Charles Cotton: challenges and opportunities of the National Living Wage

Furthermore, 28% of employers report that this initiative has had a large impact on their pay costs and a further 37% state it’s had some effect, while the remaining 35% say it’s only had a small increase.

‘Recruitment and retention difficulties’

In response to the NLW, 28% of organisations have allowed the wage differential between supervisors and employees to shrink. Those employers who face pay-bill increases have been more likely to squeeze differentials, especially in some low-pay industries.

While this may help employers cope with the NLW now, it is not sustainable to carry on reducing differentials because it will eventually create recruitment and retention difficulties.

Profits affected

Alongside the data around impact of the NLW, the survey also exposed the measures employers are taking to cope with the added costs. Among those reporting a pay-bill increase, the most common response is to take a hit on costs or profits by absorbing the rise (36%), followed by improving efficiency and boosting productivity (24%).

Other approaches include: cutting hours and premium payments (14%); reducing overtime (14%); rising prices (13%); and reducing basic hours (10%). So far, few have cut base pay (9%) or employee benefits (8%).

While many organisations have absorbed the costs by taking a hit on profits, this is not sustainable when cost pressures are rising from other sources, such as automatic enrolment. Similarly, cutting pay and benefits is not going to be compatible with employee commitment and motivation.

Organisational design

To avoid future adverse consequences, we need to see significantly more employers saying they are paying for the NLW through improving efficiency and productivity. Reward professionals should take this opportunity to help their employer by looking at the design of the organisation, work and jobs to see how they can be improved.

Other approaches revealed by our survey include improving management practices, investing in new technology and training, boosting employee morale, bettering progression routes and improving the way that staff are rewarded and recognised.

At present, employers seeking to improve productivity have focused on improving management practices, possibly as it is relatively easier than other improvement programmes such as changing the way that jobs are designed or how people are rewarded. However, sustainable performance improvements cannot rest on just one initiative but involve a number, no matter how challenging.

This column first appeared in the REBA/JLT Employee Benefits New Model Reward Research 2017. Download full 46 page PDf of the research here.