Wages and the new minimum wage

[Talay]

So we had £6.50 and though we pay most more than this, these will now cost £7.20 from April 2016. However, for staff who earn over this currently, say £9 an hour, the difference between their pay and the minimum wage is eroded substantially.

So how are you going to cope not only with a minimum wage of £7.20 rising to £9.00 plus by 2020 but also by the implied necessity to raise other wages to maintain an income gap over minimum wage ?

 

[myfairworld]

Hang on tight and hope that more people earning more means more business for you so less difficulty about finding the money?

 

[Talay]

Hang on tight and hope that more people earning more means more business for you so less difficulty about finding the money?

Not really about finding the money or difficulty in doing so but this is the first time we have ever had forward planning for a minimum wage out to 5 years.

More significantly, there is probably no real world pathway which would see a £9.75 (50% over NMW) an hour worker today earning £13.50 an hour for the same job in 5 years time, not when inflation is 0%-2%. However, we are expected to suck up a 50% increase in NMW.

If staff earning above NMW now do not also see their pay increased, then they will surely be demotivated (I saw this in a company I purchased last year when pay had not been increased for 5 years).

Socially, I point out that the Labour lunacy of Tax credits is the root of all this and has depressed low pay for years but we cannot right 20 years of wrongs in the next 5 years.

 

[myfairworld]

I suppose my stock answer to this as well as other current problems is 'Don't look at me, I didn't vote for them!'.

I'd like to stress that though I don't pay minimum wage, this is a general issue for my business too and could well lead to its closure if I don't get very imaginative and very marketing savvy very quickly!

On the other hand I don't see how people can reasonably live and put a roof over their heads, even at the most frugal level on the current minimum wage, and believe that there has got to be a move to a genuine 'living wage' (what the government is currently proposing is not in fact a genuine living wage).

In theory at least, if small businesses can survive a difficult interim period (yet another difficulty but that is the nature of small business), we will potentially benefit from an increase in income for those who are the most likely to spend. I believe this is called 'marginal propensity to spend' and the equation goes like this: if someone who is already very rich or well off gets substantial increase in their income they tend not to spend it so it simply increases their own personal wealth or they tend to spend it in ways which don't benefit the wider economy. So Mrs X buys another luxury flat which she will only inhabit for one month out of the twelve or not inhabit at all. Someone gains from that purchase but by and large it isn't a small business. In contrast the worker on minimum wage, and those on the immediate tiers above minimum needs just about everything, they are wondering how to replace the shoes their child is outgrowing, they need more and better food, they value small luxuries in a way which is almost incomprehensible to the better off for who such things are normal. So the low paid worker who gets more pay tends to spend it and that is very good news for the ordinary small business.

 

[Newchodge]

You need to consider whether your better paid workers are really 'worth' so much more than those on minimum wage. I would include much better paid workers in this. I have never understood how one organisation can pay its 'top people' 10s of millions of pounds, and pay their basic workers an absolute pittance. Is the relative worth of these people really valid?

Every organisation I have been involved with cannot function without ALL its employees. No one can really be worth 183 times more than their average worker.

 

[myfairworld]

I agree with Newchodge. Yes some employees are 'worth' more if they are willing to put in a lot of effort and training to become better at their job or to learn how to do a more complex job, Though it is less done these days there are also good reasons for paying for 'loyalty' - though that can rebound in some cases and needs some thinking about with 'loyalty' having to equate to increased skills and responsibilities. But most very senior managers are most definitely not worth 183 times the wage of the person who is actually doing the critical thing of selling or making or whatever.

As a business owner I always assiduously cultivate the street cleaner, the collectors of my rubbish and recycling and so forth. This in my position amounts to little more than smiling and waving and shouting 'thank you' but it is based on the fact that the actions of such people are missed long before and are worth much more to the small business person than the leader of the Council or the Mayor or the CEO of Marks and Spencer or whoever. No Mayor? There'll soon be a new one. No CEO of M&S? There are so many folk pushing from below and eager to step into that person's shoes. Street cleaners who take a pride in their job are actually harder to find yet they have a more profound effect on the atmosphere of a local shopping area. We rarely forget to put our recycling out (masses of cardboard and paper) but if we do someone from the lorry will come running into the shop to say 'No recycling this week?' and they'll help us carry it out. Being stuck with our excess cardboard for a week is a big issue for us. I know perfectly well they drive past other businesses who forget to put their recycling out, they don't drive past us.

Similarly it is the pleasant and efficient waiter/waitress who makes your evening. It's my apprentice who makes your shopping with us so pleasant. It's her who hops up and says to an obviously breathless customer 'why not sit down for a minute'. Yes I work endless hours behind the scenes and my work is important but at the end of the day it is the customer facing staff who make or break a business.

 

[Newchodge]

Thanks @myfairworld that is exactly what I meant, but you phrased it so much better.

 

[Talay]

...In theory at least, if small businesses can survive a difficult interim period (yet another difficulty but that is the nature of small business), we will potentially benefit from an increase in income for those who are the most likely to spend. I believe this is called 'marginal propensity to spend' and the equation goes like this: if someone who is already very rich or well off gets substantial increase in their income they tend not to spend it so it simply increases their own personal wealth or they tend to spend it in ways which don't benefit the wider economy. ...

Any economic analysis must consider (at least) two additional principles of economics, namely the effect of time lag and ceteris paribus (all other items remaining constant to analyse the effect of one change).

Time lag means we pay out more now and hope to reap the benefits later; hope being the operative word. In this economy, this is flawed as at or around minimum wage, the majority of any increase in earnings is simply offset by a reduction in Tax Credits, Housing Benefit etc. at the rate of about 85%. Thus, little trickles down to affect any marginal propensity to consume.

In isolation, this merely transfers costs from government to employers, which is where they should have been all along but after so long nursing at the bosom of Labour's largesse, the balance is so heavily skewed that trying to right it will take a generation or more, not a 5 year plan.

To me this means increasing prices now to cover the costs and smooth out employee expectations over the medium term. With years of trimming the cost side of the businesses, it requires a lot of faith to see whether retail customers will accept price increases well ahead of what they will themselves be getting in salary rises.

 

[The Byre]

Poverty cannot be legislated away. The UK has the largest sector of poor people in North West Europe. This is because we have the most unfair society (difference between rich and poor) and the lowest GDP-per-capita in NW Europe.

But passing a law stating "Thou shalt pay poor people more!" does nothing to repair the broken society we live in. We limit the supply of housing artificially and make no jobs secure. We make the tax laws so complex that only those with access to an accountant can find their way through and we have deliberate and very large holes in tax law, so that, from VAT to stamp duty, from income tax to NI, no rich person needs to pay these unless they want to for social or political reasons.

The poor have every card stacked against them. Buying a decent house is beyond anything they could manage, their jobs are insecure, education in poor areas is bad and getting worse, we spend less on health care than any other NW European country and if they step out of line, we lock them up with the most draconian crime laws in Europe.

The UK needs social and economic reform on a MASSIVE scale.

Vital changes that must happen (but will never be introduced) are -

1. Rent control and minimum building standards for all rented property.
2. Massive house building plans by both the private sector and the public sector.
3. Compulsory apprenticeship schemes for larger companies.
4. Large R&D subsidies for private enterprise (subject to production within the UK via relief on payroll taxes).
5. Reform of the educational system, to reduce Mickey-Mouse degrees, make all tertiary education in those subjects society requires free, make three-year apprenticeships in key subjects (e.g. plumbing, building, roofing, hairdressing) compulsory.
6. Simplify the tax system, so that there is one book that defines all tax rules and laws.
7. Compulsory education and rehabilitation schemes for criminals.
8. Increase spending on health care and preventative health care in particular, from $3,600 to $5,000 p.a. per person.

The above is not radical. The fact that many Brits will think that it is radical, is what is really sad. It is how things are in most European countries, Germany in particular.

The absence of these reforms is the reason that the UK has the largest difference between rich and poor in the whole of Europe. This massive difference is possibly the largest brake on the UK economy.

You can't sell a poor man a new house or a new car and giving him an extra pound an hour ain't going to cut it!

 

[Scott-Copywriter]

You need to consider whether your better paid workers are really 'worth' so much more than those on minimum wage. I would include much better paid workers in this. I have never understood how one organisation can pay its 'top people' 10s of millions of pounds, and pay their basic workers an absolute pittance. Is the relative worth of these people really valid?

Every organisation I have been involved with cannot function without ALL its employees. No one can really be worth 183 times more than their average worker.

It all boils down to value for money and return on investment - like almost anything a business pays for.

If a company brings in a CEO who makes changes which are responsible for a huge growth in sales, then they could easily be worth that sort of money.

Another factor to take into account is the competitive employment market. There are only a finite number of very talented people with a proven track record of success, and those people will go to the businesses which offer the best deal (i.e. salaries).

It's not like businesses want to spend millions on a CEO. They just have to do it to provide a competitive salary because everyone else is doing it. It's like any free market out there. Supply and demand sets the prices, and competing businesses push those prices up.

If businesses in the UK try and cut MD and CEO salaries, the top talent over here will just be lured by much bigger salaries in the USA and Asia.

In a free global market it's extremely difficult to do anything about it.

 

[Newchodge]

While I understand your point, it doesn't hold up in the real world, where organisations pay huge salaries, and eye-watering bonuses to 'top people' who completely fail to achieve anything.

 

[myfairworld]

Newchodge has made such a valid point. As many of these hugely paid 'heroes' of business take huge companies down as seem to mange to build them up. The really bizarre thing is that they then on the back of their lack of success get appointed to destroy some other company! It is a bit like the reward for losing a general election - write a book and get huge royalties, get appointed to some role in the EU or elsewhere where you can continue to wreak havoc! The same thing seems to apply to really big companies (who have important politician friends) e.g fail to fulfill your contract for the Olympic Games, unfortunate members of the Armed Forces get drafted in at tax payer expense to do the job instead, but this is no barrier to such companies getting even more contracts. It's mad - or actually it's fraud on the taxpayer!

I believe that our biggest obstacle to financial progress in the UK is this belief in the 'hero' business person, the superman or superwoman who will sort all problems but mostly does not and then leaves with a huge severance payment. Businesses only work - especially in the long term - if they work at all levels, the contribution of all workers at all levels is critical. This is where we are hammered by economies such as Germany where building the skills of every worker is taken so seriously.

 

[The Byre]

I believe that our biggest obstacle to financial progress in the UK is this belief in the 'hero' business person, the superman or superwoman who will sort all problems but mostly does not and then leaves with a huge severance payment. Businesses only work - especially in the long term - if they work at all levels, the contribution of all workers at all levels is critical. This is where we are hammered by economies such as Germany where building the skills of every worker is taken so seriously.

This paragraph should be read out with a loud hailer at every board meeting in Britain!

You have healthy companies that then make the mistake of falling into the hands of career managers who turn them into hollow companies through a series of M&As fuelled by massive borrowing (e.g. new share issues, stock swaps, IPOs, etc.)

The company is now completely hollow. It may employ thousands and have a turnover of millions or billions, but it is, in reality, a rag-bag of activity with little or no unifying purpose, built only on debt and one bad year away from collapse.

This thread started with the effects of the new minimum wage on retail, so mentioning Aldi is inevitable. Aldi hasn't even begun to develop to where they want to be in the UK. They are not only one of the most profitable retailers, but are expanding rapidly. Aldi is debt-free. Aldi is a private company. Aldi thinks long term. They even have a strategy for the next on hundred years! The person at the till starts at £8.15 per hour and rises to £9.75. They have always had things like company pensions, maternity pay and one month paid holiday. Management trainees start at £40,000 p.a.

Aldi is opening over ten stores in the UK every month. Between today and the end of the year, it will open 44 new stores in Britain.

When Aldi UK started over 25 years ago, management was rubbing their eyes in disbelief at the state of UK retail. High gross margins, high levels of debt, huge and wasteful ranges and short term thinking were the rules of the day.

More importantly, UK retailers were completely absorbed with their own 'trolley wars', building ever-bigger out-of-town super stores and seemed oblivious to what was happening in the rest of Planet Earth.

"The housewife wants choice and a pleasant shopping experience. Retail is show business!" said Terry Leahy, totally ignoring the World-wide move to fewer items of higher quality and a fast shop in stores located on the road home. Tesco was now built on debt, debt and more debt and the other major retailers copied them.

The hero businessman had created a huge soft under-belly of debt and structural inflexibility.

 

[Scott-Copywriter]

While I understand your point, it doesn't hold up in the real world, where organisations pay huge salaries, and eye-watering bonuses to 'top people' who completely fail to achieve anything.

That's just completely inaccurate and not a fair reflection of the real world whatsoever.

Look at the FTSE 100, the Dow 30, the 1,900 listings on the NYSE, the 2,300 listings on the TSE, or the 3,000 listings on the NASDAQ.

There's thousands of massive companies there worth trillions of pounds. Now where is your evidence that so many of these companies have CEOs who "completely fail" to achieve anything?

There are thousands more CEOs out there than what you just hear about in the news, but unfortunately, people lap up what they hear in the media and just assume that all CEOs are big baddies who fail everywhere they go.

Look at The Byre's example of Aldi. The company is doing well, but I believe the CEO, and the UK MD Matthew Barnes, earn upwards of £1million each per year. With a great employment ethic and a rapidly expanding business with sound financial footing, I'm sure Aldi consider that money well spent.

Sure, there are some bad CEOs out there, but there are some good ones to, and certainly more good than bad. Contrary to popular belief, it is not easy to run a multi-billion pound company.

Instead of attacking CEOs, perhaps people should be more concerned about the constant requirement to please public shareholders, where they must balance long-term health with short-term gains to please shareholder expectations. There's continuous pressure to meet the expectations of shareholders and analysts on a quarter-by-quarter basis, whilst also juggling the long-term development of the business. Those two goals aren't always necessarily in sync with each other.

It's also interesting to note that Aldi, as a private company, does not have that burden, so the CEO an make decisions which benefit the business long-term without worrying about meeting short-term expectations and avoiding sell-offs which would wipe millions off the value of the business.

 

[The Byre]

Look at The Byre's example of Aldi. The company is doing well, but I believe the CEO, and the UK MD Matthew Barnes, earn upwards of £1million each per year. With a great employment ethic and a rapidly expanding business with sound financial footing, I'm sure Aldi consider that money well spent.

Considering the scale of the operation and the 13% ROI, that's very little. But Barnes is just a regional director for the UK. Aldi is a huge company with branches in 32 countries and a set model for range and expansion set across Planet Earth, Barnes 'just' has to adapt a very well honed battle plan to UK market conditions.

I am dealing with a US company right now, that has c.a. $800m TO, employs fewer than 2,000 and is struggling. The CEO will get $10m this year!

His two predecessors crippled the company with crazy empire-building A&Ms that had to be sold off at a loss. All the current guy has had to do to 'turn the company around' was to stop acting stupid. Instead, he has bought yet another tech company that has seen better days for $100m - and with borrowed money of course!

 

[Scott-Copywriter]

Considering the scale of the operation and the 13% ROI, that's very little. But Barnes is just a regional director for the UK. Aldi is a huge company with branches in 32 countries and a set model for range and expansion set across Planet Earth, Barnes 'just' has to adapt a very well honed battle plan to UK market conditions.

I am dealing with a US company right now, that has c.a. $800m TO, employs fewer than 2,000 and is struggling. The CEO will get $10m this year!

His two predecessors crippled the company with crazy empire-building A&Ms that had to be sold off at a loss. All the current guy has had to do to 'turn the company around' was to stop acting stupid. Instead, he has bought yet another tech company that has seen better days for $100m - and with borrowed money of course!

There are certainly bad CEOs out there. My gripe is just with those who believe that most CEOs are bad and end up causing damage.

For every bad CEO, there are dozens who keep their businesses ticking over nicely with steady growth and good financials. However, as there's no interesting story to take from that, the media never reports on it and no one ever hears about it.

Dare I say that the same can be said for bankers. There's always a media frenzy surrounding bankers who cause damage or make massive bonuses, but there are many out there who make big sums for their employers, do their job well and manage the risks. However, once again, no one hears about it because the media can't get an interesting story from it.

There's too much tar and too many brushes going around amongst some folk.