Automatic Enrolment – another unwanted cost or an opportunity to create value?

For many the new legislation introducing compulsory employer pension contributions has come at a bad time but in this article Chartered Financial Planner Richard Ross considers a more holistic approach that could see the legislation used as a catalyst for creating value

The latest raft of workplace pension reforms came into being in 2012, and saw the introduction of compulsory employer pension contributions for the first time. Although it will be well into 2015 before the majority of smaller firms are required to do anything and not until late 2018 before the changes take full effect, its worth starting to plan a strategy now. Being well prepared can help you turn a cost into an investment.

Times are tough and likely to get tougher. Businesses are rightly focussing on controlling costs but it is important to resist the temptation to simply cut ever more deeply and risk going beyond rooting out waste to causing lasting damage. Reducing costs produces short-term and once-only gains. The more hard-won but valuable objective is to create sustainable competitive advantage that will contribute to true underlying profit growth on a continuing basis. Often this requires changing the cultural web – the unique shorthand combination of practices, protocols and ethos that makes an organisation ‘who’ they are. It can be summed up as ‘the way things are done around here.’.

At a time when managers are responding to the tension between their employees’ experience of inflation and their own inability to pass on increased wage costs, care must be taken to protect and positively influence the cultural web to ensure it aligns with the firm’s objectives. In this article I use a real-life example to consider benefit provision holistically and explore ways that an appropriate reward structure can best support the firm’s strategic objectives. Viewed from this perspective the new legislation becomes an opportunity to create value rather than simply a cost.

A Case Study

A company’s value does not sit with its equipment, its outlets or its people. These are all resources that only become valuable when they are combined to create capabilities – for example, the capability to attract customers, persuade them to stay until they have maximised their spend and encourage them to return. Thus the company’s value is vested in its ability to successfully apply its resources. Competitive advantage is gained when a firm can apply a resource that is rare and valuable.

We have a couple of clients in the Adult Gaming Centre industry – what used to be called amusement arcades are now big business run by very professional operators with multi-million pound turnovers. The AGC industry is essentially an entertainment industry. Customers will typically be looking to spend a specific amount of money on being entertained for an expected period of time. They will return if they feel there is a chance their entertainment time will be extended (e.g. better payout rates), be heightened (e.g. bigger wins, more exciting machines) or if they feel the environment is particularly welcoming and conducive to their overall feeling of well-being. In this mix it can be seen that the attitude of unit staff is crucial in defining and delivering the firm’s proposition.

Of the three areas high-lighted only one is truly capable of being developed to create a rare and valuable resource. Payout rates are simply price competition and it is open to any competitor to offer better rates. Maximum prizes are restricted by legislation and apply equally to all in the industry, so while there may be some competitive advantage delivered to those more financially able to benefit from any legislative changes this will be limited, as will the effect of new machines. By adopting more efficient funding methods the company increases its ability to benefit from these changes but they remain available to the market generally. The area where the company can significantly differentiate itself by developing a rare and valuable resource is in its customer service and its means of delivery – the front-line shop-floor staff.

If the shop-floor staff are a key resource it follows that staff turnover is a key factor in determining the operational efficiency of the firm. Short-term staff have a direct cost in terms of increased supervision and training and represent a general drag on efficiency as, being less committed, they are, for example, more likely to be absent and less likely to take the initiative when issues arise. Equally importantly, high staff turnover represents a leakage of a valuable resource that has a direct effect on the customer experience.

Managers need to develop a clear understanding of the cultural web they wish to support. What are the core values the firm wishes to encourage? Is the company focussed on cost or value? Professionalism and a focus on customer service are both hallmarks of a progressive management style. Comparing a firm’s performance in these areas against direct competitors will give an indication of how well it is delivering and highlight areas for improvement but for more meaningful gains it is useful to look beyond the core industry to examples of excellence in a particular field.

So, in terms of customer service, it could be useful to look at a firm like John Lewis who appear to perform at a consistently high level. Setting John Lewis as a benchmark rather than a direct competitor would force the firm to raise its game by more than would otherwise be the case. It is interesting to consider how important the cultural web, ‘how we do things around here’, is in creating the overall customer proposition at John Lewis. For example, while there are doubtless basic rules, the attitudes and actions of the staff are overwhelmingly driven by an unspoken but widely understood expectation – the cultural web in action.

In a similar way, when it comes to staff retention if the firm Is operating in an industry where high staff turnover is endemic it should look across to firms in other industries that are able to employ lower-paid staff without the same high levels of turnover. Basing employment conditions on these best performers is more likely to result in improvements in staff retention than simply extending historical precedents that apply to the firm and its direct competitors. A well designed and applied employee benefits package can be seen as supportive to the creation of a professional, customer focussed cultural web by offering a reciprocal best practice employer response.

Motivating and Retaining Staff

Particularly at the lowest level, it is easy to think of the shop-floor staff as an homogenous commodity resource with effectively unlimited availability of a broadly standard quality. However this view is at odds with the principle that the customer-facing staff are a potentially valuable resource. Developing the resource is expensive in terms of time, training and management resource. High levels of staff turnover, especially at this level, mean that too often this initial investment is wasted or not used effectively. The nature of the work, the level of remuneration and the basic skills required mean that it will tend to attract recruits with irregular employment patterns and following disorganised lifestyles. This has led to high levels of turnover in the first few months being viewed as inevitable. However, it is the contention here that by challenging this view the firm has the potential to significantly increase its operational efficiency and therefore its profitability.

Most value lies in the longer-serving staff. Those that are still with the company after a year are well vested in, and broadly supportive of, the cultural web. In terms of their skills and ongoing training needs they require little more than routine maintenance. They are a profitable, relatively stable constituent of the human resource. Measures targeted at increasing the population and reducing the attrition rate of this cadre are likely to add most value.

Applying differential pay rates to reflect length of service is problematic where the duties undertaken are not similarly differentiated, but there is scope for offering an improved overall package that recognises the increased value of these staff over a new recruit and the opportunity gain of retaining them.

Factors influencing employee behaviour can be divided into two specific categories – Hygiene factors, the provision of which will help avoid dissatisfaction; and Motivators that will lead to satisfaction. The semantics are important – lack of dissatisfaction is not the same as satisfaction. Hygiene factors are extrinsic to the job and include company policy and administration, supervision, interpersonal relationships, working conditions, salary, status, and security; while Motivators are intrinsic and include achievement, recognition for achievement, the work itself, responsibility, and growth or advancement. Hygiene factors are responsible for most unhappiness at work. Unhappy people will be more likely to leave so it is important to ensure appropriate hygiene factors are in place as a first step towards reducing staff turnover.

Hygiene factors are not consistent throughout the organisation. A senior manager would have a greater number of hygiene factors, or basic expectations, than an hourly paid unit operative.

Although many of the hygiene factors can be seen as necessary costs their value can be increased by considering their motivational utility and aligning it with the cultural web so this aspect is leveraged. This article is considering pension provision so we can look at that as an example. Taking the view that any provision represents solely a cost becomes a self-fulfilling prophesy – it results in a cost producing little or no added value.

Taking a more holistic approach from within a cultural web that says that this is a paternal employer who values long-serving employees, an appropriately structured pension scheme can become both a hygiene factor and, as recognition and a reward for preferred behaviour (i.e. not leaving), a motivator. Given the likely cost of staff turnover – the tangible cost of recruitment, training etc and the less tangible impact of loss of experience, knowledge, consistent customer experience etc – a benefits package that can straddle the divide between hygiene and motivating factors has the potential to be cost effective.

Does it work?

We are fortunate to have been able to observe closely the attitudes towards benefits at all levels of many businesses over several years.

When we analyse membership data we find there is a strong correlation at all levels between membership of the pension scheme and commitment to the company. It is not possible to demonstrate from data analysis that this is a causal relationship from either direction (i.e. do people join the scheme because they are committed to the company or does the pension scheme increase their commitment?). What can be reasonably concluded is that the presence of an employer contribution increases pension scheme take-up significantly and that this forms part of an active decision process undertaken by the employees. This has important implications from the perspective of developing an appropriate corporate web – this is a strong indication that the value of an employer contribution is both understood and appreciated.

Conclusion

Employers are faced with a fundamental choice between cost and value. In the short term a lowest cost strategy will reduce overheads and increase profits. This would involve delaying the introduction of a pension to the last possible moment and making the minimum employer contributions. However, in the longer term a more strategic approach that seeks to treat the cost of benefits as an investment to support an appropriate cultural web is likely to lead to increased value via improved staff retention rates and, consequently, a better customer experience. An obvious dilemma facing the management is that the costs are a known figure and are incurred now, whereas the value is difficult or even impossible to calculate and will be seen some time in the future.

NEST – the facts

• NEST (the National Employee Savings Trust) is a simple, low cost pension any employer can use to meet their new automatic enrolment duties. NEST is run by the NEST Corporation, a not-for-profit organisation set up with funding from the Government, which it is expected to repay.

• Starting in 2012 all employers will be required to automatically enrol all eligible employees over 22 in either NEST or a qualifying alternative

• Roll-out will be phased through a series of staging dates with most smaller employers not being required to comply until well into 2015 or later.

• Check your staging date herehttps://www.thepensionsregulator.gov.uk/employers/staging-date-timeline.aspx

• Once enrolled, employees will have an option of opting out. If they do not take that option their employer is required to make a pension contribution.

• The minimum level of contributions will be phased-in so that between an employer’s staging date and September 2017 there will be a requirement for the employer to pay 1% of qualifying earnings, with employee contributions and tax relief taking this total to 2%. This will then increase to 2% from the employer with a total of 5% starting from October 2017, and 3% from the employer with a total of 8% from October 2018.

• Private sector alternatives to NEST could offer significant advantages and advice should be sought before deciding.