How changes to the National Living Wage might affect your deal…
July 17, 2015
The summer budget on Wednesday 8 July brought with it a number of changes affecting employers. One big promise has the potential to significantly affect workforce trends and costs with a knock on effect on deal pricing through quality of earnings adjustments.
The key points to note on the National Living Wage (NLW):
- From April 2016 the new NLW will add a premium of 70p/hour to the current National Minimum Wage (£6.50) for workers over the age of 25 (a 50p increase from the new October 2015 National Minimum Wage rate of £6.70).
- This will mean a cost increase of 12% for some worker groups (possibly more depending on pay-based benefits provided, such as salary sacrifice arrangements and pensions).
- Significant increases will follow in subsequent years as the NLW rate heads for 60% median earnings, expected to be over £9/hour by 2020 – increasing by c. 50p/hour year on year.
- Companies are likely to need to increase wages further up pay scales too in order to maintain pay differentials.
- The additional pay complexity (e.g. monitoring of ages if they pay the minimum) may add to payroll administration costs.
- Companies may need to review other employee reward aspects, such as salary sacrifice arrangements currently being used by employees close to the new NLW.
This is likely to not only push up overall costs in traditionally low pay industries, but will also hit many industries and companies previously less affected by National Minimum Wage levels – particularly at the projected 2020 levels.
We expect to see quality of earnings adjustments on many corporate deals. On deals that have already signed, or for ongoing businesses, many will wish to review their pay approaches or look for mitigating areas of cost reduction.
Not just a standard % increase
The impact is not straightforward but potentially very material for some businesses. It’s not just a case of a standard percentage increase – the projected increases will vary widely depending on workforce demographics, industry norms and current and proposed future pay approach.
The increases may also have disproportionate impacts on benefits such as pensions auto-enrolment costs (as more of the part time workforce become eligible) and will increase pension deficits where impacted employees are still in defined benefit plans.
Understanding the current employee demographic and pay approach is key to quantifying the future costs and potential mitigation strategies whether you are on buy side or sell side of a deal.
Buyers will need to quantify and develop arguments for quality of earnings adjustments. After the deal is done buyers will also need to consider the best pay approach to limit the cost impact or consider other potential payroll or headcount efficiencies that might mitigate it.
Sellers will need to determine the likely buyer reaction and consider whether a pay approach can be adopted to mitigate the cost. It’s also worth sellers thinking about whether they can show buyers that the impact is less than the headline figure, for example due to a high proportion of under 25 year old employees.
How do you see the significant impact on people costs from April 2016 affecting your business? What’s your plan to deal with these in your next deal? Share your thoughts below or schedule a meeting to discuss this in further detail.