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Is the national living wage good

Is the national living wage good, bad or just best fit?

Monday, 04 April 2016

It’s high time that employers took a more ethical approach to pay and reward, says Duncan Brown

I tell my children that there is a difference between right and wrong. But what about at work – are there ‘right’ and ‘wrong’ reward practices? And should governments, and HR and reward professionals be more assertive in promoting and practising the ‘right’ ones?

The introduction of the new national living wage (NLW) today prompts not only economic debates about its positive and negative effects, but also issues of personal and organisational ethics and values. Take a look at the evolution of reward strategy over the past 30 years, and you’ll see a hot debate in academic and practitioner literature between the so-called ‘best practice’ and ‘best fit’ schools of thought.

The former argues that certain reward practices – such as employee shareholding and profit-sharing – are generally associated with successful businesses. Those who advocate best fit believe that your reward practices should be “tailored to the specifics of each situation – the strategy, the environment, the culture”.

The academic research is generally more supportive of the tailored best-fit school, while reward practitioners – as our insatiable appetite for benchmarking information shows – tend to behave more in keeping with the market-mirroring, best practice point of view.

The UK government is now moving decisively to stop employers paying as little as they like – especially to female workers – with any shortfalls in what employees need to feed their families made up by in-work benefits. The impending 50p hourly boost to wages from the NLW, following on from the national minimum wage increase last October, will mean that almost two million of the lowest-paid workers will have had a 10 per cent increase in pay over the past 12 months, with possibly another two million benefiting from the ‘ripple effects’ as pay structures adjust. Almost two-thirds of those who will benefit directly will be women.

Employer bodies mutter darkly about the likely price increases and redundancies that will result from the NLW’s introduction, with the Office for Budget Responsibility (OBR) estimating that job losses could reach 60,000. Yet a recent survey of leading economists carried out by the Centre of Macroeconomics found that 60 per cent do not agree that the NLW will lead to lower employment, and three-quarters agree that it will have only a muted effect on prices.

According to ONS figures, the real wage of the average full-time UK worker has doubled in the past 40 years. But while young and part-time workers have fared worst over that period, pay for the top 1 per cent of earners almost tripled, rising by 189 per cent.

In a recent paper for the Institute of Business Ethics, Fair or Unfair? Getting to grips with executive pay, Peter Montagnon argues that “fairness and a quest for simplicity should drive the [executive remuneration setting] process” – not two adjectives that you would normally associate with the typical executive remuneration section in an annual report. So should your remuneration committee be addressing more simple and straightforward questions that are often overlooked, such as just how much is enough, and what scale of internal pay ratios are sustainable?

Regardless of the economic risks, introducing the NLW is “the right thing to do, given the scale of low pay in the UK”, says Resolution Foundation director Torsten Bell. In fact, it is here that the economic and moral case come together – at least in the longer term.

Seebohm Rowntree, the Quaker industrialist, philanthropist and pioneer of modern HR, recognised this more than a century ago. He argued that “it is one of the first responsibilities of employers to raise the standard of efficiency within the factory, for substantially higher wages can be paid only in proportion as they are earned”. Official figures show that UK productivity has barely increased since 2006, that the UK has the lowest rate of growth in the G7 – and it fell further in the last quarter of 2015.

A new survey by the Smith Institute of 7,400 employees across the private and public sector helps to explain why: more than two-thirds say they are working longer hours than two years ago, but only 10 per cent believe they are more productive. More than a quarter of staff feel their productivity has declined over that period. Coming only a fortnight after the OBR downgraded its forecast for productivity, the study will fuel concerns that British businesses are relying on cheap labour to work more hours in an effort to increase output – concerns that have been a key driver of the chancellor’s NLW.

Only a minority of employees polled by the Smith Institute associated higher productivity with better pay and conditions. “There is a clear message that employees feel that they should receive a fair share from delivering higher productivity in pay terms, but they feel pessimistic that this will be the case,” the report concludes.

Or, as Rowntree put it a century ago: “To earn [higher wages] involves the united effort of the employer and the workers.” It’s time for HR professionals and their management colleagues to start listening, learning and practising more economically effective and ethical reward policies.

Article by Duncan Brown 

Source (http://www.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2016/04/01/is-the-national-living-wage-good-bad-or-just-best-fit.aspx)

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