Feature – Dealing with minimum wage rises

In summary
If an increase in the national minimum wage causes some of your staff to receive a pay rise, you may well find that those earning above the minimum will be looking for some kind of increase too.
Using benefits to promote good feeling about you as an employer may be one answer that will not break the bank. Flexible working and voluntary benefits might help, but be careful when offering salary sacrifice to the lower paid and ensure that their take home pay does not drop below the legal rate.
Case study: UGC

Article in full
When it comes to money no one likes to feel short-changed. So how would you feel if a whole group of your colleagues suddenly received a pay rise, yet you didn’t see a penny extra? Following October’s rise of the national minimum wage, many employees have found themselves in this position.

The altruistic among us would like to think that those earning above the minimum wage should be gracious about the rise. After all, employees at the lower end of the pay scale can use all the help they can get. But human nature dictates that we often want what someone else has got. So if employers are unable to raise wages across the board to match the nearly 8% increase those on the minimum wage received, how can they ensure that all staff feel they have been treated equally?

Kate Upcraft, policy and research manager at the Institute of Payroll and Pensions Management (IPPM), says that the rise has caught many organisations unawares. “The rise is something they had not budgeted for. I was a payroll manager at Marks & Spencer and I know that the team there in the reward department is having to pay much more attention to the national minimum wage than they ever have. It does have an impact as there is not an infinite amount of money to go around.”

She adds that this may become even more of an issue if the minimum wage rises further next year. “If it goes up to £5 next year, even more [employers] are going to find that they’re going to have to look very carefully at where their budgets are going to go.”

Employers may find that they have to be creative with the resources that they do have available. In these cases, a little bit of creative thinking can go a long way. As can consulting with staff.

And if the talk turns to benefits, what most employers will discover is that staff do not always automatically attach the greatest value to the most expensive perks. “It’s very hard to generalise because, depending where employees are in their lives, different things are going to matter to them. A pension benefit might be hugely important if they are over 50, while childcare vouchers may be very important if staff are just starting a family. They put different values on different elements of the package depending on their priorities at the time,” explains Upcraft.

Mark Thompson, head of reward at the Hay Group, believes that tailoring benefits to meet employees’ needs can be much more productive than putting in expensive perks. “It pushes [employers] more into intangible rewards and trying to become an employer of choice not on the basis of how much you pay but on the way that you treat people. It makes people feel good about the company. People don’t work just for the money and benefits are an essential part of that. It’s a constant regeneration of that approach that really makes it work.”

He adds that this is particularly important in certain sectors such as retail, where staff at lower levels may expect to receive a low wage and instead judge an employer on what else they are prepared to offer. “I think most people in retail recognise it’s a cut-throat, low-margin business and they don’t expect their company to pay them much more than the retailer next door. But they do expect to be treated like human beings.”

One option is flexible working. Providing employees can still meet the demands of the business, introducing a little flexibility into their working arrangements is unlikely to cost a penny. You only have to look at organisations such as retailer Asda to see this theory in practice. Like most supermarket staff, many Asda employees on the shopfloor earn slightly above the minimum wage. Yet its extensive flexible working policies mean that the retailer is frequently hailed as one of the country’s top employers.

Another alternative is to offer a voluntary benefits scheme. Some of these are available at no charge to organisations, making them an attractive way to boost a benefits package. Cinema chain UGC (see case study below) opted for this route in order to focus more on the concept of total reward following the minimum wage increase.

One benefit that can only be offered to staff that earn more than the minimum wage is a salary sacrifice scheme. These enable employers to offer benefits such as childcare vouchers, home computer schemes and some share plans at no extra cost to themselves. Employers need to ensure, however, that by sacrificing a portion of their salary staff do not drop below the minimum wage in terms of take-home pay. This limits the number of employees for whom salary sacrifice is suitable, so employers considering this route need to be warned that future calculations are vital in case of further increases in the minimum wage.

Thompson warns: “A salary sacrifice scheme is a good idea, but the danger is that it will fall foul of the minimum wage much quicker than people might think.”

A potential drawback to any of these ways to smooth the differences in pay increase levels, is that they either benefit all employees or, in the case of salary sacrifice, exclude those that earn just above the minimum wage – which is the group most likely to be looking for redress. So while you may be able to please employees higher up the pay scale, there is the risk that it could alienate lower-paid and minimum wage staff. IPPM’s Upcraft warns: “You can have packages that are targeted at certain levels but the danger in that is the issue that causes with general employee relations if people are unhappy that there is a perception that [some employees] are above a line and [others] are below it.”

The benefits on offer can also help to enhance an organisation’s reputation.

Employers that were previously renowned for paying above the minimum wage may have found that its increase now marks them out as a minimum wage employer.

Retailers, in particular, are facing this challenge; former upper quartile paying employers are now languishing among the lower quartile payers.

“Everybody now is getting caught in the same mindset. People are a lot more savvy now about employees and where they are going to take their business.

Benefits are important as people are looking at the bottom line,” Upcraft explains.

The Hay Group’s Thompson adds that more organisations will face this challenge in the future. “In the past, the minimum wage has been so low that any self- respecting company has paid more. But £4.85 is already [what] a lot of retailers [offer], so this may change.”

So employers should not begin to panic that they will see a mass exodus of staff in a lemming-like stream unless their benefits package is improved. Thompson explains: “To some degree, [staff] have got to accept the narrowing of differentials at the bottom.”

Stephen Brookes, a member of PA Consulting Managers Group at PA Consulting, agrees. “Most organisations are forced by market rates to pay above the minimum wage,” he explains.

So if staff are still feeling hard done by and you have looked at all the options to help smooth jealous feelings, then you could resort to the Dilbert- style of management and simply point out how much better off they are than their colleagues earning the minimum wage.

Case study
has introduced a voluntary benefits package to help smooth over the narrowing of pay differentials caused by the rise of the minimum wage. The cinema chain launched the scheme to its 3,000 employees in November. John Heath, compensation and benefits manager, explains that the move was aimed at promoting employees to look beyond their pay: “It’s to try to focus on the total package rather than the basic hourly rate.”

But he adds that this is not solely due to the increase in the minimum wage.

Communication for the scheme, meanwhile, has enabled the organisation to highlight the benefits that UGC offers to staff above and beyond the minimum wage. “It’s a constant tapping away so employees are aware of the benefits. If it looks fresh and looks slightly different, people will take notice,” says Heath.

He agrees that staff do not always look for the most expensive benefits when comparing organisations. “It’s about being imaginative and being creative with your benefits. [UGC offers] a fun environment, which is [often] the attraction.”

UGC also offers several incentive schemes based on employees reaching key performance indicators throughout the year which boosts their remuneration.