The wage of enlightenment?

So the economy is back on track, we hear – unless you’re in retail. The financial pages are full of doom and gloom when it comes to shops, and that pessimism reflects in pay. Because whilst some employers are taking the plunge and deciding to pay the living wage to staff, there isn’t a single High Street retailer willing or able to put its hand in its pockets and fork out at a higher rate.

Such has been reported by The Independent, which says of the roster of payers of the living wage, ‘Retailers are conspicuous by their absence from the list, with even “ethically” branded chains such as John Lewis and the Co-operative not signed up.’ The living wage is paid by 1,200 firms and is currently set at £7.85 per hour, or £9.15 in London.

National Express has, however, just signed up, with its CEO Dean Finch claiming that ‘committing to become a living wage employer in the UK testifies to our determination to be the best possible employer.’

The move was welcomed by politicians on both sides of the House, and Labour has pledged to introduce tax breaks for firms that pay the living wage, should it manage to achieve a working majority after the election.

And interestingly, firms making a similar commitment to National Express say that paying more to staff is actually helping productivity and leading to more stable, more profitable business.

CORGI model

CORGI HomePlan is a Dunfermline-based provider of boiler, central heating and home electrics cover. It employs 90 people, mostly in call centre and administrative capacities.

The organisation says that paying higher wages helps them attract and retain a higher calibre of staff, and has contributed significantly to them becoming a £35 million turnover business in just four years.

Kevin Treanor, director of CORGI HomePlan, says: ‘In Scotland we’re one of only 128 living wage employers. I’m in no doubt that if more signed up, it would not only benefit the businesses concerned, but also the wider economy and society as a whole.

‘We actually pay above the living wage, and it has undoubtedly played a huge part in our success. Our annual staff turnover is 17% lower than the average. It really should be a priority for any business.’

CORGI HomePlan increased customer sign-ups by 31 per cent in 2014, which they credit to their attracting and keeping good people by paying fair wages.

It says it will create 20 new jobs in 2014, and a further 30 in 2015.

CIPD disagreement

The CIPD though, isn’t keen. They argue that simply giving workers pay hikes doesn’t work and actually obscures the real reasons behind wage stagnation.

“Simply asking companies to improve pay without examining more closely the factors which have contributed to our poor productivity performance fails to address the underlying cause of low wage growth,” argued Ben Willmott, the CIPD’s Head of Public Policy, earlier this year.

Productivity first, pay later, reckons Willmott. His is a well-argued point, but it’s rhetoric that runs dangerously close to being anti-labour, particularly when productivity has an uncertain relationship with executive pay and shareholder dividends.

This 2013 article in Forbes, though, looks at the actual costs involved in staff turnover, and decides that paying more can often be the wisest choice in terms of controlling overheads.

In ‘Are You Spending More By Paying Your Employees Less?’, Chris DeRose and Noel Tichy set out ‘the simple lesson that wage increases can be partially offset by lowering employee attrition, leading to a happier, more productive and more knowledgeable work force.’

As the writers point out, there is at least one strong relationship between pay and productivity:

Now, many conscientious human resources leaders will cite studies showing that replacement costs for workers can be anywhere from 30 to 150 percent of yearly pay….

We’ve worked with several major retailers, each with over 50,000 employees, and found that all of them grossly underestimated their labor costs directly resulting from turnover. For one of the companies, a 107 percent churn rate among its part-time labor accounted for more than $150 million in annual expenses once all the costs were fully loaded (hiring, training, on-boarding, separation, etc.). Another company discovered that nearly 50 percent of its turnover happened within the first two months of employment, meaning workers tended to quit just as they gained enough experience to actually be productive. Not only did the company incur big expense as employees came and went, but customer service and sales also suffered…

It’s a bit like basing a decision on which car to buy by looking at the sticker price versus calculating the real costs of ownership once gas, insurance and the many other expenses are factored into the equation.

States of pay

Elsewhere in the US, as reported in the New Yorker, a pocket of employers is deciding to increase pay to staff for both commercial and ethical reasons.

Last month, for example, health care company Aetna raised wages from twelve to sixteen dollars an hour, and improved its medical coverage into the bargain.

Aetna’s CEO Mark Bertolini told the New Yorker’s James Surowiecki that it was

not “fair” for employees of a Fortune 50 company to be struggling to make ends meet. He explicitly linked the decision to the broader debate about inequality, mentioning that he had given copies of Thomas Piketty’s “Capital in the Twenty-first Century” to all his top executives. “Companies are not just money-making machines,” he told me last week. “For the good of the social order, these are the kinds of investments we should be willing to make.”

The debate harks back to generations when big companies were arguably less concerned about looking after shareholders, and more concerned about looking after their communities and staff.

But as Surowiecki continues, echoing Forbes, ‘a substantial body of research suggests that it can make sense to pay above-market wages—economists call them “efficiency wages.” If you pay people better, they are more likely to stay, which saves money; job turnover was costing Aetna a hundred and twenty million dollars a year.’

History seems to link reward with productivity. ‘The most famous example in business history is Henry Ford’s decision, in 1914, to start paying his workers the then handsome sum of five dollars a day.’ writes Surowiecki.

‘Working on the Model T assembly line was an unpleasant job. Workers had been quitting in huge numbers or simply not showing up for work. Once Ford started paying better, job turnover and absenteeism plummeted, and productivity and profits rose.’

There’s a lot of noise about pay at the moment, and the election campaign might change the terms of the debate yet again. But let’s not overlook employers such as CORGI HomePlan and Aetna who are trying something different – experiments which, for commercial reasons alone, deserve to be monitored closely.

About the author

Andrew Baird

Andrew is the CEO of HRville. He is also Employer Brand Director of Blackbridge Communications, Editorial Director of Professionals in Law and an associate of The Smarty Train. Previously, he was the MD of TCS Advertising.