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The National Living Wage - just a Reward issue?

By Toby Burton. Published on 20 October 2016

This keynote interview has been extracted from Toby Burton’s Autumn edition of Reward insight.

To download the full version, please click here.

I recently met Victoria Milford to chew the fat on the National Living Wage. I knew what it was and when it came in, but what does it really mean, and have businesses really prepared for the challenges it presents over the next five years and beyond? I’ve worked on some great Reward searches in the first half of 2016 where preparing for the National Living Wage has been highly relevant; retail, hospitality and leisure, healthcare and logistics. The more anecdotal evidence I heard, the more curious I became; has anyone really got the strategy right?

Victoria has a fascinating background, spanning (then) Big Five consulting through to General Management with retailer Comet. Along the journey, Victoria has worked in Finance, Operational, Reward and HR roles. It is this breadth that made her not just passionate, but extremely well positioned to consult with a portfolio of clients surrounding Reward, the pay debate, and now specifically the National Living Wage.

The pro and con debate as to whether the Government’s new National Living Wage will do Britain ‘more harm than good’ or ‘more good than harm’ has economists split down the middle. There is a real lack of certainty. Will we as a country be more productive? Can we afford it? Will it cost jobs? All tough questions, only time will tell. Through my conversation with Victoria we did not seek to answers the big economic questions, though they provide useful context.

I’m grateful to Victoria for her time in allowing me to explore what the National Living Wage means for the Reward mix, for talent management challenges, for resourcing strategies. How will employers rise to the challenge of (in some cases) adding hundreds of millions on to the wage bill over the next few years.

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TB: Victoria, how did you move into Reward consultancy from Finance and General Management?

VM: “For me, Reward brings everything together. Reward is an incredibly powerful messaging tool and people do not often realise how powerful. There is an old adage of ‘what gets measured gets done’. Yes that’s true, but what gets paid for, definitely gets done. People, are generally the largest cost for businesses. How this cost is managed is key, whether this cost is engaged, motivated and ultimately retained is critical to the success of the business.

Reward connects the Exec team with the front line. It enables Strategy to be translated into Reality. It has the biggest impact on your people, and your people have the biggest impact on your bottom line.

The CEO and Exec team can set out a business strategy but if the Reward framework does not absolutely align to that, then what employees are effectively being ‘told’ on a daily basis will be at odds.  How will they get promoted, how will they be bonused? If you tell the workforce, ‘you’ll be paid more or recognised as great for doing ‘X’’ then most people will do that. Reward is a critical business driver. I’m not convinced that all Boards understand just how powerful. It is almost like the Chief Exec talking to every colleague personally on a daily basis, something that is just not achievable through any other means.

On a personal level, my background means that I am looking for solutions that are not only well modelled and financial viable, not only in line with employment law and engaging, but actually workable on the shop floor, not just great on paper.”

 

TB: If industry is not fully prepared for the National Living Wage, what makes it so challenging?

VM: “The National Living Wage was announced July last year and has been law from April 2016. The announcement was that employers would need to pay £7.20 initially and rising to around £9.00 by 2020 for any employee aged 25 or above. It was an easy message for the Government to deliver. However, what sits behind it is a very complicated set of issues, including whether to reward only from age 25, what the trajectory looks like, what the impact on other parts of the reward package is, what the differentials between roles and levels should be, what the relationship is with other regulated activity like Salary Sacrifice and Pensions. Some employers have seemed to say ‘it’s just another 50p for this group of people, job done,’ or even think that it didn’t affect them, but it just isn’t that simple.

The world has changed. Brexit wasn’t even a twinkle in anyone’s eye back in the summer of 2015. Pay awards have been falling generally, and the notion of now going up close to £9.00 per hour is going to be at least 5%, perhaps closer to 7%, year on year for the next four years. This is when, on balance the rest of the workforce will be receiving 1-2% increases on average. The increase will suck money from other places in the business at a time when no-one else is getting this kind of award. Ultimately companies will have to find it from somewhere!”

 

TB: What will be the likely impact of Brexit?

VM: “Although we still don’t know what Brexit will mean, the biggest issue seemed to be around immigration. By 2020 this could mean that this cost burden could well be coupled with a restricted talent pipeline, with employees no longer readily available from outside of the UK. Organisations, notably the service industries, are going to have to get creative with how they attract talent.”

 

TB: And how will organisations do this?

VM: “The key word for me on this is flexibility. Flexibility in contracts, flexibility in reward and overall flexibility in creating cultures to be an employer of choice.

As one example, there is a huge market created by mothers, and to a lesser extent fathers, who would work if ‘term time’ contracts existed. As our population ages, we will work longer and employers need to further embrace this through contracts, and environments, that appeal to those in their 60s, 70s and beyond. The days of a workforce comprised of 18-60 year olds working full time in a single job are over. Industries like Retail and Services are very well placed to offer great opportunities in the so-called gig economy, but corporate thinking and systems have got to change.

Ultimately post-Brexit, at a macro level, the Government has a role to play in unlocking markets to try and bridge the talent gaps and to create a greater incentive to mobilise the workforce.”

 

TB: How will companies materially be impacted by the National Living Wage?

VM: “Government was slow off the mark in terms of backing up the headline, what was going to be happening regarding the National Living Wage and how it was actually going to be implemented. This left industry best guessing for several months. For example, no guidance was given for the relationship between salary sacrifice and National Living Wage.

I set up a Reward forum with some of the leading UK organisations who would likely be most affected. Within a few minutes’ discussion we had worked out the National Living Wage would cost us alone around £1 billion over the first five years! So there was of course lots of concern from a pure cost perspective.

The new median is £7.20. Lower quartile pay doesn’t really exist anymore and upper quartile payers are going to get caught up very quickly by the National Living Wage unless they really push their reward mix.

For year one, the costs weren’t too extreme and many businesses have been able to absorb them.

The real challenge will be year two onwards, where most employers are likely to be affected across most retail and service industries in the UK.”

 

TB: So how are employers going to fund this?

VM: Realistically there are only three choices for businesses:

1 – Customer pays – Increase prices – this will be very hard as we live in a price sensitive society where making comparisons is very easy, particularly where the product or service is not specific to a brand.

2 – Shareholders pay – Lower profits –this may be palatable for a year or so but cannot be a long term strategy.

3 – No overall change for employees – this is the most likely scenario. The Reward mix will be shuffled around to ensure base pay is higher but the ‘Total Reward Pot’ per employee is not likely to increase. This is a real shame as it was the objective of raising the National Living Wage but it does not recognise economic reality.

 

TB: So how are employers likely look at the make-up of employee Reward?

VM: “Employers could well take from the more controllable pots to fund the gap. Bonuses and benefits will be the obvious factor to come under pressure, also overtime and shift premiums. None of this is easy and some will require consultation. We’ve been through tough times economically as a country. Remember this started before Brexit, and many firms are already stripped back pretty far.”

 

TB: So it’s going to be tough for employers. Is this not an opportunity for them to try to make their businesses more efficient, to use technology to complete that re-organisation, to be lean, to be more effective, creative, innovative?

VM: “Absolutely, but this could mean job losses, and the last thing a company wants is fewer people facing the customer, so redundancies will be avoided wherever possible. The unfortunate reality is that big projects designed to drive efficiencies, can themselves cost millions, so could represent a harder journey for corporate spend.

Looking at the opportunities of technology is the right long term solution.

Many of those projects will now be economically more viable than before, but will also take a certain amount of time to be implemented so will not resolve the issue in the first couple of years.

On the up side, over the last 10 years we have seen a massive swing in the amount the customer is willing and wants to do for themselves via the internet, rather than having to call a contact centre or go into a store. Some of the work can be redirected to the customer via technology but of course this will mean fewer jobs on the front line.

In the short term there is a lot that can be done to evolve the Reward mix. Return on investment is very difficult to measure. How much is attributed to base, to bonus, to benefits, to legacy parts of the contract? Employers need to get out there and find out from their employees what they actually need and value in their lives today.

And industry must think creatively, it should not only be those impacted by the National Living Wage set to fund the wage increase. What ROI is the employer gaining on its head office bonus scheme or executive healthcare policy, for example? It should all be in the mix.”

 

TB: What consequences will we actually see in terms of Reward strategy?

VM: “Companies need to put the whole organisation’s Reward package on the table. Look at every element then say ‘what are our constraints? How much of our budget is governed by staff at the bottom end?’

Organisations are likely to flatten their structures. The consequence of raising the entry point will be, ultimately, you are paying entry level staff the same as team-leads or senior sales staff.  Paying staff more money for long service will likely become a thing of the past. So these sorts of job titles and roles could disappear.

On the front line, the gap between the lowest and the highest will narrow and remove some of the ability to differentiate on pay. Companies will need to create a strong employer brand proposition to attract the best talent.

They will have to ask themselves; how do we become a much better place to work? How can we attract different talent populations? How can we retain the strongest talent?

And the answer? They have to be creative! They must start to truly embrace flexible contracts and not just concentrate on customer demand and equate that to 40 hour contracts. By hiring people when they want to work you can retain them, you can recruit a more mature population, and ultimately have a happier workforce. This should be a fundamental pillar in building out a volume-based Resourcing strategy.

In time, as the National Living Wage increases and we see the market settling close to it, employers with high labour turnover will really have to ask themselves if people actually leave because of the money, as that ‘excuse’ will be far less robust.”

 

TB: So a key consequence in the longer term could be a war for talent around brand proposition, around flexibility? That sounds like a real positive move for the better!

VM: “Yes, it could be. Employers of course are really up against it in respect of delivering weekly sales figures and getting someone in front of the customer is still critical to sales. The challenge is more around how broad and long term will businesses be in their thinking, because the status quo is not going to be viable.”

 

TB: What advice would you give to an HRD, in approaching their leadership team or Board to ensure they are as fully prepared as possible?

VM: “Firstly, I would say that this is not an HR problem. It is a whole business issue and a whole business opportunity.

The HRD first needs to understand what are the costs and the scale of the challenge, and encourage the whole Board to see that it is not just the problem of say, a retail or sales director, but a business wide challenge around how collectively we can evolve and fund this change.

The Board need to truly understand not just the organisation, but more importantly its people today and tomorrow, and what they want in order for them to feel it is a great place for them to work and hence offer their labour. It is not always money!

Bottom line, they need to GET GOING, get a project team together, start now – it needs to involve IT, Operations, HR, Finance, in fact all areas of the business!

How do we ensure that we are an attractive company in five years’ time when the National Living Wage has really kicked in? How do we differentiate ourselves? If we are creative and flexible in our practices now, can we fund National Living Wage through savings from lower labour turnover and not have to pay upper quartile to be attractive?

Ultimately it is a difficult business issue and an exciting reward challenge. The main task is for businesses to embrace it, tackle it head on and think about the medium and long term impact on both Reward and engagement.”

 

Victoria, once more thank you for your time, it was a really engaging discussion and you have an enviable level of knowledge on what is such a key Reward theme for commerce and industry today.

Huge challenges and huge opportunity is my sense from this discussion. I can see how, in the short term, companies will probably shuffle around the elements of the Reward package to pay for the increase in basic pay. This doesn’t necessarily benefit the employee, though hopefully they won’t go backwards.

The opportunity to drive creativity and flexibility through the many industries impacted by the National Living Wage really resonates. It could make for stronger D&I practice, strong retention and improved motivation, which for me is the key to improved performance.

Toby Burton

PARTNER
HEAD OF HUMAN RESOURCES PRACTICE & REWARD SPECIALIST

With over a decade’s experience across UK and Europe within the human resources market, Toby joined Eton Bridge Partners at its inception to drive executive search within the Human Resources Practice, delivering assignments upwards of £80,000 to circa £200,000 base salaries. Having forged a strong track record in delivering high end reward assignments he now leads Eton Bridge’s reward offering, providing both permanent and interim solutions.

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