Spotlight on a National Living Wage market

The past two years have seen a big shift in the U.K. pay landscape for low earners. Back in 2015, George Osborne, a member of the British Parliament and former chancellor, announced the introduction of the National Living Wage (NLW). Essentially, it’s a minimum wage guarantee for those aged 25 and over to supplement the minimum wage rates already in place for younger people. This increase from £7.20 per hour last year and to £7.50 in April 2017 has many implications for both employers and employees.

The future is anyone’s guess

Any drive for pay differentiation between levels could present a significant cost increase challenge

What the future holds, I’m not sure; Could NLW accelerate automation and digitization of operational and service-based work? We are already seeing more focus on automated efficiencies in manufacturing, more online focus in retail, and less reliance on bricks and mortar branch networks in retail banking. As lower level pay increases, pay will become compressed and, as a result, a medium-term outcome could be that we’ll start to see changes in the way firms organise roles at lower levels. Amended organization structures and role consolidation are two likely, albeit unintended, consequences of pay compression. Otherwise, any drive for pay differentiation between levels is going to present a significant cost increase challenge. This isn’t the only answer, but it is one very likely shift we will start to see happening more regularly.

Most companies are managing, absorbing costs when possible and trimming around the fringes of reward packages, but eventually the cost impact will require more fundamental change.

I’ve seen people taking a very relaxed, business-as-usual approach to managing this, while others have shown more concern around keeping hold of their key talent. Willis Towers Watson’s recent U.K. pulse survey examined NLW’s 2016 impact and companies’ plans in anticipation of the April 2017 rate increase. What were the findings? In short, inconclusive; I was really quite surprised to see what I can only describe as a fairly stark divide between companies making wholesale changes – big leaps in pay and reward offerings – to bolster talent retention as well as wider brand image, versus other firms who are doing only what they have to by law, seeing far less need to stretch the budget.

A key question

In many cases, paying higher rates comes down to a preference for “doing the right thing”

A key question on the lips of many HR and Reward Directors is “should we pay NLW rates to all staff, or only those over 25?” My first question to them is “Can you afford to pay these rates to everyone?” Some companies are paying to all employees, and indeed often paying higher rates than required by law. In many cases this comes down to a preference for “doing the right thing.” But is paying more than standard rates necessary? Is it affordable? What does staff turnover look like? Why do people come and work for you, and why do they leave? Does it have anything to do with pay? How easy is it to recruit the right talent? “Doing the right thing” might feel good, but I would challenge any companies not doing so to take a step and think through the benefits of any proposal.

Ethics vs. profits, or is there more?

Some might argue it’s a matter of ethics vs. profits, but I don’t see it as that simple. There has to be an element of doing what is practical and feasible for the long-term benefit of your organization. We have long lived in a world where younger and less experienced staff are on average paid less, which makes sense in many respects given they may have less impact and require more guidance and development. So why should NLW legislation change that? U.K. businesses are facing tough times at the moment; inflation is up, margins are tightening, currency is weakened, and Brexit beckons… you have to prioritise your spend, right?

Pay for performance (P4P) is an imperative in high performing companies

The NLW has also, for me, raised a whole new question around how the U.K. market manages younger workers. I find it rather ironic that we have increasing guidance and legislation preventing age discrimination in the workplace, and yet, the government then goes and fuels a further age-specific pay divide by introducing an age 25+ pay rate. Why not raise the existing “minimum wage” for everyone? The answer? That wouldn’t be good electoral politics – show the workers you are doing something, catch the headlines, and then let businesses make the hard decisions. Perhaps I’m too cynical…

One client recently said to me that people below age 25 are statistically less productive than older workers. A controversial, generalized statement, I thought, and one which needs careful consideration in an age-discrimination conscious market. But one could argue that pay for performance (P4P) is an imperative in high performing companies, so if the productivity stats support my client’s claim, then are age-related pay bands just another iteration of P4P?

Company culture and brand

Company culture and brand play a part here too. If you market yourself as a highly ethical and fair employer offering equal opportunities for all, then think about what this means for your pay policy. If you don’t want to pay NLW to everyone, then you need a good answer as to why.

What to consider

Maximise what already works for your organisation

Should you be worried about NLW? Well that partly depends on your circumstances. You need to ask yourself what you can afford; what you can and need to pay; as well as make the most of what you have already. For instance, one client noted “we market ourselves as a great place to work, and people don’t come or go for the money.” Good point, I thought. If it’s the brand and the culture that people come for, then maximize it. If your strength is great training and development, then tell people. It’s not always about the money.

Back in 2015, the then Chancellor Osborne said that NLW was targeted at £9.00 an hour by 2020. That’s not legally set in stone anywhere, but people haven’t forgotten about it. If this becomes a reality, it represents an approximate 5% year-on-year increase in minimum pay rates – way ahead of inflation and more typical annual pay budgets which are nearer the 3% mark. At the moment companies are assessing staying rather coy about the need to make sweeping changes to reward offerings or staffing models, and are silent about the impact on commercial price points. Clients are talking about reviewing operating models, cutting out lower-level job layers and blending roles together, and even putting hourly-paid employees onto salaried contracts to cut the overtime bill. But will this be enough to balance the books? With this sort of year-on-year payroll rise facing business, together with a lot of wider uncertainty and cost pressure for businesses, something has got to give, sooner or later…


Guest blogger Ben Sutton is a consultant in the Willis Towers Watson Reward practice based in London. He specializes in developing career architecture and broad based compensation frameworks, and has worked with a wide range of clients and sectors, with notable experience in the retail, media, technology and manufacturing sectors.

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