Charles Cotton: The impact of the National Living Wage on businesses

The sudden introduction of the National Living Wage has resulted in many firms looking to make cost savings in other parts of their rewards bill – especially in the retail, hospitality and care sectors.

As a consequence of this wage hike, some of the UK high street’s best known brands have cut parts of their employees’ reward packages, such as removing paid breaks or cutting the amount paid for working weekends, public holidays and overtime.

These cuts have led to a furore in the media and Parliament, which have had a negative impact on these companies’ employer brands and dented their customer brands.

Could things get even worse as the National Living Wage remorselessly increases over the next four years?

While employers undoubtedly face severe employment cost challenges arising from the National Living Wage, automatic pension enrolment and the proposed apprenticeship levy for large employers, they do have a choice in how they respond.

Cut costs

One tactic is to look at how the reward package can be cut. Cutting reward costs can now be an attractive solution for employers under short-term stress. The drawback with such a tactical approach is that it can damage relationships with both existing and potential employees and customers, with the possibility to create potential issues for the future.

I’d anticipate that employers taking this route would adopt a reward strategy that was focused on pay, with benefits simply meeting the statutory minimum. There may be a more generous package for senior staff for recruitment and engagement purposes, though this may reduce negative consequences for employee and brand relations.

Encourage effective working

An alternative is to look at how the existing reward package can be made affordable through increased employee productivity. Increased productivity doesn’t mean employees working harder or for longer, but more effectively.

This strategic approach can be harder to achieve in the short term, because it requires an employer to ask questions about its current business strategy, such as: what’s our mission, vision, business strategy, culture, brand, and so on. Do they need to change and if so, how?

A change of purpose can involve far-reaching organisational and jobs redesign. We would suggest talking to employees for their ideas about how they think productivity could be increased, especially if they are then able to enjoy the success of the organisation.

Once organisational success has been redefined; this will have implications for people management policies and practices, such as recruitment and selection, training and development, and reward and recognition.

In terms of the reward strategy, pay and benefits will be focused on rewarding individual and team contribution, as well as attracting and retaining skilled and enthusiastic employees. Praise will become more regular and recognition less bureaucratic, while benefits will be more flexible.

While this high-quality approach can be initially be harder, it will lay the foundations for the increased productivity needed to pay for not only this year’s increase in the National Living Wage, but the future increases between now and 2020.

Charles Cotton is performance and reward adviser to the CIPD