Responsible investing

Living Wage: a UK perspective

The living wage is gaining momentum in the UK. We look at its costs and benefits, which sectors have the most exposure to the issue and the impact of its implementation on corporate margins.

26/03/2015

Elly Irving

ESG analyst

Schroders

In summary, we find that the costs and benefits of introducing the living wage include:

Costs

- Higher costs per employee
- A negative impact on corporate earnings (particularly in the retail sector, where there is a larger number of sub-living wage earners)
- Additional costs if a company wishes to maintain wage differentials across its workforce

Benefits

- Lower employee turnover (studies have shown that paying a living wage has increased employee motivation and loyalty)
- Lower absenteeism
- Increased productivity (especially where the living wage has been introduced alongside an up-skilling programme)
- Improved customer satisfaction and lower complaints
- A greater ability to attract and retain talent
- Living wage earners see an increase in disposable income, which is then spent elsewhere in the economy (retailers, restaurants and bars are likely to benefit from this)

Retail sector most exposed in the UK

Research suggests that the hotels, restaurants and leisure sub-sector employs the largest proportion of sub-living wage workers.  For example, 90% of bar staff earn less than the living wage, but the retail sector employs the largest absolute number of sub-living wage workers with 760,000 UK-based workers. So for investors, this may mean a higher level of employee turnover and lower productivity per employee than other sectors.

Savings partially offset the costs in UK retail sector

Our proprietary research highlights a material cost in reaching living wage, ranging between 1 – 2% of UK revenues. However, the potential savings achieved through lower absenteeism and lower turnover offsets between 16% to 36% of these additional costs.

While the range of potential benefits is broad, we note that speciality retailers are best placed to benefit from introducing the living wage. With higher margins, it is more feasible to invest in staff, and the resulting improvement in customer service is likely to have a greater impact on sales, as demonstrated by two case studies which are presented in the full article at the link below.

An important part of Schroders’ engagement strategy

As part of our engagement strategy, we have spoken to a number of different companies across the consumer sector on the topic of living wage. While very few consumer companies have become accredited living wage employers, there is some evidence of pay increases and up-skilling programmes. We will continue to engage with companies to better understand the costs and potential benefits that can be gained from introducing a living wage on a case by case basis.

Investment conclusions

There is increasing pressure from a broad range of stakeholders on companies to pay a living wage. While there are clear direct costs, it is estimated that these will impact EPS by between 1 – 7%* depending on both the sector and individual company. However, while difficult to quantify, and the underlying assumptions may vary, it appears that the benefits are significant. Both the costs and benefits are greater for the retail and leisure sectors. Potential benefits include increased employee productivity, higher retention rates, lower employee turnover, the ability to attract higher quality candidates and improved customer service.

All of these factors could have a positive impact on sales and reduce costs in the long run with lower training, recruitment and employee absence costs. However, the cost and benefits differ not only between sectors, but also within sectors. Within the retail sector, for example, it may be more feasible to pay a higher wage amongst speciality retailers where margins are larger and the potential benefits are greater. Improvements in customer service are likely to be more material when selling a speciality, one-off good, rather than everyday items. While there are clear benefits of introducing a living wage, this issue should be considered on a case by case basis.

*The Case for Living Wage, ShareAction, November 2014.

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Living Wage: a UK Perspective 4 pages | 404 kb

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This article is issued by Cazenove Capital Management which is a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Issued in the Channel Islands by Cazenove Capital Management which is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital Management unless otherwise stated.