Paychex, Inc. History
Rochester, New York 14625-0397
Telephone: (716) 385-6666
Fax: (716) 383-3428
Sales: $869.9 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: PAYX
NAIC: 541214 Payroll Services; 54121 Data Processing Services
Paychex was founded in 1971 with an objective of providing timely, accurate, and affordable payroll-related services to American business. Focused on that goal, the company and its employees have been successfully serving clients and their employees while achieving consistent growth and strong financial performance for shareholders.
- B. Thomas Golisano establishes PayMaster.
- The firm incorporates as Paychex Inc.
- Paychex goes public and raises $7.7 million in the IPO.
- The firm is added to the S&P 500.
- Paychex posts its eleventh consecutive year of record revenues and net income.
Paychex, Inc. is the second-largest payroll accounting service in the United States, just behind competitor Automatic Data Processing Inc. (ADP). The company processes payrolls for over 375,000 businesses nationwide. Paychex finds its clients mostly among small businesses with fewer than 200 employees, and its typical client has just 14 employees. Though payroll processing is its main service, Paychex also provides an array of human resource compliance and benefits administration services, including payroll tax and workers' compensation insurance administration, 401(k) plan record-keeping, and section 125--individual health care planning--administration. The firm also offers various employee pay options that include direct deposit. With headquarters in Rochester, New York, the company operates out of more than 100 offices across the United States.
Paychex was founded by B. Thomas Golisano, who still heads the company. In 1971, Golisano worked as a sales manager at Electronic Accounting Systems (EAS), a payroll processing company based in Rochester, New York. EAS aimed its services at large companies with at least 50 employees. Its minimum charges were generally too much for smaller companies to afford, and EAS did not pursue the small-company market. But Golisano, then 29 years old, speculated that small companies had as much need for a payroll accounting service as large companies. A little research at the library confirmed Golisano's suspicions that the potential market was enormous--in 1971, 95 percent of the nation's 3.5 million businesses had fewer than 50 employees. Golisano's father ran his own small heating contracting firm, and Golisano knew first-hand that making out payroll checks was a big headache for the small businessman. Golisano decided to market a payroll service that would be cheap enough for small businesses like his father's to afford.
Early Growth: 1970s
When Golisano first took his idea to EAS, the company was not interested in pursuing small clients. But EAS did agree to rent Golisano an office for his venture, and in 1971 Golisano started his own company, then called PayMaster. His service was offered to companies for only a $5 minimum charge per pay period, and the total fee was proportional to the number of employees. Not only was the price reasonable, but Golisano made his service extremely convenient. Whereas clients of EAS had to fill out forms each pay period and turn them in to the company, Golisano's clients only had to make one phone call. The client simply called in the hours each employee worked, and any changes, and the company did the rest. The process only took about four minutes.
It took Golisano a year to attract 42 clients, and Paychex did not break even for three more years. During that time, Golisano kept the business afloat, somewhat precariously, with borrowed money and credit card loans. Because Paychex clients were small, the company needed a lot of accounts to keep going. Golisano marketed to CPA's, and increasingly got referrals from satisfied customers. After five years, Paychex had attracted about 300 clients in Rochester, and the business was relatively stable.
The impetus to expand the company came from two friends of Golisano, who approached him independently in 1974. One suggested opening a branch office in Syracuse, and he and Golisano would be co-owners. The second asked Golisano to sell him a franchise, and he started up a branch in Miami. Then Golisano began to recruit people to open branches in other cities. By 1979, he had 17 partners, 11 of them joint ventures and six franchises. These operated in 22 cities spread across the country. Golisano's partners came from various backgrounds-teaching, sales, engineering. Some were high school friends or friends of the family; some were his softball buddies. Golisano gained one partner on a trip to Florida--the doorman of the Boca Raton Hotel. They were all trained them at the company's Rochester base, after which they received help to set up business elsewhere.
By 1979, it began to be apparent that there were problems with the looseness of the organization. Paychex had 200 employees, 5,700 clients, and 18 principals. Different partners had different skills and different aims. Some locations offered different services from others, so that the Paychex product was not consistent. There was little central planning, and little input from one office to another. Golisano decided he wanted to consolidate Paychex into one company. For this he needed the acquiescence of his partners. It was difficult to persuade people who had headed their own branches that they would be better off as part of a more traditional company organization. Golisano came up with an equitable stock distribution formula and presented a five-year plan for the future of the company, which included taking it public. After a tense two-day meeting in the Bahamas, all the principals agreed to the consolidation. In 1979, the company incorporated as Paychex, Inc.
Adjusting to Reorganization and Product Expansion: 1980s
The company began to change quickly. People who had been president of their own branches became vice-president of the new corporation. The company immediately began hiring and training a crew of sales professionals. The branches, which had previously operated more or less independently, were now subjected to management controls such as location-by-location comparisons of productivity. The company also strove to standardize its services. This was extremely important as the company grew. Most of its new business came from referrals from satisfied clients. It was crucial that if one company praised the way its account was handled by, for example, the Syracuse office, a company in New York could also expect the very same service. Golisano himself kept careful track of his growing organization, lugging around a three-ring notebook with hundreds of pages of relevant figures wherever he went.
Paychex initially experienced financial difficulties as a result of the reorganization, and at one point in 1980 cash-flow problems caused the company to suspend salaries. But this crisis was quickly resolved, and Paychex did grow as expected. With its new professional sales team in place, Paychex began to attract clients in numbers much higher than anticipated. By 1982, the average salesperson was bringing in 100 clients a year. This figure rose steadily. In August 1983, Paychex made its initial public offering. The company raised $7.7 million, which was used to fuel further expansion. By 1986, Paychex had close to 60,000 clients. The company had 58 offices in 32 states. Sales doubled to $51 million in the three years since the public offering. The company was far bigger than Golisano's former employer, EAS.
Revenues close to doubled again in the next three years. In 1989, the company brought in $101 million from its client base of 115,000 accounts. Some of the growth came from acquisitions, such as the 900 clients acquired when Paychex bought a Minneapolis company, Purchase Payroll, in 1987. Paychex also began to expand its services. In 1987, Paychex opened a division of Benefit Services, to keep track of clients' employee benefit plans. The next year, the company opened a Personnel Services division. The new services under this rubric included preparation of employee handbooks, providing information on new laws affecting the workplace, and updating clients on equal-employment regulations. In 1989, Paychex began offering a new service called Taxpay. For clients selecting Taxpay, Paychex prepared payroll tax returns, made the payments, and actually filed the returns with the government. Taxpay provided a real revenue boost to Paychex for two reasons. For each client who selected Taxpay, Paychex gained about a 45 percent increase in revenue on that account due to the fact that this service required only a little additional work. Paychex also benefited from Taxpay because it accepted money in advance to pay the taxes. Before the taxes came due, Paychex could collect interest on this "float" money. Paychex invested the float money, an average daily balance of $4,000 per customer, in tax-free municipal securities, and earned an average annual return of three to four percent. In just a few years, almost half of Paychex payroll clients were also using Taxpay, and Paychex experienced a vital boost in revenue.
Paychex had experienced growth of around 20 percent annually in the 1980s, and the company was consistently featured on lists such as Forbes' "Best Small Companies in America" and the OTC Review list of "100 Most Profitable NASDAQ Companies." The company's success did not go unnoticed, and Paychex began to face competition from the leading payroll accounting service firm, Automatic Data Processing Inc. ADP began a separate sales division to try to hook small business accounts. By 1989, ADP had 400 sales representatives in this division, versus Paychex's 310. In that year, companies with fewer than 50 employees made up 60 percent of ADP's accounts and brought in about twice as much revenue as did Paychex. Even so, the small business market was enormous, and there was still room for growth. And about 80 percent of Paychex's clients renewed every year. Most of the clients the company lost did not turn to another provider. The rate of failure among small businesses is very high, and most lost clients simply went out of business. But to keep up with this turnover, Paychex sales representatives had to bring in an average of 160 new clients a year, or over three a week.
To train salespeople to keep up with this demanding quota, Paychex opened its own school at its Rochester branch. In 1991, Paychex spent approximately $3,500 per trainee to put its new salespeople through a seven-week course in tax law, accounting principles, and selling skills, and to send them on rounds with experienced sales representatives. The expense of the school, which had 11 full-time instructors, was far less than it cost Paychex to recruit a replacement for sales reps who quit or were fired. And new hires who had come through the training school started making money for the company twice as fast as before. Paychex had started in the 1970s with people who had little or no background in either selling or payroll accounting; in the 1990s, the company was operating with a highly professional and well-prepared staff.
Success with New Services: Early to Mid-1990s
By 1990, Paychex had 335 sales representatives and around 125,000 clients. But a recession in the autumn of that year set back the number of paychecks the company was processing, and sales representatives found it hard to meet their ambitious quotas. Nevertheless, the Taxpay service was increasingly successful. At the end of fiscal 1991, Paychex estimated it had lost several million dollars due to recessionary cutbacks, but it more than made up the difference with revenue from Taxpay. That year saw record sales of $137 million, as well as record earnings of $9.6 million. At this time the company had around 26,000 Taxpay customers, and that number rose to over 50,000 by 1993.
Paychex added other services as well. In 1991, the company formed a Human Resource Services division, offering clients a package of employee evaluation and testing tools, employee handbooks, insurance services, customized job descriptions, and other benefits. Paychex used its expertise to help its Human Resource clients keep abreast of government regulations affecting the workplace and took over time-consuming administrative procedures. The company then introduced Paylink in 1993. Paylink appealed to businesses that used personal computers, allowing clients to send payroll information in to the Paychex database via computer modem. In 1994, Paychex added a similar service, Reportlink. After a client's payroll was computed, Reportlink sent the figures back to the client's computers for use in internal reports and accounting.
Paychex continued to roll out new services, though in 1994 over 80 percent of its revenue still came from its basic payroll accounting service. And enrolling new payroll clients was still the key to the company's growth. According to CEO Golisano in a June 13, 1994 Barron's article, Paychex aimed to expand its client base by 11 to 12 percent a year in order to keep revenue growing at close to 20 percent annually. This actually meant bringing in even more new clients than it seemed, because Paychex always had to make up the 20 percent of clients it lost each year. And though in 1994 there were still more than 4.6 million businesses with fewer than 100 employees, more than 60 percent of these had only one to four employees, and thus were too small to be likely potential clients. Paychex also had to contend with increasing competition from software manufacturers. Business owners with personal computers had an array of cheap software packages to choose from that made doing their own payroll relatively cheap and convenient.
But Golisano was confident the company could meet its goal. He took time off in 1994 to run for governor of New York as an independent party candidate. Golisano had become increasingly interested in trying to solve Rochester's urban problems, working with city youths on running their own businesses and heading a city campaign to lower the rate of teen pregnancies. Golisano also had an in-depth knowledge of government regulations and tax codes that he believed harassed small businesses. Though Paychex had made its living dealing with government red tape for its clients, Golisano claimed he would work for tax reform and simplification if elected. A long shot at best, Golisano did not win the governorship, but Paychex flourished. In 1995, the company increased its client base by 11.8 percent, exactly as Golisano had wished. Paychex had over 200,000 clients, and half of these were using the lucrative Taxpay service. Earnings were up almost 40 percent, with net income of $39 million. The company increased its penetration in the California market with two acquisitions--Pay-Fone and Payday. The Human Services division introduced a 401(k) record-keeping service, and other human resources services, as well as Paylink and Taxpay, continued to grow significantly.
Continued Growth: Late 1990s and Beyond
Paychex aimed to expand even more through the remainder of the 1990s. Its market penetration was still low enough to leave room for growth. The company also committed to make use of blossoming technologies in computer networking and digital communications to enhance its service and capabilities. In 1996, Paychex acquired California-based Olsen Computer Systems Inc. and National Business Solutions of Florida. The firm celebrated its 25th anniversary that year and was ranked number two on the "Industrial & Commercial Services" segment of the Wall Street Journal's Shareholder Scoreboard ranking of 1,000 companies.
By 1997, the company had secured five consecutive years of over 30 percent earnings growth. It continued to expand its product and services offerings, including the addition of the Paychex Access Card. In a partnership with First Chicago NBD Corp., the firm developed the card to allow wages to be deposited into a Paychex Access Card account. These wages could then be withdrawn using a MasterCard-branded debit card, thus eliminating the need for paper paychecks. The firm's success continued to be recognized throughout the industry and during 1998, the company was added to Standard and Poor's 500 Index (S&P 500).
Paychex looked for continued expansion in the United States, eyeing the domestic market as a lucrative avenue for increased revenues and earnings. When questioned about whether his company could continue to secure such solid results, Golisano replied in a 1999 Business Week article that Paychex only had five percent of the payroll processing market and the entire industry had just 13 percent overall penetration. "So there is no reason that we shouldn't grow at relatively the same rates, as long as we continue to do our job," Golisano stated firmly.
Paychex did just that as it entered the new millennium. In fiscal 2001, the company posted its 11th consecutive year of record revenues and net income. The firm continued to invest in new technology as well as develop new services that catered to its small business clientele. Paychex also held strong to its long-standing belief that employee training was key in its success. In fact, during the year 2000, 5,000 employees were trained at the University of Paychex, and 750,000 hours were spent on field training and ongoing training programs. The firm's focus on its employees led to its first-time ranking in Fortune's 2002 list of "100 Best Companies to Work For" in the United States.
As Paychex forged ahead in the payroll industry, it remained committed to serving small business. According to the company's 2001 annual report, the firm was dedicated to achieving success in the future by focusing on its growth strategy which included increasing its client base, obtaining higher utilization of ancillary services, developing new services, and leveraging its infrastructure. With 30 years of success under its belt, Paychex appeared to be well positioned to secure positive earnings well into the future.
Principal Competitors: Automatic Data Processing Inc.; Administaff Inc.; Ceridian Corp.
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Source: International Directory of Company Histories, Vol. 46. St. James Press, 2002.