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3 ways to manage National Living Wage increases

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Posted by Alastair Cole on 23 April 2018

3 ways to manage National Living Wage increases

HR Reward | Reward Consultancy | Performance Related Pay | Reward Intelligence | Benefits intelligence | Analytics | National Living Wage | Low Pay | Pay Progression | Pay benchmarking | Reward

UK businesses have just applied the latest increase in the National Living Wage (NLW) from £7.50 to £7.83 per hour. This additional tier to the National Minimum Wage is applicable to workers aged 25 or over, and requires employers to pay a 4.4% wage increase to cover higher living costs.

For businesses with a large proportion of lower-paid employees, 4.4% is quite a large pay pot to find. And with the NLW on target to reach nearly £9 an hour by 2020, it’s vital to work out how you’ll continue to absorb such a large hike in your wage bill over the next two years.

It’s not just the direct wage cost to consider, either. By uplifting the lower salaries, the NLW narrows the differentials for the roles above. This causes an additional headache for employers of finding another pot of money to reward enhanced performance across the board. It’s a particularly pertinent question for the already struggling retail sector, which currently employs over 20% of those on the current minimum wage (source: PWC).

So now is the time to plan how to make optimum use of your pay review budget, and consider these 3 steps to take now in preparation for next year:

1)      Benchmarking – refresh your market pay insight with particular focus on the roles where salaries are just above the National Living Wage.  Ensuring these roles are being paid at least in line with market, and communicating this approach to employees, will ensure a fair and justifiable pay differential and help mitigate any disquiet around pay at the lower levels of the organisation.

2)      Pay scales – if you operate a pay framework you may find that the scales at the lower end are shifted upwards due to the NLW increase. Some readjustments may be required if too much overlap starts to occur or if employees at the upper end of the scale, not benefitting from the NLW increase, find their salaries pushed back towards the middle or lower end.

3)      Pay progression – However large your pay pot is, allocate it wisely by differentiating between poor, good, and high performers. At the same time, target any salaries that have fallen behind market.

Now you’ve got this year’s increase out the way, it’s tempting to forget about the NLW until 2019. But forward planning is fundamental in ensuring that while the NLW provides a welcome uplift for the lowest paid individuals, it doesn’t have an unintentionally negative impact on the rest of your employees.

If you do one thing from the list above, now is the time to get your pay benchmarking in order. Otherwise you run the risk of applying pay increases to salaries already above market, which may then continually inflate year on year only compounding the issue; or losing key team members due to their pay falling behind market.

Getting the facts around your market pay stance is essential. Working with Innecto on your pay benchmarking project will allow you to create effective reward strategies, design robust pay structures and be consistent and confident with your messages around pay.

If you’d like to get in touch to discuss your requirements, please email me at alastair.cole@innecto.com or call 020 3457 0894.

We’ll be discussing Gender Pay Year 2 in a webinar on Friday 11th May at 12:30, with HR Directors from the England & Wales Cricket Board and Equifax. You can register here – we hope you can make it!

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