The Business Case for Fair Pay

Paying people wages at a level that provides sufficient income to secure an adequate living standard without recourse to in-work benefits is a central means of ensuring that many households remain free from poverty. Fair pay is an urgent moral and practical imperative for any society which strives to eradicate the scourge of poverty and ensure the flourishing of social justice.

But fair pay is not only beneficial to those individuals who receive it. Fair pay also benefits the employers who decide to implement a fair pay policy. Put simply, fair pay is not only moral and just but is also a sensible, beneficial, and profitable decision from a business perspective.

Many employers still cling to the notion that the costs of implementing a fair pay policy are too high. They argue that introducing fair pay policies would force them to re-think their procurement regimes and police the employment practices of their contractors at an unacceptable price. They remain convinced of the ostensible benefits of outsourcing services and leaving the day-to-day management of large sectors of their workforce to someone else. They remain committed to the idea that cost savings flow from low pay contract labour and are thereby justified in a world which pressures organisations and executives to prune budgets and drive up profits.

The experiences of organisations which have adopted fair pay policies tell a different story. This suggests that the benefits employers believe they derive from keeping workers of low pay is more apparent than real. A substantial amount of evidence suggests that fair pay policies bring a string of unexpected benefits to the employer as well as the individuals who find their pay levels rising.

Efficiency

Evidence suggests that fair pay policies increase worker efficiency within organisations that adopt them. This is primarily felt through the contribution which fair pay levels have in combating the recruitment and retention problems which plague employers of low-paid workers.

The Chartered Institute of Personnel and Development (CPID) estimated average turnover in private sector at 22.9% in 2006 ¹ and also calculated the average cost of labour turnover in 2006 as £8, 200 per leaver. Turnover costs such as these are commonly associated with low-paying sectors within any organisation and represent a significant cost to contractors which is often passed on to their clients. Fair pay policies can help savings in these areas and put a stop to the time-consuming and costly search for new personnel.

Productivity

Evidence also suggests that fair pay policies help increase worker productivity. Fair pay levels have been found to increase worker motivation and reduce sickness absence levels. At present the direct costs of sick leave to the UK economy represents more than £11bn a year, about 1 per cent of the country's gross domestic product.

The savings which employers can gain from low levels of sickness absence can be ploughed back into an organisation while the creation of a motivated workforce with an increased stake in their organisation is likely to result in increased productivity and a better quality of service.

Company Reputation and Image

Fair pay policies also crucially enhance the reputation of any organisation as a responsible employer and a pathbreaker in the field of good corporate governance. The benefits of cultivating the image of an ethical and responsible employer will be felt through increased customer satisfaction and an enhanced business reputation.

In the 21st century world where ethical business choices represent a marketing tool just as crucial as direct advertisement can organisations risk not implementing fair pay policies for their employees?

Case studies

Employers who have adopted fair pay policies have themselves acknowledged the impact these decisions have made upon their ability to meet performance targets:

Since 2004, Barclays bank has implemented these standards in their cleaning contracts across the city. Alongside a rise in hourly pay rates the new pay and benefits package introduced included pension contributions, sick pay, bonuses, and an increased holiday entitlement.

The new policy resulted in a dramatic drop in absenteeism and staff turnover fell from 30% to 4%. All this was accompanied by a general rise in staff performance and customer satisfaction levels ². As John Cotton, Barclays Canary Wharf programme director, explained at the time: 'Clearly there are some cost consequences of what we've done but they for us are completely commercially viable because they provide us with a quality of employee and a commitment of employee which we believe will actually give us a better cleaned building.' ³

In 2006 Barclays announced that they would roll out this 'fair wage' package across its 2000-strong UK branch network, and the company pledged to pay all of its 1000 cleaning, catering, and post room staff across London £7.50 an hour index linked to rise each January.

Like Barclays, KPMG found that its turnover rate was halved after it introduced a living wage policy for all of its in-house and contract staff. This policy, introduced in 2006, applied to all directly and indirectly employed staff. "No one abused the new sick pay scheme," said Head of Corporate Services Guy Stallard, "and absenteeism is very low. We get the benefit of reduced training costs and staff continuity. It is a much more motivated workforce." ⁴

A growing number of organisations have incorporated the living wage into their procurement policies. This includes: HSBC, Barclays, Morgan Stanley, Royal Bank of Scotland, KPMG, Lovells and Macquerie. Public sector organisations who have done the same include: Greater London Authority, London Fire Brigade, four East London health trusts, Queen Mary University and London School of Economics. A growing group of Third Sector organisations have adopted living wage policies: The Big Issue, Child Poverty Action Group, ACEVO, and Westway Development Trust.

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Notes
1. CIPD Annual Survey Report, Recruitment and Turnover, 2007
2. Barclays Press release 18/6/2007 http://www.newsroom.barclays.com/Content/Detail.asp?ReleaseID=1102&NewsAreaID=2
3. Nice Work, BBC, 22 March 2005
4. Meeting with KPMG, 14 March 2007