The introduction of the National Living Wage, (not to be mistaken for the current Living Wage or National Minimum Wage) in April 2016 has created panic for a number of our clients. But let’s put this into perspective; I would break it down into two aspects:  

1. What can we predict?

• The current minimum rate for over 21s is £6.50 and will rise to £6.70 in October 2015, increase of 3%
• In April 2016, an employee aged over 25 will see their minimum rate increase by an additional (approx.) 11% to £7.20
• We can roughly assume that to get to £9.00 by 2020, we will see an average level of increase of 6% each year

2. What do we think the impact might be?

The cost impact: The Resolution Foundation predicts that at the start of the implementation of NLW it will cost employers an additional £1.5bn (or 0.2% of the national wage bill) in April 2016, rising to £4.5bn (or 0.6% of the national wage bill) by 2020. Sectors taking the biggest hit of these costs are; healthcare, manufacturing, education and construction.

The impact on other pay levels above: The increase of pay for lower level roles will put pressure on the levels above, particularly to maintain the differentials in place. The Resolution Foundation chart below shows the % potential increase for those employees indirectly affected (blue). But it’s not quite as straightforward as this…

Consequences: An employee who feels valued by receiving a fair wage for the work they do, will have an increased level of performance. This has a positive impact on productivity levels. Conversely, there’s an argument that says giving higher wages, could mean businesses put greater pressure on employees, having a negative impact on the quality of output. There’s no clear evidence to support either side of the argument. 

It’s reasonable for employers to expect more from their employees, however they have a responsibility to ensure various checks and balances are in place, to guarantee the result of performance is of the highest quality and achievable. I anticipate that where possible, the level of candidates recruited will be of a higher calibre to warrant the pay at the new level. This again could impact the calibre of levels above, ruling out individuals that would have in the past been successfully employed. 

There’s a risk that employers will start to apply negative approaches, particularly to those tipping over into the NLW criteria (over 25s). For example, non-renewal of fixed term contracts, an increase in zero hours contracts, and pay differentials for the same role seeing a greater discrimination based on age alone. 

So, what can employers do?

Cost analysis: No doubt by now you are running some quick costing analysis. However this analysis can only be predictive, particularly if the impact towards 2020 is being included. Employees’ age will change the dynamics of the analysis as you move through the years. A simplistic example:

• 100 employees over 25 require an increase from £6.50 to £7.20 in year one
• In year two, an additional ten become over 25, joining the original 100 - however ten have left or been promoted, leaving 90
• Therefore, the additional ten will require the difference between National Minimum Wage for over 21s and the year two NLW; let’s say it could be £7.65, and the original 90 will require the difference between year one, which is £7.20 and (our guessed) £7.65

An important aspect to remember; if an annual pay review is generally applied, then any investment is the difference between the % increase needed to meet the requirements and the % given as part of the annual pay review.

Refresh benchmarking: These increases will gradually be reflected within pay market data. It will be increasingly more important to carry out benchmarking to determine whether you organisation is a minimum payer (at NLW) or if your pay stance is higher up in the market. This helps rationalise the level of investment needed to make these pay increases.

Identify the impact on the levels above: It’s imperative that analysis is carried out to identify how increasing salaries at the bottom end will impact the levels above. The worst case scenario is that differentials are diminished, however for some roles within some pay structures/grading (such as shop assistants and shop assistant supervisors) the levelling doesn’t flow continuously up through the business hierarchy. In any case there are ways to minimise or mitigate that within the current pay and grading frameworks.

Review bonus scheme OTE with new baseline salary in mind: By increasing base pay, the variable pay element may become less important to the business, or employee for that matter. There may also be a requirement to review the ratio of variable vs fixed pay, to ensure that the total cash has been equalised. 

National Living Wage is just around the corner – you should act on it now. By doing it now and doing it early, as an employer you show you want to do it rather than being forced to further down the line.

Download our guide to National Living Wage increases.

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