A 30% Pay Raise in the UK?

The United Kingdom is bracing for a major change, something that will upend how many firms do business.

No, it isn’t Brexit, or even Brexit related. Instead, the UK is closing in on raising its minimum wage by about 30% over the next five years. The ruling Conservative Party proposed a wage hike late last month, and it’s a goal of the opposition Labour Party as well.

The plan, outlined by Britain’s finance chief Sajid Javid, would lift the legal minimum wage 28% from £8.21 an hour to £10.50 ($12.92) an hour across the entire country by 2024. At the same time, the eligibility for that rate will get cut from age 25 to 21. The change will affect as many as 4 million employees.

The announcement, of course, comes just weeks ahead of the country’s scheduled October 31 departure from the European Union. On the face of it, the timing looks awful. Much doubt remains about the future UK-EU trade relations starting November 1, and higher wages may make UK workers less attractive for companies that are deciding where to set up shop. Still, UK unemployment is at a multidecade low, at about half the jobless level across the channel in the eurozone. 

Higher wages are likely to put the squeeze on retail and hospitality businesses in particular, says Ben Frost, Korn Ferry’s global manager for pay. In those businesses, salaries are a significant part of the operating expenses, and so company leaders may find themselves caught between raising consumer prices and cutting other pieces of worker compensation, or both. “It is going to have a big cost implication,” Frost says. But that doesn’t mean such changes are insurmountable for savvy leaders.

There are ways that executives can deal with mandated wage increases. One is to adjust the different parts of an employee’s pay package, says Mark Thompson, a Korn Ferry senior client partner for rewards. In addition to hourly pay, workers routinely receive overtime and pension contributions. While the minimum wages are a legal matter, the other components are easier to change. “You can divert some of the overall cost into basic salary without increasing overall costs,” Thompson says. That’s what some leading companies have done in the past with similar changes, he explains. “It is hastening a reduction in benefits.”

Another thing that leading employers are embracing is the use of self-managed teams, says Thompson. It can help improve worker efficiency. Consumer products company Unilever and Britain’s state-funded National Health Service are increasingly utilizing this work practice, which eliminates many supervisor roles and also means that workers get assigned a variety of tasks involved in the production process. That method reduces labor costs relative to output. “You get higher levels of productivity,” Thompson says. That, in turn, means that the costs per unit of production can fall even while hourly pay rates rise.