As organisations continue to evolve their reward strategies, artificial intelligence (AI) is emerging as both an opportunity and a challenge for payroll and compensation professionals. Recent evidence provided to HM Treasury by the Chartered Institute of Payroll Professionals (CIPP) offers valuable insights into how AI is reshaping the reward landscape.

Current State of AI in Payroll and Rewards

According to the CIPP’s consultation with its members, AI implementation in payroll services remains in its early stages, with most organisations still in the testing phase. The research found that AI adoption is predominantly occurring where it’s already available within existing systems and software, indicating a cautious approach to procurement of specific AI solutions.

Currently, payroll teams are using AI primarily for:

• Chatbot functionality for employee queries
• Automated report generation
• Pattern identification and analysis
• Executive and board-level summary creation
• Modern slavery detection
• Data comparison exercises

The Evolution of Reward Roles

One of the most significant findings from the CIPP research challenges the common narrative around AI and job displacement. Rather than anticipating job losses, payroll professionals envision a transformation of their roles toward more strategic functions.

"Members believe AI won’t result in job losses, but can help with time savings, allowing payroll professionals to concentrate on the value-add part of their roles," the research states. "Members predict the role of payroll professionals to change, to more of a data analytics role."

This evolution presents an opportunity for reward professionals to shift from transactional processing to more strategic advisory positions, potentially elevating the function’s impact within organisations.

The research highlights several areas where AI is already improving productivity in payroll operations:

• Automating repetitive tasks such as monthly reporting
• Reducing manual intervention requirements
• Enabling more sophisticated analysis across multiple pay periods
• Freeing up professional time for higher-value activities

These productivity gains could potentially allow reward teams to focus more on strategy development, employee experience enhancement, and deeper analysis of compensation effectiveness.

Data Security Concerns

Despite the potential benefits, the CIPP research reveals significant reservations about data security. With payroll functions handling some of the most sensitive employee information, professionals are understandably cautious.

The consultation found that only one-third of members using cloud-based solutions would be comfortable with their software provider using their payroll data to train AI models. This hesitancy stems primarily from concerns about:

• Potential data breaches
• GDPR compliance risks
• The probabilistic nature of AI outputs
• The risk of using incorrect data to train AI systems

Samantha O’Sullivan, Policy and Advisory Lead for the CIPP, summarised these concerns: "AI can certainly bring benefits when looking at time saving, resolving employee questions, data analysis and process automation, but it also comes with concerns around trust, cost, risk to the business, security concerns, data breaches and GDPR risks."

The research also highlights the complexity added by system integration. As O’Sullivan notes, "Payroll software is often linked with other systems, such as HR platforms, this can introduce other risk factors and involve more stakeholders, potentially decreasing buy-in and acceptance of AI."

For reward professionals, this integration challenge is particularly relevant as compensation data often flows between multiple systems including:

• Core HR platforms
• Payroll systems
• Benefits administration software
• Performance management tools
• Budget planning applications

Each integration point presents potential data security vulnerabilities that must be addressed in any AI implementation strategy.

Despite the challenges, the CIPP research identifies potential benefits for employees as well. Members "can see potential where AI could be used to identify where people may not be taking advantage of benefits, for example, salary sacrifice pension schemes."

This application of AI could help organisations:

• Optimise benefit utilisation
• Identify gaps in employee understanding of reward packages
• Target communications more effectively
• Improve overall reward strategy effectiveness

The Call for Regulation and Guidance

Perhaps most significantly, the CIPP members are calling for governmental guidance on AI implementation. O’Sullivan emphasised that "CIPP members are calling for Government steer and regulation when it comes to AI in the payroll industry, to support both in-house and bureau environments."

Specifically, members believe the government should:

• Set standards for AI in payroll and reward functions
• Produce practical guidance for businesses on data protection
• Develop regulatory frameworks to build trust
• Provide templates for organizational AI policies

Strategic Implications for Reward Professionals

For reward strategy professionals, this research provides several key considerations:

1. Prepare for role evolution: As AI handles more transactional aspects of payroll, reward professionals should develop stronger data analysis and strategic advisory skills.

2. Address data security proactively: Review contracts with software providers to explicitly cover AI usage and data protection.

3. Consider targeted AI applications: Focus initial AI implementation on areas with clear productivity benefits and minimal data security risks.

4. Develop cross-functional governance: Create interdepartmental oversight for AI initiatives that span HR, payroll, finance, and IT.

5. Emphasise employee benefits: Explore how AI can help employees better understand and utilise their total reward package.

As the CIPP continues its dialogue with HM Treasury, reward professionals have a unique opportunity to shape how AI will be regulated and implemented within payroll and compensation functions. The research suggests that with appropriate governance and security frameworks, AI could transform reward operations while enhancing rather than replacing the human expertise at their core.

For organisations developing their reward strategy roadmaps, AI implementation deserves careful consideration—balancing innovation with the critical trust and compliance factors that underpin effective payroll and compensation management.