overall U.S. pay levels?
We observe in our data that a vast number of the jobs created have been in jobs below $25,000. Job growth in the low-income category is particularly strong, and much more muted in the categories above $50,000. It’s really quite remarkable to see the shift in income distribution.
A lot of ADP’s profit comes from float and investing it, so you focus on interest rates. What’s your sense of where they’re going?
ADP does have a big float business. We collect monies for payrolls a few days before disbursement, and it takes a while to distribute the monies. On average, we have about $22 billion of client fund money on our balance sheet, which we invest carefully, and hence we have a dependence on interest rates. We take forward-looking yield curves as our indicator. We don’t anticipate any interest rate movements in the medium-term future, so we are working in a constant low interest rate environment.
For a long time to come?
For a long time in the U.S., meaning two years or so.
ADP is one of the four remaining U.S. companies with a triple-A credit rating. The difference in credit costs between being triple-A and being one notch below is not great, and ADP is not a hugely capital-intensive company. How important is it to be triple-A in today’s environment?
We are the smallest of the four triple-A-rated industrial companies and view it as a testament to the strength of our business model. We believe it signals to investors and our shareholders the stability of the business, the high entry barriers, and the prospects of the company. For our clients, it’s also important because we collect their money to pay their employees, and knowing that they’re with a company that is a better credit risk than the U.S. I believe is an advantage. I know our sales force uses that argument every day.
As we sit here this morning, the stock market and the U.S. dollar have fallen on the release of the newest ADP employment report. You helped develop that report, which has become a great bit of branding for ADP. Are there lessons here for other companies?
When we started this six years ago, we wanted to create a very high-quality measure that would reflect our aspiration as a company to deliver the best quality possible to our clients. We worked very hard not to create something just for the short-term benefit of a media splash. We wanted something sustainable, a public good that would be relevant to the media, to the financial markets, and to the government. We never felt that we wanted to make money off it.
In a nutshell, we use our real-time payroll-processing transactions to calculate the report, so it is based on those people being paid in the period that we’re trying to cover. The government uses a method that collects surveys from companies. The two different methods have slightly different results. Our objective is to predict the true employment level at that moment, and so we may be a little bit ahead of the government data that the BLS updates in the months to follow — they adjust the data two or three months following. We hope we give an advance look into the economy.
And in fact those later government revisions often get closer to your initial number. More broadly, companies have access to a lot more data than ever before, which in theory ought to be a tremendous boon to CFOs. In practice, what are the challenges in taking advantage of it?
Data sources are endless today, but how do you make a decision relevant? How do you make it matter for your business, make it actionable? That’s the primary challenge. I see it as CFO for my own company, and we see it also in the requests from our clients.
What are they interested in?
We get many requests regarding the broad set of human-capital management data. It’s not only employment data that we publish every month. Clients are interested in understanding wage developments. What type of benefit offerings should I provide in my company? How do I compare in these offerings to my competitors? The more specific you can be, so that the information becomes relevant to that specific client, the more successful it will be.
As CFO, how are you using all the data you have available?
We use detailed reports about employment and hiring statistics to direct our sales force, to identify opportunities for us to grow the business, and also to identify potential needs that our clients may have. We have the same challenges that all other companies have in making the most sense out of a vast array of data.
The Leadership series: This is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership — plus find Colvin interviews with Charles Schwab, the team of Jeff Immelt (GE) and A.G. Lafley (P&G), Pimco’s Mohamed El-Erian, Novartis CEO Joe Jimenez, Whole Foods co-CEO Walter Robb, and many more.
This story is from the July 1, 2013 issue of Fortune.