Hidden Impact of the National Living Wage

With George Osborne’s recent announcement to introduce a National Living Wage in April 2016, with increases of over 10% above the existing minimum wage from £6.50 to £7.20, rising progressively to £9 by 2020, companies need to be more productive than ever to safeguard profits.

Before the budget, KPMG calculated the impact of the universal adoption of the Living Wage in the UK. In their report, The Living Wage: an economic impact assessment, KPMG concluded that raising the Minimum Wage to the Living Wage would take just 1.3% of the national wage bill and lift six million people out of poverty.

KPMG looked at the different scenarios on how the increase might be paid for when all workers’ wages were raised to the Living Wage and at the differing impacts on the public finances. The average gain to the public finances across the different scenarios is just over £4.5bn of additional revenue from taxes and reduced benefit payments. However, this is offset by the Government’s own wage bill increase and higher procurement costs, leaving a net benefit of around £1.5 bn.

The research by KPMG also simulated the effect of a wage increase using the macroeconomic model (NiGEM) built by the National Institute of Economics and Social Research and used by HM Treasury for its own policy simulations.

On the economic assumptions that underpin the NiGEM model, paying the Living Wage universally has no effect on productivity.  This may be as workers would simply consider it as the new minimum wage.

However, it is possible that productivity could actually rise as higher pay tends to motivate staff and helps with key costs, such as childcare. Current Living Wage employers have seen a boost to productivity, with much attributed to “first-mover” advantage, as employees really value the premium of being paid a higher than minimum wage.

The Chancellor’s announcement was accompanied by some positive changes to help employers offset the increase in wage bill, including lower corporation tax and employer NI contributions.

However, as positive as these changes may sound, there is a hidden caveat that you may not have considered yet. If front line worker pay increases, the salaries of senior positions, shift leaders, supervisors etc., will also need to be reviewed and realigned within your existing pay scales. Otherwise your supervisors will be pretty upset if, come April 2016, they are earning the same as their subordinates, or doing more work for a lower pay differential.

Escalated up through the ranks the final salary bill could make a significant dent in your profitability.

There isn’t much data on this issue for small businesses yet, but the Local Government Chronicle reported that maintaining pay gaps between the lowest paid workers and their superiors is expected to see the new national living wage cost councils in excess of the £1bn originally predicted.

Businesses will have to take some swift proactive measures to ensure they’re getting the best value for money from the performance of their employees, finding ways to improve working methods and management skills.

To start with, here are three questions to ask yourself now. The answers to these will drive your pay strategy for at least the next five years.

National Living Wage Impact Questions

1. How do we handle the ripple effect?
   The number one question you’ll be considering is “what do we do about our existing staff at that level?” If you have employees that are currently earning £6.70 ph being bumped up to £7.20 ph for compliance, what do you do about those you are currently paying £9 ph, who could argue their pay has effectively reduced in value?
2. What do we do with our pay structure?
   If you need to increase all pay scales, can you avoid overpaying people at the higher levels by not increasing every pay scale at the same rate?
3. How does it impact my overall budget?
   Then the ultimate question, “What can we afford?” Increasing minimum wage workers to the new living wage will increase your overall spend; So do you have a performance management system in place to retain the people on higher pay scales and prioritise those positions that drive your business forward?

Now that you are clear on your approach, let’s get into the detail on how you will implement your new pay strategy in your company.

National Living Wage Salary Review

Map Out The Transition

The new national living wage has to be implemented for over 25 year olds by April 2016. Calculate how many employees will reach that threshold for each of the next five years so that you can dedicate the appropriate budget to bringing those employees into compliance when required.

Examine Your Structure

Will your payscales be overlapping when you move those on current minimum wage up to the new national living wage? Prepare new payscales in advance and begin communications to the organisation as early as possible to prevent your higher grade staff becoming demotivated as they see their salaries devalue.

Review Pay Scales

Consider adjusting the difference between pay scales, so that your overall structure retains the same number of pay scales with smaller increments between them.

Prioritising Pay Rises

If it looks as though your overall pay structure will increase, focus your budget on bringing minimum wage workers into compliance initially. For the remaining pay rises, prioritise your best performers before increasing all wages to simply maintain parity.

Benchmark

You’ll need to stay current with market rates. It’s not likely that higher pay grades will increase across the board immediately because of the new living wage, but this is inevitable in the long run. Eventually, you’ll need to re-examine the difference between the lowest and highest.

Get Staff Buy-in

You know how highly I value staff engagement in building a productive business. Read my recent blog, Transform Your Business Plans With Buy-In. Spend some time considering how you want to communicate your approach to complying with the new national living wage. Find the right way to use it to your advantage and be positive about it!

Ultimately, I think if we can reward people in the right way, for the right work without killing off small businesses, then the living wage will prove to be good for us all.

But this will affect every part of your business, so start planning now. Download my guide today.

Your Next Steps to Greater Productivity

Alluxi is here to offer you support, bringing a facts and figures approach to evolve your business and realise your goals.  As a first step towards identifying your current business challenges and evaluating where your future opportunities exist within your business, we invite you to complete the in-depth Alluxi Business Success Scorecard focussing on the 10 key areas of a successful business.

Take 15 minutes to respond to the scorecard and get your results within minutes.  You’ll be invited to book a follow-up 1-2-1 Productivity to Profit Breakthrough Session to find out how you can implement rapid and measurable improvements.

Click here to take the Alluxi Business Success Scorecard now