How Will HR Resolve The Problem Of The National Living Wage?

The National Living Wage (NLW) comes into force across the UK on 1st April 2016 on what appears to be a wave of negative publicity. A report released by the British Retail Consortium (BRC) claims that the combination of the NLW and the apprenticeship levy may result in 900,000 lost jobs in the sector by 2025. The increase means the minimum hourly pay for people over the age of 25 will rise from £6.70 to £7.20 per hour.  The predicted additional cost to wage bills according to the BRC is predicted to reach £300 billion annually.

Just over half of all employers say they will be affected by the National Living Wage according to a survey carried out by the CIPD and the Resolution Foundation (RF). This figure rises significantly in the retail, hospitality and healthcare sectors. Some of the suggestions being considered by UK businesses to offset the impact of the NLW include:-

  • Reducing headcount.
  • Replacing regular staff with project based contractors rather than hiring permanent employees.
  • Increase prices to customers.
  • Increase hiring of people under the age of 25 – which has its own inherent problems of age discrimination.

The most common proposal made by one third of employers is to offset the cost of the NLW by increasing productivity and therein lies the problem. According to the Office of National Statistics, productivity in the UK workforce remains stubbornly low and is significantly lower (20%) than the average of the G7 nations.

How can HR boost productivity to absorb the costs of the National Living Wage? Improving productivity isn’t a matter of bringing in more talent, it requires a strategic approach from HR focusing on specific areas to transform the underlying problems.

Here we identify some of the key areas requiring that focus:-

Succession planning and leadership development : Identifying the people who will lead and motivate efficient teams to meet business challenges now and in the future is key to improving productivity. Research carried out by Roffey Park suggests that this is the biggest challenge that businesses face, with succession planning cited as a problem by 70% of respondents. Deloitte’s 2016 Global Human Capital Trends Survey echoes this problem, revealing that 28% of business have weak or very weak leadership pipelines. It recommends that HR applies ‘rigorous, structured, scientific approaches’ to succession planning. Early identification of future leaders, supported by a ‘comprehensive’ leadership culture is vital.

Overcoming the recession mindset : In its report Weighing Up The Wage Floor : Employer Responses To The National Living Wage, the CIPD and the Resolution Foundation highlight the lingering impact the recession has left on the mindset of employers. 40% were still focused on cost-cutting and creating leaner businesses, caught up in a survival mode which affects their behaviour. As the challenges of automation, the looming EU referendum and the management of a multi-generational workforce gather pace, HR must focus on the creation of a motivated working environment.

Pay and rewards : The CIPD’s report indicated that the introduction of a pay and rewards strategy was a further consideration to boost productivity. The issue here is the consistent prioritisation of work/life balance, flexible working hours, ongoing career development opportunities and recognition over pay increases in employee surveys. A further point to note is that nearly half (46%) of employers questioned by the CIPD cannot accurately predict the impact the NLW will have on employee pay.

Training and development : Learning and development is key to employee retention and improving morale. Roffey Park's report refers to the need for ‘talent preparedness’, combining training and development with what it describes as ‘experience-creation’. In essence, this is ‘on-the-job-training’ with a difference, offering employees the chance to move beyond their comfort zone, combining theory and practice to enhance both technical and soft skills.

Investment in technology : The CIPD sums up the problems behind the UK’s ‘productivity puzzle’, as the result of ‘weak investment’ not just in people but also technology. Technology supports robust hiring processes, automating repetitive elements of the HR function. If HR is to play a transformative role in improving motivation, performance and productivity, investment in sophisticated HR technology is essential.

Potential setbacks to HR initiatives

Several additional concerns face HR which may hinder its efforts, including those outlined below:-

Automation in the workplace? While the National Living Wage was identified as one of two principal causes of job losses by the BRC, this overlooks the impact that automation will have, particularly in sectors such as retail. Furthermore, Deloitte’s new report Global Cities, Global Talent, which identifies London as the ‘soft power capital of the world’, highlights a predicted ‘hollowing out’ the city’s lower paid jobs due to automation. Automation is predicted to have the most significant impact on low paid workers and women, according to a report from the WEF. Combined with the soaring cost of London living, this compounds the problems arising both from potential jobs cuts and talent shortages in specific sectors such as IT.

Downward pressure on wage growth : Despite the skills gap, the downward pressure on UK wages is expected to continue during 2016. Predictions suggest that this is influenced in part by low productivity, low interest rates and a ‘sufficient’ labour supply in the majority of sectors. At current levels, pay rises may be restricted to 1-2% for the rest of the decade. This may pave the way for an ever decreasing circle of low motivation, disengaged employees, poor retention levels and continued low productivity.

A positive note in the retail sector

A glimmer of good news is on the horizon in the retail sector. Brands such as Aldi, Lidl and Morrisons have offered a pay deal above the NLW to all of their staff. Similarly, as part of a series of initiatives, Starbucks will also pay the NLW to all of its employees, including those under 25 years old and apprentices.

Regardless of the stark headlines, the impact of the introduction of the NLW cannot be accurately predicted. It does, however, present HR with an opportunity to positively impact productivity and performance while improving the competitive advantage of UK business.

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