What’s the real cost of the National Living Wage? Act now to mitigate costs

November 12, 2015


Our October 2015 survey looked at the impact of the National Living Wage on 135 businesses. The survey reveals that over half (51%) of respondents estimate increased  wage costs as a result of the introduction of the National Living Wage (NLW), which will see the minimum hourly rate rise by over 7% in April 2016 to £7.20. Participants estimated an average increase of £2.3m over the short term, with expectation for the increase to escalate to a staggering £11m by 2020 as more workers claim the NLW over time.  The survey shows that employers in hospitality & leisure, healthcare and retail will be most affected.

 

Next steps for participants
Over half of employers (57%) say they’re likely to spend more on their wage bill to maintain pay differentials between their lowest pay bands. In the most impacted sectors, we anticipate the cumulative impact of these costs will drive wider business innovation.

Around a third of respondents (32%) say they’re planning to pass on the increased costs to customers and over a quarter (26%) say they plan to reduce their headcount due to the increased wage bills.

Some participants said no action is required as they pay in excess of the 2016 National Living Wage. However, projecting ahead, we can see that the pay across sections of the workforce will converge, wiping out internal pay differentials, and bringing many much closer to being a statutory minimum wage employer.

Maintaining pay differentials, and keeping a market competitive reward proposition will add a premium to the National Living Wage uplift that employers may not initially anticipate.

 

Possible phasing of the NLW to 2020

NLWimage
Source: PwC 2015

 

What else should you look out for?
There is further bad news for employers and employees alike in that many will have to come out of existing salary sacrifice arrangements if this would bring their pay after the salary sacrifice to below the NLW. This means employers lose savings just as pension auto enrolment contribution rates are about to increase and the new Apprenticeship Levy is introduced.

 

Act now to mitigate your risk

Businesses need to act quickly in ensuring they take appropriate steps to mitigate the increased costs before it impacts profitability. A lower EBITDA could decrease the value of your business which, for example, could make a business less attractive to an acquirer.  Those organisations that can adapt to this change at pace will gain a market advantage by avoiding passing on the increased costs to customers or reducing headcount. 

Implementing rapid changes to your business to help mitigate the impact of the NLW can be done by seeking advice on releasing cash rapidly through:

  • Improving working capital balances for a one off cash release onto the balance sheet;
  • Process reviews to ensure most efficient routes are used;
  • Review of third party spend to ensure essential spend only and best pricing achieved;
  • Revenue leakage analysis;
  • Cash forecasting and cash management process;
  • Expert program management set up; and
  • Rapid delivery in both diagnostics of savings achievable and implementation of savings.

How will the introduction of the NLW impact your business? What changes are you making to mitigate this? Share your thoughts below or schedule a meeting to discuss your situation in confidence.

 

Glen Babcock | Deals Partner
Profile | Email | +44 (0)20 7804 5856

 

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