Understanding the effect of increased staff costs on business performance

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JMD no tie (1) BWJustin Duffy, Consulting Director, writes on management and strategy

Since it was created in 1997, the Low Pay Commission has been responsible for putting a floor under hourly earnings in the UK. At the time there was widespread fear that the National Minimum Wage it set would lead to job losses. Such effects, however, were negligible, and in the years since, the Minimum Wage has become part of the UK’s economic furniture.

Its success reflects a basic truth of developed economies – that we expect that anyone in work should be able to feed, clothe and house themselves and their children. If, as has happened, economic factors make this very difficult, then political expediency dictates that redistributive taxation will take up the slack. But this is clearly not ideal, and dissatisfaction with the situation led to the announcement, in the Chancellor’s most recent budget, of the replacement of the Minimum Wage with a much higher Living Wage, and the reduction of some of that redistribution.

Given the scope of the economic factors that contribute to employees’ living standards, the question of how much responsibility employers can or should accept is extremely complex. Very few business leaders would argue for the merits of expanding redistributive taxation – but neither would they relish trying to increase productivity amongst a genuinely poverty-stricken workforce.

It is hard to argue against the principal of the changes, but their scope and speed have caused concern in some quarters. In an interview published this week, the Low Pay Commission’s current chair, David Norgrove, outlined some of his concerns about the changes, including the potential for unintended consequences. For example, pay and progression structures within organisations may be affected, with nearly half of workers in some sectors on the legal minimum wage by 2020. This could make it harder to incentivise and retain experienced staff, pushing up non-salary staff costs. And there remains some uncertainty around the impact on hiring decisions at a company and national level.

Mr Norgrove was correct to point out that the consequences at the level of the wider economy are not easy to predict. Predicting the impact at an organisational level, however, is not just possible, but absolutely essential for any organisation affected by these changes. The financial and non-financial impacts could be significant, and it will be crucial for companies to analyse these fully, before developing a clear strategy in response.

Business leaders who simply resign themselves to a hit on profits will miss a competitive opportunity. Ambitious organisations must look to gain greater productivity to offset the increase in costs. The systemic impact will reach further than that, however, and the right training, recruitment and staffing strategy will only be reached with complete visibility of the financial and non-financial drivers of value in the organisation. That requires some well-researched and very robust modelling, but the resource required to put it in place will be a tiny fraction of the potential costs if it is not done.

 

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