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What Are The Unintended Consequences of The National Living Wage?

This summer was busy on many fronts. Exciting reward projects, a good albeit short holiday away mingled with George Osborne's shock announcement in the summer budget. I'm talking about the government’s plan to introduce the National Living Wage (NLW) as distinct from the current £6.70 per hour National Minimum Wage (NMW) to £7.20 from April 2016 for employees aged 25 and above. This will rise to a compulsory £9.00 per hour in 2020. In the meantime the existing NMW continues to apply for eligible employees under 25 years old.

The merits - The National Living Wage has some merits as the country moves into growth. Women in traditionally low-paid occupations of cleaning, catering and caring may be big winners where jobs are not cut. It should also benefit those aged 25 and above provided they’re not replaced by younger less expensive employees. It’s also an opportunity for 'early adopters' such as Lidl whose business model is typically lean on staff numbers.

However - There’s the wider point of unintended consequences to consider. For employers such as the John Lewis Partnership (JLP) who operate in the price sensitive retail sector offer a generous benefits and total rewards package. Andy Street, Managing Director of JLP highlighted that they may need to revisit their approach on staff benefits in order to fund the wage. This raises the question that if others can afford it then why is an issue for our favourite retailer? Digging a little further JLP pay 15% of payroll costs on pensions in addition to bonus and other benefits. While they don’t anticipate £7.20 being an issue the leap to £9.00 raises the old chestnut of unintended consequences which include:

  1. Younger workers – The lower pay rate of younger employees is attractive to employers operating in cost sensitive sectors such as care, hospitality and cleaning. Could this be a good thing? Well, where it increases the employability of younger workers, particularly those who undertake structured training such as apprenticeships that will be valuable. However care is needed as employees reach the magic age of 25 that they do not fall off a cliff edge.
  2. Employee benefits - Employers with generous benefits may revisit their current provision going forward. A NLW of £9 in 2020 may not be an issue for some industry sectors however it will certainly impact others. When many employee benefits are optional, may be costly to provide and invisible in the public relations fall-out of the NLW this needs to be on the radar. As employers cannot easily ignore the external market in which they operate I anticipate that cost sensitive employers will review and evaluate their benefits offering.
  3. Spot rates – Perhaps one of the less considered points is the knock-on effect that the NLW may have on other job levels. With a higher compulsory minimum wage in the pipeline employers in some industry sectors are considering the impact this may have. This may encourage good employers to consider adopting spot rates in preference to a pay structure with pay progression opportunities that may be linked to performance. This may produce some positive results on areas such as pay equality though a scheme that does not reflect skills or performance may not be a winner for all employees.
  4. Total reward a cost or differentiator? - It’s true that tangible rewards such as pay needs to reflect the external market however such extrinsic rewards are relatively easy to replicate. Could the mandatory shift to a higher minimum pay level increase the stakes for employers to differentiate themselves through total reward or could it have the opposite effect?

Addressing the work environment as well as leadership and career opportunities can help employers to differentiate themselves from the competition. It can be relatively low cost though it touches upon the DNA of an organisation and its culture and values which makes it a tougher nut to crack.

Time will tell whether this may fall into the ‘too difficult’ box. Perhaps enterprises and employers less encumbered by legacy issues embrace this. What are your thoughts?

Biography: Sylvia Doyle, Chartered Fellow CIPD is Managing Consultant of Reward First ® People Consulting which she established in 2004. With over 20 years’ experience gained in senior HR and reward HR roles consultancy and mentoring clients span industries including technology; media; financial services and retail. Her expertise includes total reward; base and variable pay, executive remuneration and strategic reward to develop and implement reward solutions that impact employee engagement and bottom-line results.

Sylvia mentors HR leaders having established a reward mentoring programme in 2010 and she was previously Head of European Compensation & Benefits for McCormick, the global leader of spices, seasonings and flavours. She is an independent non-executive director on the remuneration committee of the General Chiropractic Council (GCC); course tutor on the CIPD’s postgraduate course on base and variable pay. Sylvia speaks and writes on reward issues and her views have featured in the Financial Times, CIPD and other media.

Tel: 07989 383 491

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