The welcome fall in UK price inflation reported last week does not disguise the economic reality that with average earnings growth remaining low, most of us are still suffering falls in our real incomes. The solution for national growth, corporate profitability and individual well-being, I am becoming convinced, is to pay employees more.
Just as our political leaders are realising that, three years into economic depression, they need to combine their austerity approach with a new focus on investment and growth; so the balance of compensation and reward activities in our organisations needs to shift away from an extreme cost-focus towards policies that more positively engage their employees and pay them more. The UK’s deputy prime minister, Nick Clegg, catching the mood in an interview withThe Financial Times recently “signalled a shift from lurid warnings about the debt crisis to a fresh emphasis on growth”. And for many employers, growth depends on their consumers having money to spend.
Now I fully accept that going to your board and recommending huge pay increases may seem like a career-limiting course of action (though the cynical observers amongst you might think that, as the recent MMK survey shows, senior executives seem to be doing ok on that score themselves). Political correctness in too many organisations still demands that their HR teams continue to deliver wage freezes and total wage bill reductions through downsizing and casualisation of the workforce. But in reality, as the economy continues to flat-line, providing decent jobs with decent and growing pay levels is as good for business as it is for their staff.
The ILO’s recent World of Work Report 2012 identifies this country and company “austerity trap” with a “rising risk of social unrest” and strike action. Amongst the solutions it prescribes for countries “a careful increase in the minimum wage” and “employers ensuring wages grow in line with productivity”.
We can see such action in the faster-recovering USA, where last year 18 states raised their level of minimum wages above the federally required minimum rate. The National Employment Law Project estimates that the extra $600 in workers’ pay cheques will add $366 million to the country’s GDP and create more than 3,000 new jobs (14).
Smart employers also seem to be responding. The fast-expanding Intercontinental Hotels Group, which owns Holiday Inn, announced last month that it was adopting the London Living Wage of £8.30 an hour for its staff, well above the National Minimum Wage in the UK that they previously offered, providing more than 800 employees with a wage boost worth nearly £5,000 pa. Have they gone mad in forgetting the essential focus on pay cost austerity? Isn’t this commercial suicide?
Not according to IHG Managing Director Stephen McCall, who recognises as London Mayor Boris Johnson put it, that “not only does this foster a loyal and hardworking workforce, it can lift people out of poverty and give people a proper reward for their labour”. Growth in pay and jobs boosts the consumer confidence and spending which is so essential in our service-based economy. As my Paris-based colleague Vincent Cornet put it at a conference recently, “With the prolonged period of economic depression and continued austerity measures, companies are feeling the need to show a positive sign to employees…attempting to be socially responsible”.
A variety of research studies support the benefits of basing employees’ pay on growth in skills, contribution and added value, rather than just minimising cost. For example, Brown, Sturman and Simmering found that higher pay levels were associated with greater efficiency and also improved perceptions of pay fairness. A CIPD research study led by Professor Michael West similarly demonstrated that good pay levels, with a performance-related component and an attractive total rewards package, drives higher employee engagement, which in turn is associated with improved customer service and increased consumer spending/revenue.
And of course, it’s good for employees, especially the lowest paid. Recent research funded by the Joseph Rowntree Foundation reveals a frightening growth in the levels of in-work family and child poverty. The authors identify that low pay and high levels of casualisation are not economically pre-determined, but the result of strategic HR choices, with higher paying employers using a more permanent staffing model succeeding even in low-margin sectors. So which model are you choosing?
According to the CMI’s acting-CEO Christopher Kinsella “we understand organisations are still struggling to provide general salary increases due to recession. But a company that does not work hard to retain its employees and invest in its people will find itself in a difficult situation”. As more of us start once more to experience the talent shortages that the CMI’s new survey identifies, firms need to break their three-year pay austerity mentality if our economy is to recover its historic rate of growth.