Paycom, Paylocity, & HR Software Competition

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

We want to understand the general sales environment, quality of the software, corporate culture, and things like that. We hope you can help us with that. I saw your LinkedIn profile, so I have a general understanding of your career, but could you explain it in your own words?

Certainly. I started at Paycom right out of college in 2010 as a sales representative, working as an individual contributor in their West Coast, Southern California office. I did that for five years. During that time, they asked me several times to move into leadership due to my success. I made the President's Club every year. After about five years, I decided to lead a team as a sales manager. At Paycom, this role is very much a player-coach role, where you're still responsible for selling, but also for developing your reps. They hire people right out of college, so development is crucial.

I moved to Miami, took over an existing sales team of eight reps, and we had a lot of success, turning the team around and being responsible for the entire office's quota. I did that for almost three years before being promoted to open their San Diego office, where they didn't have a market. I built a market from scratch, hired a sales team, and did that for about a year. Then we moved to Boston, where my wife is from, and where we live now. I returned to an individual contributor role for about a year before being promoted again to lead that office. I left Paycom in 2022, after about 12 years, and left the industry for a couple of years. Now, I'm back in the industry at Paylocity, where I've been for about a year.

That's quite impressive. What made you join Paycom right out of college?

A friend of mine graduated a quarter before me and spoke highly of Paycom. I knew I wanted to go into sales from an internship I had done, not at Paycom, but at a life insurance organization. It was really a personal referral from a friend. I liked the manager and, although I knew nothing about HR payroll at the time, it seemed like a fast-growing company with good opportunities, so I took it.

Can you describe Paycom's position in the market a bit, especially regarding Beti?

Are you asking about Beti specifically, or Paycom overall?

Paycom's position overall. I know roughly what the market share is, but there's some controversy around Beti.

Yes, there is. I was there for the Beti rollout and saw it all unfold. Would you like me to describe my thoughts on Beti or what it is? What would be most helpful for you?

Any information would help, especially in comparison to other products. I understand Paycom describes Beti as a self-administration tool for the ordinary employee. I'd like insights on how well it works in practice and how customers perceive it.

It was definitely a unique value proposition. Paycom was the first to market with something like Beti, which I believe was introduced back in 2018 or 2019. Essentially, it allowed employees to see their paycheck before payroll and, in a sense, "run their own payroll," giving them more visibility than other systems from a timing perspective. It was well-received by certain industries.

Beti allowed employees not only to see their paycheck but also to approve it, which helped eliminate payroll mistakes and automate the payroll process. High hourly organizations, such as blue-collar industries, restaurants, hotels, and manufacturing, found value in Beti because payroll mistakes were common and costly to fix. For these groups, Beti was beneficial. As a salesperson, it gave me a differentiator to discuss. Some people cared, while others didn't.

We also sold to many white-collar companies, like law firms and tech companies, with full-time salaried employees. These companies didn't see value in Beti because their employees' pay didn't change frequently. For them, approving a check was more of a nuisance. The market's perception of Beti was mixed. It was a differentiator, but I believe the CEO and executive team focused too heavily on it, neglecting overall platform improvement.

The company was focused on getting existing clients to upgrade to Beti, and for new sales, we were instructed to lead with Beti. If clients didn't want Beti, we were told not to pursue their business. In my opinion, they leaned too heavily into Beti, which hurt them in several ways. I'm happy to elaborate on that, but that's my general take. It was an innovative idea, but Paycom may have overplayed their hand.

How did this disconnect occur between what the customer actually wants and what management believes they want?

Chad Richison, the CEO, is a very smart individual and a billionaire who has done well for himself. I think it was his idea, and he believed it was the future. He thought people would eventually get on board, so they stuck with it and tried to force its adoption. Part of it was an ego thing, as it was his idea. Perhaps there wasn't enough customer feedback. I believe the main driver was that it was Chad's idea, and as the founder and CEO, he decided the direction. It was a matter of getting on board or getting off.

Is there a feedback mechanism? Does he regularly communicate with customers?

Not that I personally observed. At Paycom, as sales representatives, we often emphasized that we take a lot of customer feedback. I believe there is some truth to that. However, specifically with Beti, it seemed irrelevant what the customer or prospect said. Chad was always right, and this was going to revolutionize the industry. I remember that was the narrative for a couple of years, how it was going to completely change the payroll industry. For some organizations, that might be true, but for many others, not so much.

What is your sense now? Have they become more realistic about Beti's prospects, perhaps positioning it only in certain industries and not others?

I think they have become more realistic. Although I'm no longer there, from what I've seen and heard, they seem to have become more reasonable. It's not the ultimate solution anymore, and they are more flexible with things like pricing. Previously, we faced challenges as sales reps due to limited discounts, which sometimes led to losing deals on cost. They have become more aggressive with pricing to attract customers. If someone doesn't prioritize Beti, it's no longer the focal point of the sale. However, Chad and the executive team still believe in it and monitor its utilization closely. It's still heavily promoted, in my opinion. They've had to reassess, especially considering the stock situation, and focus on innovation and maintaining a great platform. They've faced service challenges and significant internal turnover.

How do you evaluate the platform in general compared to the main competitors, such as Paylocity?

It's a very solid platform, especially for what I would call the mid-market, ranging from small businesses to a couple thousand employees. I think it's a very robust platform. Five or ten years ago, it was highly differentiated because ADP and other major players had disjointed technology where HR, payroll, and time systems were separate. Paycom built it from the ground up as a single system, which was a major selling point for a long time.

However, the rest of the market caught up with more modern, integrated technology. As of today, it's still a powerful platform. I believe Paycom wants to move upmarket and sell to larger enterprises, but they are a closed system without open APIs or a marketplace for integrating other technologies. In 2024, having open APIs is a necessity for many mid-sized and larger organizations. This is a gap in Paycom's platform and strategy. Nonetheless, their core product—payroll, time, HR—is very good, with deep self-service capabilities and good mobile apps.

Was the system devised in the late 1990s when Paycom was founded, or is it based on older technologies that are now 25 years old?

Yes, they've continued to build off the same platform since then. However, I wouldn't call it antiquated in terms of look and feel. It's more a decision by the CEO to keep a closed system, believing customers should do everything within Paycom without needing other systems for HR-related tasks. But today's businesses want a best-in-class recruiting system or benefits tool integrated with their HCM. Paycom still looks modern with a clean UI, but it has continued to iterate since its inception in the late 90s.

So the reason they don't have an API is by decision, not because they can't have it or due to security risks?

Correct. It's purely a strategic decision made long ago. I wouldn't be surprised if that changes in the coming years, as I think Paycom is realizing they need to be more flexible and listen to what companies ultimately want.

How would you describe the culture compared to other companies in the industry?

It's more intense. Paycom is very good at squeezing maximum productivity out of its employees, which can be beneficial in the short term. For instance, you're getting more sales from newer salespeople, and they're having more meetings. On the sales side specifically, it's very structured, almost militant. You're expected to make calls as a team during specific hours and set five or six appointments a week. They have much higher standards in terms of activity and number of meetings than the competition. At Paycom, you're forced to do more with less. Paycom doesn't have solutions consultants doing demos, so sales reps are responsible for learning the technology, conducting demos, setting meetings, and handling the entire sales process. This makes the sales reps very strong over time, but due to the high pressure and expectations, there's high turnover, not just in sales, but throughout Paycom.

This focus on having the salespeople do everything keeps costs low, but it's only possible if you have a well-integrated system. If there are many interfaces to other systems, you probably need a solutions consultant. This seems to fit the general strategy, at least it sounds like it.

Yes, and at Paycom, we would often say it's a user-friendly system. It's so user-friendly that even a salesperson can conduct demonstrations. This was a differentiator, especially from 2010 to 2020, as many other systems were clunky and required extensive training. However, this approach can also lead to issues, especially if new sales reps don't fully understand the product and oversell it. This can result in problems during implementation when the product doesn't meet the expectations set by the salesperson.

You mentioned overselling. It seems this has happened to some extent, and now they appear to be more flexible, allowing people to exit their contracts or adjust them. Sometimes people subscribe to a module they don't really use. Is this true according to your experience?

When I was at Paycom, we didn't have contracts. It was just a payroll-to-payroll service agreement. I heard that changed about a year ago, where they now have actual contracts locking you in for a couple of years. Everyone I sold to could leave whenever they wanted, so it was on Paycom to service them well. I've heard that Paycom is now not only offering contracts but also giving discounts to larger, current customers if they sign a contract to stay for a certain number of years. Paycom seems to be getting more serious about retention and using contracts as a way to achieve that.

There's a story circulating that some customers gained so much productivity in their HR department from using Beti that a significant part of the HR department could be eliminated. ADP and others approached HR departments using Paycom and told them that using Beti could lead to upper management eliminating positions. They offered their software for free for a year and then at a cheaper rate than Beti or Paycom. The head of HR would then present this offer to the CFO, who, with incomplete information, might adopt it. Can you comment on that?

Yes, a couple of things. Initially, Beti's selling point was that it could potentially eliminate an FTE or a payroll member due to the automation of manual processes. This was part of the pitch to executives like CFOs. However, if we were demoing to the entire team, including payroll, we would just say Beti would help with their job. In reality, I don't think Beti has allowed many organizations to eliminate payroll positions. They still need payroll staff, though maybe not as large a department if using something like Beti.

Regarding your story about ADP and others offering a year for free, I have seen some of that. There was a lot of it at the end of last year and early this year, but I'm seeing less of it now. There have been wild discounts and offers like a year for free or lifetime price locks from ADP. This is part of the competition's strategy when targeting Paycom customers, as Paycom was one of the more expensive providers.

According to Paycom, this has led to a higher churn rate. Historically, the revenue retention was 94%, with a 6% annual churn, but now it's more like a 90% retention with a 10% churn. Could this be the reason why the churn increased?

Yes. Are you referring to Beti and the challenges associated with it? I'll share my perspective on why their churn has increased. I think there are a couple of factors. First, we discussed the culture a bit. It's not only intense in terms of requirements and workload for sales but for the entire organization, including the service side. Customers often get a new service person frequently, sometimes multiple times a year, which is frustrating from a customer experience standpoint. This high turnover in service roles contributes to their lowered customer retention.

Additionally, Paycom has focused heavily on Beti and hasn't innovated in other areas where competitors have. For example, employee engagement technology is lacking at Paycom compared to the competition. So, it's a combination of service-related issues, product-related issues, and falling behind in certain areas.

Price is another factor. Many customers have realized they are overpaying for what Paycom delivers and are receiving competitive bids with equal or better technology at a lower cost. These are the main drivers for the decline in retention.

How would you compare the culture at Paylocity to Paycom?

It's like night and day. For example, at Paycom, there are strict in-office requirements. You must be in the office during specific hours and can't leave before 5:00 P.M. It's a good place to work when you're young and don't have a family and other obligations. But for someone with a family or who's a little bit older, it's very challenging.

Paylocity and others in the industry offer a different culture with more balance. You can work from home, have more flexibility, and face less pressure regarding quotas and activity standards. At Paylocity, you have more resources available, like solutions consultants for demos and BDRs for setting appointments. Overall, Paylocity takes a more balanced approach to culture.

Does Paylocity focus on the same customer segment as Paycom?

Yes, they target similar-sized accounts, ranging from small businesses up to probably 2,000 to 3,000 employees, which is the cap for both organizations. One difference is that Paylocity has segmented its market into small business, mid-market, and enterprise divisions. At Paycom, they have not segmented in the same way. They do have a small business division, but everything else falls under outside sales. For instance, under 50 employees is handled by inside sales, and everything else is outside sales. Paycom is likely the only one in the industry that operates this way.

Regarding moving upmarket, when I was at Paycom, it was always a topic of discussion. It might not be as big of a focus for them now because there's still a lot of opportunity in the mid-market. However, now that I'm at Paylocity, I believe that to succeed upmarket, segmentation is necessary. You need seasoned enterprise-style reps and seasoned solutions consultants who can demonstrate the technology. I'll be curious to see if Paycom decides to segment in the future, but they tried before and it didn't work. So, I'm not sure if they will attempt it again.

Yes, it depends on their appetite for growth.

Exactly. They need to deliver shareholder value, so we'll see what they decide to do.

Continuing with the Paylocity theme, how would you say the products compare?

There are pros and cons to each. Generally, Paylocity has a more modern platform. Not only does it have an open API integration marketplace, but it also strongly focuses on employee engagement. This includes communication, surveys, recognition, and rewards, all grouped under employee engagement. Paycom, in my opinion, lacks this aspect. Both platforms are strong from a mobile app perspective with a clean UI for employees. Paycom does have more depth in core HR functions like timekeeping, scheduling, and benefits. However, overall, I believe Paylocity's product is stronger due to its modern approach. Paylocity's leadership has taken a better approach in developing the platform, listening to customers, and providing a more scalable solution.

You mentioned earlier in the call that the exclusive focus on Beti was causing downstream problems. Could you elaborate on that?

One example is the group called CRRs, or Client Relations Reps. These individuals are responsible for upselling current customers with new products they don't yet have. When Beti was introduced, the entire division, under Chad's direction, was focused solely on selling Beti to existing customers. They stopped promoting the rest of the solutions to the existing client base. I believe this decision hurt them significantly from a revenue perspective.

From a development standpoint, initially, Paycom did a better job of listening to customers. Most of the people we brought in were from ADP, and we often heard from ADP clients that their system was clunky, employees didn't use it, and it had many separate tools. Reporting didn't work, and there were separate systems and databases on the back end, making it feel like everything was duct-taped together.

Paycom initially took the right approach by building the system themselves rather than acquiring and bolting together various systems. This gave Paycom a strong value proposition and a well-built tool. However, when Beti came along, they stopped listening to customers as much and neglected development in other areas. Recognition and rewards are just one example. Many companies today want a recognition and rewards solution, and Paycom could have developed that quickly, in my opinion. But they were so focused on Beti that they missed opportunities to enhance other products and strengthen existing ones. From my perspective, all development focus and resources were directed towards Beti.

I think you mentioned earlier in the call that especially white-collar companies wouldn't derive much value from it. If they felt forced or strong-armed into buying it, they might consider it a form of mis-selling.

Exactly. Many people didn't realize what Beti entailed when they purchased it. I have spoken to current Paycom customers, and many have Beti but don't really use it because they don't want or need it. You can essentially choose not to utilize it, although Paycom doesn't openly communicate that. Especially for white-collar groups, they might have chosen Paycom for reasons unrelated to Beti. When they discovered they had to use Beti, it became more of a hindrance and headache. Paycom allows clients not to have employees approve their checks, but they heavily encourage it. This has been a point of frustration for clients who feel pressured to use Beti.

You mentioned there's an opportunity for some competitors to offer a cheaper, comparable product. I'm sure there's a lot of differentiation by price depending on what you choose, but in a broad sense, what do you think the price premium is that Paycom has?

Up until the last year or two, Paycom was consistently 20% to 30% higher than the competition. We had strict discounting guidelines, and as a salesperson, I often had to walk away from accounts. They wanted to work with Paycom, but management was unwilling to discount to the levels our competitors were willing to offer. We would lose deals on price sometimes.

I've heard that has changed, and now Paycom is willing to do whatever is necessary from a pricing perspective to win a client. Generally, there was a premium, probably 30% or more in some cases. If you look at major players like ADP and Paychex, everyone is needing to show growth and acquire new clients, so they are more aggressive now than they were two years ago.

Part of this is because the competition has caught up. Paycom was very differentiated with its single solution, but now everyone can check the boxes for the full employee life cycle. The HCM space has become much more competitive. From a prospect's perspective, especially for smaller to mid-sized companies, most solutions can get you where you want to go, which wasn't the case five years ago.

Are there ways to differentiate the software again for Paycom?

This isn't really about the software, but I do think their sales strategy is somewhat differentiated. They out-hustle the competition by making more calls and knocking on more doors. They're more old school, and it works in many cases. They've also invested heavily in marketing and generate a good number of leads, more than the competition from my perspective. I believe Paycom still has room to grow. Chad is a very determined guy. You probably saw the stock went up quite a bit earlier this week, which I was happy about since I held on to more than I should have.

From a product perspective, it will be more challenging for Paycom if they don't return to listening to customers and innovating. I don't know their roadmap, as I haven't seen their product in a couple of years. I'm sure there have been quite a few updates since then. One thing, to answer your question, is that they were going into international payroll. I can't confirm how much of a focus that still is, but international payroll could be a differentiator. They were building it themselves, unlike most providers who have a third-party payroll arm for international, which isn't really native or part of the same solution. This could potentially be a differentiator for Paycom.

Yes, they seem to be going international. The problem is they don't have a unique international client. It's usually a subsidiary of a US company that uses Paycom for payroll in that subsidiary to keep the systems simple. There isn't a customer in the UK that is only in the UK and uses Paycom. But maybe that's a goal they could reach in 10 years?

Yes, I don't know. When I was there, they always said they've only acquired 5% of the TAM in the US. I'm not sure how much focus international expansion has now or will have for them. However, if they could crack that nut, so to speak, it could be a differentiator. It's a pain point for many organizations with employees in multiple countries because it's so siloed and disparate.

Do you have a perspective on the GONE module?

To be honest, I don't know much about it. I wasn't there when GONE was released. From what I've heard and seen in conversations, I'm not sure how innovative it is. My perspective, though I've never seen it, is that it's not much. It's called GONE, but it just approves your time if certain thresholds are met. Personally, when talking to Paycom clients, I've never heard anyone ask if Paylocity has something like GONE. That question has never come up for me. I'm not sure how much clients and customers want things like PTO requests to be auto-approved. I was a bit confused by it, to be honest. I think they won an award for it at the HR Tech recently, which surprised me. From my perspective, it seems like it's automating something that might not be that necessary. That's my two cents.

You're obviously doing sales now for Paylocity and know the Paycom software intimately, having worked there for many years. If we were a 200-employee SME and considering going with either Paylocity or Paycom, we don't expect you to be objective because you represent Paylocity, but how would your pitch go? What key points would you use to point us towards why Paylocity is the better solution?

I would ask about your organizational goals, especially if you have a decent amount of turnover, many locations, or a lot of employees working from home, which can make communication challenging. In today's workforce, with millennials, Gen Z, and boomers, each generation wants to be communicated with differently. I would ask questions to guide you towards the theme of employee engagement, as this is where Paylocity differs from Paycom.

I would also inquire about your accounting system and 401k provider to understand the other systems you leverage. Paylocity likely has strong, pre-built integrations with your ERP, Power BI, and other systems. I would highlight these integrations throughout the process because if you only care about payroll, time, and benefits, it's a toss-up. However, if I can get you to care about engagement and connecting to the rest of your tech stack, then Paylocity will win that deal.

Paycom trains their reps well, reaching the C-suite quickly by calling on CFOs and CEOs. They do this better than Paylocity and others in the industry. They also excel at building a business case and ROI, presenting it compellingly to the executive team, which is an advantage. Their sales training is strong.

If you're a software company from the 90s, you probably have Oracle as your big role model, with selling as a major focus. This might be less so for younger companies from the 2000s.

Exactly.

The curious thing is that they are still growing at 10% despite the disconnects over the past years. The question is, can they fix it and return to their old glory days?

I hope so, because for my stock's sake, I hope they can fix it. It's interesting, as you know, I'm not sure if you've already invested in Paycom or are just looking. For a while, they had a co-CEO who left, and I'm not sure what happened there. As long as Chad is at the helm, it's both good and bad. He's very militant, almost like a dictator. I think he will get where he wants to go, but I go back and forth on that question.

I'm a perfect example; I'd probably still be there if their culture was better. They'd have many seasoned salespeople like me. To answer your question, I think they can grow, but not back to the glory days of 20% growth. They'll continue to grow because ADP still has a million clients and many prospects that would fit Paylocity or Paycom. ADP struggles with innovation and service, so there's plenty of opportunity and runway for Paycom.

However, they have their challenges. They've become lenient on discounting, which I never thought they'd do. If they truly listen to customers and innovate, delivering what customers want instead of what Chad wants, they can accelerate again. They've built a machine, and switching providers isn't fun, so larger clients will likely stay unless they're in significant pain. It's very competitive now with Paycor, Rippling, Dayforce, and UKG. There's a lot of movement in the space.

UKG, for example, is having layoffs, and their product has declined, which is an opportunity for Paycom. I'm sure they're aggressively targeting UKG clients. So yes, there's still runway for Paycom, but it depends on how willing Chad is to listen to others and customers.

It seems there are pros and cons to the system Richison has built. He moves quickly in the direction he wants, but that direction might be wrong.

That's a very good way to sum it up.

If he figures out the right direction now, it might work for a few years until he gets it wrong again.

Yes, exactly. And who knows how long he'll stay? I mean, I think it's his passion project. He referred to it as his third or fourth child. I don't know if he'll ever step down unless he's forced out. It's a very competitive market out there.

Do you have a perspective on him selling his stock so aggressively?

No, I don't. I haven't been paying attention to whether he's been selling significant amounts recently. When I was there, he was always consistently selling off.

He's consistently selling. I was wondering what he needs the money for. Does he have any expensive hobbies or things he spends time on?

He has several big houses in real estate. One is in Beverly Hills or Malibu, next to Katy Perry, if my recollection serves me correctly. What does he need the money for? Who knows? Maybe to print out dollar bills and sleep on them. I couldn't tell you. He certainly has more money than he knows what to do with. I think he'll probably continue with projects like the Paycom Center, which is the Oklahoma City Thunder NBA Arena. I wouldn't be surprised if they do more things like that. They've got a pro golfer and have done a good job of marketing. I'm sure he'll use more cash for similar ventures.

What's your perspective on Paycom? I'm curious as an outsider what you think.

We are in the process of forming our final opinion. We have a small position in Paycom, which we built at around $160 to $170. I had the impression, similar to what we discussed, that they were heading in the wrong direction for some time but have now corrected course to some extent. This might mean their growth will re-accelerate from the current 10%. The growth slowing from 20% to 10% is why the stock went from $500 to $160. It's not super expensive right now. Even if they continue growing at 10%, it may still be a sensible investment.

There is more benefit to be had from correcting course than potential downsides right now, I would say. I've seen such organizations many times, where one leader calls the shots. It usually works well over time. It doesn't mean they don't make mistakes, but they will correct course. It seems like such a situation. Do you have any perspective on the new sales leader who took over in spring, Amy Vickroy?

I do. I worked for her directly. What would you like to know? Just my thoughts?

I'm not sure what question to ask.

Let me think about how to phrase this. Jeff York was their original Chief Sales Officer, and he was amazing. He was like the Tony Robbins of salespeople, excellent at training and building up young people, enabling them to achieve big things quickly.

I believe Paycom has been trying to fill his shoes ever since he took a back seat. Amy is very process-oriented. Holly was in her position before, and she didn't perform well, with sales not hitting metrics. Time will tell if Amy can accelerate and fix some of those issues.

Part of Holly's challenges might have been Chad's strictness with discounting, which was a significant issue for us as salespeople. We lost deals on price. Now, with the new regime under Amy, that's no longer the case, and Paycom will do what is necessary.

If Amy can get Chad on her side regarding flexibility and delivering what customers and prospects want, whether in pricing or product, that will be beneficial. Amy started when I did, so she doesn't have 30 years of experience or experience with competitors.

I think Chad's strategy of not hiring anyone with industry experience is a miss. It disqualifies you from working at Paycom if you've worked at a competitor. While it made sense in the early days to train the Paycom way, I think that strategy is outdated.

They need to hire experienced people who understand the industry and have worked at competitors, which isn't Amy. I think she'll do better than Holly, but if I were Chad, I'd hire people from within the industry.

Why did you decide to hold onto your shares?

That's a good question. I naively thought the stock would keep going up. It did during my time there. I was fortunate to make the club almost every year and received stock. I did sell some over the past four or five years, but if I could do it again, I would have sold more at the peak.

I never saw it go down significantly while I was there and thought they would continue to grow. The big drop hurt me financially. I'm debating whether to sell another batch or hang on to recoup some losses from the glory days.

Hopefully, some of the questions we asked help you in that deliberation process.