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Putting Paychex back on the growth track

(Photo by Kimberly McKinzie)

When Martin Mucci was named president and CEO of Paychex Inc. in 2010, the company was coming off an unprecedented year—and not of the good sort.

On the heels of the recession, Paychex had its first-ever drop in service revenue in fiscal 2010, falling 3 percent to $1.9 billion. But a number of moves—including a series of broad changes to the company’s sales team that predated Mucci as CEO, along with investments in technology—and a gradual improvement of the economy have put the company back on the growth track.

Mucci, who previously served as president of telephone operations for Frontier Communications and CEO of Frontier Telephone of Rochester, spent eight years as Paychex’s senior vice president of operations before he was named CEO. He has led investments in technology as the company expanded its online and mobile offerings. Paychex also has steadily built its human resources services, which once represented a sliver of its annual revenue but today are approaching 40 percent.

The investments have largely paid off. Paychex revenues have grown by close to $400 million over the last three years and are projected to grow even more, Mucci says.

Rochester Business Journal reporter Nate Dougherty and Editor Paul Ericson met with Mucci recently for a wide-ranging interview that touched on his approach as CEO, his relationship with Paychex founder and chairman Thomas Golisano, and the company’s goal of $3 billion in annual revenue.

An edited transcript follows:

ROCHESTER BUSINESS JOURNAL: In September you’re going to mark five years as president and CEO. How does the company’s performance over that period compare to the goals you set when you started out?

MARTIN MUCCI: I’m very pleased with the performance over the last five years and pleased with the fact that the market has recognized it, and that also shows in the stock price and level of shareholder investment in the company.

When I came into the CEO role we were at a point where we needed to reposition the company. We were always a company known for our great service and very personal service, and we had a lot of investment into technology. Over the last few years, our investments into research and development of our products and acquisitions of our products have gone up 80 percent. It really became a focus for us five or six years ago, when I had responsibility for IT and product management and knew the competition was going to come more on the technology side. We added a lot in software-as-a-service development and did cloud-based products.

We also knew we had to build and acquire, so we made six to seven technology-based acquisitions over the last five years, which is more than we had done in the last 20 years technology-wise. In the last one, in June of last year, we acquired nettime solutions. That’s the best and to me the most advanced cloud-based time and attendance product on the marketplace today. Every-thing is on the web, and we integrate those products into our platforms. Today our mobile platform, which we also developed in the last five years, can give you all your information in one or two clicks. If you’re an employer, you can do your payroll; and if you’re an employee, (you) get your check stubs and W2s and with this latest integration you can clock in and do your time and attendance.

The biggest change in the last five years was the change in the leadership team. There was a point where a lot of leaders were changing or retiring, and I had to add almost a whole new executive team, with new leadership in the CFO and sales and leadership of operations behind me. We had to change the team and really reposition the company for this combination of technology and cloud-based products with service. We didn’t want to lose any of the service we had been known for. When you look at our acquisitions—nettime for time and attendance, ExpenseWire for expense management, myStaffingPro, which is recruiting and onboarding of clients—everything is cloud-based and online.

And, of course, the expansion has been big. We had been in Germany for a few years and had to decide if we were going to make this sizable and try to go international. We did a strategic plan and decided to pick three or four countries and focus on expanding and putting our weight behind a few of them. So in Germany we doubled our size since I took over with an acquisition and growth of our sales team. We also started the payroll business in Sao Paolo, Brazil, and have been getting that off the ground. Then we’ve been looking for what that third or fourth country might be. We thought it might be Canada but haven’t found the right entry and are looking at other countries including the U.K. We’re seeing there are a lot of growth opportunities in the U.S. but also internationally.

RBJ: What has been the most challenging?

MUCCI: I think most challenging is balancing it all, making sure we still have the same stellar financial performance Paychex has already had and remaining a company with great revenue growth and improving margins, one that doesn’t have any debt and pays out a great dividend to shareholders. So, the question is how do we invest in the products and ramp up that investment and get stronger while building profit margins. We’ve been able to do that because the team was able to drive other costs down in operations and other areas of the company and invest those in IT.

So, while we did all that investment, we were able to continually improve our operating margins. You’re always balancing how to invest in the future while maintaining that great profitability Paychex is known for and that great dividend. Were still paying out over 82 percent of our net income in dividends and our dividend yield and the stock is one of the highest in the industry if not the country, from a company standpoint. We wanted to grow the top line while still be very profitable and pay a great dividend, and that was a lot of balance.

Also always having the right people on a leadership team and giving them the right opportunities has been important. I’ve been very lucky to have a great team that not only fits from commitment to the goals but also is a great cultural fit. Paychex has a great culture for employees, bringing in the best people and training them and give them opportunities. We make sure it’s a culture of high integrity and focus on results. I feel we’ve been able to do that and we’re very proud of it.

The shift to HR

RBJ: What is the importance of the expansion on the human resources services side?

MUCCI: It’s very dramatic. Just five years ago HRS, our HR services outside of payroll, were probably about 30 percent of our total revenue and now it’s approaching 40 percent of total revenue and will reach over $1 billion in non-payroll revenue, so it’s been a pretty dramatic increase. We’re still the No. 1 401(k) provider and we have more worksite employees that we touch with our HR outsourcing. That has now reached over 800,000 and it’s larger than any competitor.

We work really hard at being No. 1 or No. 2 in any market were in, and the experience that we had starting some of those businesses before me in the late ’90s and even 2000s made us really well experienced in leadership and talent to take that to the next level. It’s been double-digit revenue growth every year for the last five years and that will continue for some time. We had a lot of experience, great products, and the market took off.

What happened is people got used to giving up their HR services and outsourcing, and it came down in size where once a company would probably need to be 40 or 50 employees before they want additional HR support and now it’s down into the 15-employee range. That is due to the complexities, the regulations in things like the Affordable Care Act and competition where they need to have benefits and more complex HR. That’s been amazing to see that come down so low, but again the clients are more willing to go online. They recruit online and need more support keeping up (with) immigration, who they hire, developing those clients, and that’s what we do with our HR services and 401(k) and what we call Employer Shared Responsibility, which is our product for the Affordable Care Act.

The bad news is that more regulations hurt businesses starting up, but a lot of times more regulations encourage businesses to outsource and go to an expert like Paychex when they’re trying to run a business but can’t keep up with all these regulations. That growth has really continued to explode, and we’re well-positioned to grow with that. Like I said, going over $1 billion in revenue is amazing.

RBJ: Is that growth in HR services also in part a function of the overall economy, maybe slower growth on the payroll side?

MUCCI: Well, for quite a while in the last five years, small business startups had dropped off dramatically and slowly rebounded. They are almost back to where they were, but that’s taken five to six years. It’s been a strange economy and for small business in particular. Typically after a recession you see small business bounce back quickly with hiring, but still today you see mixed signals. Consumer confidence and small business confidence will shoot way up and then drop the next quarter. There doesn’t seem to be any complete rebound of this recession even five to six years later. The market is up strong and earnings are up strong, but they’re still afraid something might happen. The challenge on the payroll side is we lose clients and two-thirds of our losses come when they go out of business, are bought out by someone else or don’t have employees at this point. That’s continued to be difficult, (but) HRS has really helped us to continue to grow revenue. We will finish the fiscal year this month and are at the highest revenue and profitability in our history and we’re very proud. The team has done a great job.

It’s an interesting economy. It’s not booming by any means, but is dragging along and has its fits and starts. I report on our small business index that we started over a year ago and we peaked (in) April of 2014 and then dropped some during the fall. It picked back up in the first quarter but has flattened out in the last couple of months. That’s an index of small business hiring and it’s still better than in (our base year of) 2004, which is good news, but it’s still not quite to the peak years. It’s positive but tentative.

RBJ: Is that in part due to the fact that people have never been through something like the financial crisis?

MUCCI: That’s what we’ve seen from a small business perspective. You don’t see someone starting that second pizza place or second bagel shop; they’re more careful about whether to take that next investment. And we saw after the recession productivity expanded, that business owners would just keep driving more and more out of what they had.

But jobs are starting to come back— because they maxed the productivity out now they’re starting to hire, which is good for us. The more employees there are as businesses get stronger, the more they need services. I think a big part of our expansion has been technology and offering additional services. Five years ago, we didn’t really have time and attendance, and now it’s growing.

Our online presence and mobility has been amazing and we have thousands of downloads of our new mobile app each month. I think employees of our clients are starting to use it. Typically we only dealt with clients, but now that were dealing directly with employees, the stickiness with clients is stronger. They don’t want to upset their employees who are used to going on this Paychex app and seeing 401(k), changing deductions, checking pay stubs and saying, “I really like this, and I don’t want to change.”

Frankly, it’s something we didn’t even think about before. Over 80 percent of clients have some online touch to us, whether it’s reports, mobility or doing their payroll. There’s a lot of online functionality now and thankfully it’s where we’ve been investing in the last four or five years.

RBJ: What kind of boost would it be to funds held for clients (or float) if interest rates were to go up again?

MUCCI: It would be a nice boost. We’ve been waiting and Efrain (Rivera), our CFO, has been waiting many years. On average we hold about $4 billion in client finds at any time and about half of that in short-term, which is not really earning much of anything now. If we went up even 25 basis points it would probably be $4 million to $5 million, and that goes right to the bottom line. It would be a real positive for us.

It may happen in September; we don’t try to guess. But it’s a nice plus if that would happen for us.

RBJ: You talked a little bit about an Affordable Care Act product as one of the offerings you rolled out. What has that meant for you?

MUCCI: We developed that product over two years ago and rolled it out. It really didn’t get much traction for a while—I think because there was a delay and change and a lot of clients thought they don’t have to deal with it. Then last year, starting in the fall, the sales really started to take off because clients realized this was going to be really complex.

If you’re a client of payroll and of our health insurance product, we have all of the information to file everything for you and also give you an online monitoring tool. So when you add an employee, if that throws you over the threshold of whether it applies to you or not, you can see that as you’re adding the employee or changing hours. We not only give you reporting at the end of the year but also an ongoing tool that shows you online whether this will make it so the Affordable Care Act applies or doesn’t.

We saw sales pick up in the fall and expect a big jump at the end of calendar 2015 when for the first time many clients have to file and see the complexity of forms. Many are still trying to find out if it applies to them, and we think about 40,000 or so of our 580,000-plus clients this applies to, which is that 50-plus employee range. We’re constantly notifying those 40,000 that we think this applies to you, and here is a product that we think applies, and don’t wait too long because you really have to keep monthly data on hours on how many employees you have and what percentage of premiums you play. It can get very complex, and we’re trying to get employees signed up early.

We think it will be an awakening for many employers who ignored it until filing time. It’s better to sign up early, that’s for sure. It’s one of those areas where I think regulations make business more difficult, but it’s good for businesses like us that have been supporting small and midsize clients.

The fundamental thing we’re after is growth and how do you grow that top line. We’re putting a lot of emphasis on that from product service delivery. We’re at the best payroll client retention in our history, about 82 percent retention for the beginning client base compared to the end of the year. That’s highest in our history and lowest was probably 76 percent around the recession. Client satisfaction is also at the highest rate, and we’ve gotten more sophisticated about how we measure that. We get data immediately and know if a client is having an issue so we can break it down. Instead of the old paper cards and surveys, everything is online and we can see it right down to the branch and payroll specialist covering the person, and it helps us respond in a timely way.

Measuring performance

RBJ: Beyond earnings and stock performance, what are the key metrics for measuring your success?

MUCCI: Revenue growth, operating income and margin—so, are we leveraging as we grow the revenue and can we grow our profitability on that revenue. That’s a challenge because as you add things like the Affordable Care Act, that might be more expensive for us to service because it takes so much time, but we’re proud that while revenue has grown we’ve grown that leverage.

We also look at net client gain. We went through several years after the recession where we were negative and not gaining clients, but the last three years we have gained clients. Knowing that so many go out of business, you have to oversell those, so we do a good job balancing our sales team to say, what’s your growth in revenue and what’s your growth in units, and make sure they’re in a balance.

It’s the penetration of our products as well—(for example), how much are we selling 401(k) into the base. HR outsourcing, insurance, time and attendance; all those have tremendous room to grow and we increase penetration and market share.

And from an employee standpoint, we look at turnover and engagement scores. We’ve been doing surveys for quite some time measuring employee engagement as opposed to just satisfaction. Every other year we do employee engagement scores. That’s increased since the last time we did it, and we come back with goals on how to improve it.

Normally for employees it’s about career opportunities and what’s their development in Paychex. Since way before me, we’ve been known for training and we have all those rooms downstairs here at our headquarters where we do training for sales, reinforcement for sales and leadership. So, employee engagement and turnover are all looking really good right now. There are always competitors trying to steal good employees away and we try to make sure this is a great place to work.

I look at it as C, E and O. The C is the client piece of this; you want the best client retention and satisfaction and all the products they want. The E is the employee side of it, in the development and turnover and engagement. Then the O is the owner piece: Are they getting a great shareholder return? And I think by having a great dividend and stock price we’re hitting in all the C, E and O metrics.

And when making decisions we try to make them to benefit all three. We can’t make a decision that’s just good for clients but not employees and owners or for the owners but not clients or employees.

One of the things we looked at from the growth standpoint was coming out of the recession we were flat at $2 billion service revenue, that was without float, and as a team we set a goal and said we’ve been flat at $2 billion for a few years now and wanted to see if we could get this to $3 billion in five years. We have one more year to go on that, (the) fiscal year starting in June. It’s an amazing thing—when you look at the team from fiscal 2009 to 2011, when I came in and the team came in, we grew only at about $20 million in revenue coming out of the recession. The next three years, fiscals 2012 through 2014, we grew $400 million and are continuing on a great pace.

We may end up just short of that $3 billion, but I’ve got until next May, so I’ve got one more year and it will be close. My guess is we should be within $100 million or so, which is great. The team has worked so hard.

It’s all been about product expansion, product innovation and sales and marketing efficiency. How do we sell, how do we team sell? We used to sell payroll and go back in with other products and now we have a team selling where we approach clients and ask what they need in total and go in with multiple teams. It’s helped revenue growth and also employee retention. That growth shows a lot of this is paying off and the stock is reflecting it. When we were growing 2 to 3 percent in revenue, the stock was hanging out around $30 and now we’re hanging out at around 50.

RBJ: As of late the stock is performing well, but there was a period where it wasn’t. Was that a reflection of the economy and the effect it had on the company?

MUCCI: The economy hurt the results, kept us much more stagnant in our revenue growth. I think primarily it was growth; it was, hey, this is a nice stock for a dividends, but given the economy, will you continue to pay the dividend, will you increase the dividend and can you grow the top line? And if you’re not going to be able to grow the top line, the revenue, we’re going to reward you with this stock price. We didn’t show much growth at all in the recession and then coming out of it was pretty flat.

And so now that were showing this year heading to 8 to 10 percent revenue growth, if you can show high-single-digit revenue growth on $2 billion and at the bottom line continue to increase your profitability and pay one of highest dividend yields, that was unique. That was getting two different investors: the growth investor and a good dividend investor. When the top-line growth started to go up and dividend went up, that’s when the stock price took off and it’s continued to show some nice growth. That was our plan at the beginning, to have mid- to high-single-digit revenue growth and pay a great dividend to shareholders.

No. 1 shareholder

RBJ: What about your No. 1 shareholder? How has Tom Golisano influenced you as a CEO? What kind of relationship do you have?

MUCCI: We have a good relationship. He’s always challenging us to take performance to the next level, and I like that. He also trusts me and trusts the team to do that, but always challenges us to see how much better we can take it.

People always ask if he is involved in the business day-to-day, and he was good in that when he retired and became chairman, he really stepped out of the business. He stayed close as chairman, but didn’t involve himself in the day-to day-and still doesn’t. I talk to him about once a month on many things, but for someone who was so involved at building the business to where it got to be, he was great at stepping back and letting the next leader run it.

He’s influenced me in a number of ways. He has a great business mind and breaks everything down to the simplest numbers and has a great knack for trying to look at problems that way. It’s a great lesson for anyone in business who has complicated issues, to take it and make it as simple an issue as you can.

RBJ: He once said in an interview with us that running and growing the business is simple but it’s not easy.

MUCCI: Yes, that’s the way he looks at problems and it’s been interesting to learn. He’s also great at trusting. We don’t always agree on everything and he’ll be glad to tell you that, but he respects the opinion. We banter a lot and have lively meetings, but there’s a lot of respect on each side. I like having a lot of responsibility and like when people trust that I can take on a lot of responsibility. But he’s really been retired over 10 years, and he doesn’t get involved in the day-to-day.

He is very interesting on the technology side because he wanted to put a balance on whether were investing too much, but he is comfortable now with that balance of technology and service. We’ve seen a lot of our competitors move away from service to save money, to move jobs offshore and push more clients online, but I like the fact that we have all those online and mobile options but still have a dedicated person in payroll who is your person. That’s very different today, mostly it’s 1-800 numbers, but we have 7-by-24 service so clients can reach a person any time. We also have multiproduct centers with teams that work together, so you have a time and attendance sub team, a payroll team and they all work together to service the client as a single team.

The technology has been an interesting investment. Tom once told me something, and I think I can say this, it’s a funny story. Years ago when we first invested in mobility and we brought in the head of IT, Mike Gioja, and I said I’m going to make this investment in mobility, that we have this mobile app where you can do your payroll and get all your information, and I think we can be the best in the business.

He said, “Paychex already has a mobile app.” So I said, “What mobile app?” He picked up his cellphone and dialed and said, “Hello, Paychex?” I had to say “O.K., you’ve got a point, but that’s not exactly what I was thinking of.”

But he was always checking to see if it was going to pay off; that was just much different than the first 30 years when it was all about service and growing. But thankfully we made those investments, because it’s just so critical.

RBJ: Looking ahead, what are the biggest challenges you see over the next five years?

MUCCI: The economy is always a risk, but we try not to worry too much about it because we can’t really impact it. The other thing is staying on the leading edge of technology and service combined, and we’re really set up to do that with the products that we’ve built from the ground up and integrated. We are well-positioned to keep adding other products and enhancements, and we add enhancements every quarter.

The challenge is there’s a lot of competition out there now, a lot of startups that think it’s easy to get into certain parts of the business. But the good news is that no one has the fully integrated complexity of technology and service that we have from an offering perspective, though you do see a lot of competitors trying to pick off a low-priced alternative to HR online administration.

There are some companies that have started up and get a lot of play in terms of online do-it-yourself payroll, but there’s not that much difference in the cost between us and them that’s worth making a mistake. No one else has a team of over 13,000 employees that are really dedicated to those clients. It’s always a risk, and we monitor competitors closely and see if we can jump and stay ahead of them, but when you look at the resources we feel very strongly that we can do that. It’s always staying competitive and having a vision of what you want to be. You don’t give up on that goal; you keep going and making the right decision.

I have a real passion for achieving goals. We’re in that last year of this roughly five-year plan and now are formulating the next goal. What we call 3B, you can ask any employee in the country what that is and they know it’s to get to $3 billion when we were at $2 billion. There’s a lot more goals, but you’ve got to have a rallying vision that drives people and gets them excited. We’ve done a lot of things around it, like we had a big medallion I would wear at conventions. You have a lot of fun with things like that.

From a competitive standpoint, it’s also important to keep employees excited. They want to be part of a growing and flourishing company that’s a leader in the market. That’s gets them very excited. 

We talk about really helping small and midsized businesses in America—which is 90 to 95 percent of all businesses—and you’re driving the U.S. economy with the decisions you’re making. We’re also continually helping their development and give them a career here versus just a job. This is where you see all the training and work we’ve done to help people move to the next level. You want to make this a great place to work.

From a client perspective, I wanted a place where they’ll continue to come because we have the best products, technology and service. From an employee perspective, it’s a great place to start a career. And the owner perspective (is), you have to keep giving that great return. They’ve felt pretty good the last five years.

The challenges are always competition and getting the right people, but when you make a place that’s attractive to them, they’ll come and they’ll stay. Employees today are more about work/life balance and want more meaning rather than just being a successful business. We have just rolled out the Paychex Foundation, and we had a lot of questions from not only the Rochester community but also in our 100 other locations about how to give back. With this, employees can now request money to go back to where they’re investing their time and resources, into their communities. We’re always giving a lot for them, things like taking pay time off to do volunteer work, and employees are into what’s the bigger meaning of the company, business-wise, but also in their communities.

We’ve got great employee culture. When I first came in as a team we put together the values and mission of the company and everyone really gets it. That’s something Tom started a long time ago—you’ve got to have great integrity in this business.

RBJ: In terms of the employees, you’ve been recognized as a world’s most ethical company (by the Ethisphere Institute) and more recently recognized by Forbes as one of the innovation leaders. What does that mean for the company?

MUCCI: We talk about that all the time in employee and senior leadership meetings, and the most-ethical award is probably one of our proudest. In this business if you don’t have great integrity, you’re not anywhere. We always worry about clients who go to a small startup or a non-public company, because you’re trusting your tax dollars with them. It can put you out of business and it has, and they realize that that company ultimately has to pay your tax money.

The innovative award we’re proud of as well, and we’ve been recognized on (other) lists too. We’ve had a lot of nice recognition we’re really proud of, and that’s the team pulling it together. You’ve got to have a focus on results but (also) need a place people feel like they can make a difference.

Outlook in Rochester

RBJ: What’s the outlook for the company in Rochester? Right now you’re around 4,100 people here and that’s up from last year.

MUCCI: We looked at something from New York State recently that showed we’re up about 2,000 employees in about 10 years in New York. It’s been a big growth of IT employment. I think we continue to try to diversify, so not all of it’s in one location, but you’ll continue to see Rochester grow, as well as a number of other cities like Phoenix and Denver. Other cities like that will pick up more as well, but we’re proud of the fact in Rochester we’re in the top five from (the employment) standpoint. We’ve got a great employee base and great recruiting for the colleges.

RBJ: What do you see ahead for the Rochester economy and as a place to do business?

MUCCI: The great thing about Rochester is you not only have the colleges putting out great recruits, but it also has this appeal that a lot of people leave but come back and settle here, which is really good for retention of employees. So, you’re getting the 32- and 33-year-olds coming back to raise a family, and Rochester really has that going for it.

Rochester also has a really strong business community that sticks together. I’ve been involved in Rochester Business Alliance and there’s a lot of effort to work together. I’ve been involved in a health care team that Danny Weg-man has chaired for years—we started over 10 years ago to improve health care options and costs and it started the Regional Health Information Network, the blood pressure initiatives that have been underway and a lot of wellness initiatives the Wegmans started that we moved over to Paychex.

It’s a great business community that sticks together and tries to make it better for everyone, and the philanthropy is just unreal when you look at United Way and per-capita giving. It’s really an amazing town for business and for new businesses to start up, but it’s nice to see that passed generation to generation. When I came out of school in the 1980s and was with Rochester Tel it was the Bittners and Gills and Colby Chandler.

I remember when I was at Rochester Tel and they invested in the Hyatt, all the businesses came together and put money in that project and grew it. That’s still what you feel in this town, just different generations. You’ve got Seligmans and the Wegmans, and (Kodak’s) Jeff Clarke was at the last CEO meeting. It’s really been a great community for business. The weather is always a struggle, but you get past that and there are a lot of resources for businesses.

RBJ: Looking ahead, what are your plans personally?

MUCCI: I’m 55, going to be 56, and I’m just really excited every day. I like the responsibility. Some don’t like that, but I do. I like being counted on and like the complexity of it. I like fixing things, and the leadership team here is so good, so you don’t worry about infighting or things like that. It’s just a culture that wants to grow and come together. I’m a pretty young guy and as long as the board wants me, I’m excited to continue to grow.

(We) have a vision—taking it from $2 billion to $3 billion is a great thing, but now we’re looking at what’s the next thing, maybe growing to $4 billion. You’ve got to have that vision and just focus on results and build the right team and let them do their thing.

6/12/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email [email protected]


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