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Cutting Costs to Increase Revenue in Response to the National Living Wage Requirement

In April 2016 I held a part-time position as a restaurant receptionist. The restaurant had changed hands in January that same year, and the new National Living Wage for over 25s had just been implemented across the country, and workers in the hospitality and leisure industry were expected to benefit from that.

On the morning of our first pay day post April the 1st, my colleagues and I woke up to find our bank accounts lighter by £250 on average. It became clear, over the following weeks, that we were not alone!

Cafes, restaurants and supermarkets began cutting down hours, stamping out food allowance and eliminating perks in order to offset the costs of the new NLW:

Café Nero stopped giving free food to their employees (The Guardian);

Eat cut lunch breaks for staff (The Independent);

Zizzi reduced tips and cut free food (Financial Times);

B&Q forced new employment contracts that, among other things, excluded double pay on bank holiday and time and a half on Sundays (BBC).

What can possibly defend such unjust actions? In my search for an answer I encountered an unwieldy stream of alarming prognoses that indirectly served to defend the measures as the only real chance for businesses to afford their rising labour bills:

Ryan Bourn from International Business Times argued that there will be 60 000 people less employed by 2020 as a direct result of the new NLW and companies' inability to cope with it.

Tim Worstal rejected the intervention of the government to impose a new NLW by explaining that it is the market that dictates how much something costs and that “if we as a society decide that a certain price is immoral, then we have to pay for that price to change.” Further adding that “It really shouldn't come as a surprise that if you raise the price of something then people will buy less of it – and this applies to labour just as much as anything else.”

Tesco said that the new national living wage will cost them £500m by 2020, and put a bigger strain on Britain’s supermarkets.

Kamal Ahmed, economics editor for the BBC expressed the view that even though a pound or two isn’t much in itself, it makes a substantial difference to the overall labour expenses of a company.

What was unraveling was a picture that seemed to uphold this unpopular position: as great as it was, the notion of increasing the salaries of the lowest-paid members of our society was beginning to look more and more unrealistic and utopian by the minute.

Even Andy Street, the head of John Lewis, a company well-known for its great pay and benefits, said that although he recognizes the big role that a “good payment policy” plays in “driving outstanding performance”, they might be forced to cut staff benefits to accommodate the new NLW.

And as I was speeding down this slippery slope of harsh reality, the following lines from The Guardian put my ride into a complete halt, screeching friction sound effects and all:

“Siobhain McDonagh MP said the chancellor had handed companies a £15bn cut in corporation tax to help pay for the rise in the minimum wage.”

Now here’s a game changer. I quickly pulled myself out from the pile of dark prognoses that had almost swallowed me whole. If corporate tax is scheduled to fall to 17% by 2020 shouldn't workers benefit from that?

James Caan from International Business Times explains that as a businessman he can understand the concerns of business owners but reminds that people are only asking for enough to make ends meet, and if a company is unable to cope with the new numbers then that is the result of the absence of a viable business model.

A disgruntled Guardian reader, by the username of Gilligan89, commented:

“…some companies can pay their chief executives millions of pounds a year yet remain in profit. You give the working a few extra quid and businesses will be going bust?! Don’t make me laugh…Wake up!”

B&Q employees had anonymously started a petition and gained a lot of public support. A comment left by a woman called Helen Bell from Liverpool said:

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“B&Q made £664M in 2014, who helped you make that profit, your people! Never forget that!”

The final blow came from the annual figures of some of the companies imposing labour expenses cuts:

Kingfisher, owner of B&Q


£746m retail profit

Cafe Nero


241.3m gross

Azzuri Group, owner of Zizzi


£217m gross

So, while inability to foot higher employment bills is an argument that might carry significant weight for small businesses, for companies with annual gross of millions, the reluctance to provide adequate remuneration could only be a symptom of a disease that has been plaguing global economic markets probably since the beginning of the industrial revolution: how to make profit without investing much, or even better next to nothing; a.k.a simple old-fashioned greed in its purest from.

Type in cutting costs to increase revenues in any search engine and your browser will be flooded with hundreds of sources advising business owners how to artificially increase their profits by revising their expenditure, often through cutting labour outlay and compromising quality.

Now, I’m no economist but shrinking your labour pot and somehow managing to make a larger profit sounds akin to defying the laws of physics.

Imagine owing a public swimming pool, which takes your three pool boys two hours to clean every morning before you open at 8am sharp. You fire two of them to reduce your labour bill. Now you force your one pool boy to work harder and it takes him two hours longer to clean the pool, and whilst you save up some, you end up loosing money on the two additional hours that you could have been open for. You realise that so you “whip” your pool boy into working even harder. Your now Super Pool Boy somehow miraculously manages to clean the pool within the old two-hour time frame. So now he's working three times as hard and on top of it all, he finds out he's no longer getting more money for overtime. Eventually he gets sick and tired of the unfair treatment, the exhaustion and the pay, which he fairly feels does not correspond to the amount of work he does, and quits. In his last week of service you entrust him with the task of training your new hire, which he does, half-heartedly, with the little loyalty and energy he has left. The new hire takes over, under-trained, ill-prepared, certainly reducing the quality of the service you offer and thus causing visitors to seek out a nicer, cleaner pool.

Now, is humiliating your frontline workforce, and causing them to doubt whether they can afford their mere existence as your employees, a constructive management style?

In 1962 the humanistic psychologist Abraham Maslow theorized the hierarchy of needs, as part of the psychological movement of self-actualizing. The theory states that we all have the intrinsic need to self-actualize, that is: develop, grow, produce, create, contribute; however, we cannot focus our attention on this need unless our most basic needs are first fulfilled. Those being: physiological ­­– food, air, water, etc.; the need for safety – property, resources, employment, health, etc.; love and belonging – friendship, family, etc.; esteem – respect from others, achievements, confidence, self-esteem. Self-actualizing is the need to be all one can be, the desire and motivation to achieve and succeed. You can imagine what that would entail in the context of one’s working environment. Would exhausted, angry, underpaid, scared they won’t make rent employees work to their best capacity?

Such is our nature and even the greatest financial minds in the world can't cheat it. You don’t need to be a humanistic psychologist to understand that disregarding the very people who make your profit, in order to make a larger profit is a non-sustainable strategy.

So why endorse a system that is clearly set to fail you in the long run? Does greed have the ability to make its victims so shortsighted to the extend where it becomes an obstacle to its own desired outcome? Or is this just the alarming signs of another economy destroying phenomenon: the hit and run manager, whose only real goal is to make a quick buck before abandoning ship and moving onto to the next one?

Now imagine the pool boys’ story playing out in a hospitality business. Staff turnover skyrockets and replacing your lost hires with new, well-trained ones in time becomes nearly impossible. Therefore your few old employees are inundated with handling the growing day-to-day workload whilst training your new hires, which results in the insufficient completion of both tasks: the new hires end up receiving mediocre training, your old employees are exhausted, annoyed, fed up and doing a bad job at best or quitting at worst.

And if this doesn’t demonstrate what’s in store for businesses, companies and entire economies that fail to recognize how vital their workforce is to their success imagine the following: You’re going out to sea with a bunch of newbie sailors who don't yet know the drill. It's a small disadvantage but that doesn’t matter because since you’ve cut the number of crew you're expecting to take a bigger profit and you'd rather focus on that. You pat yourself on the back over this ingenious idea and sit back waiting for the cash to start flowing in. The ship might be swaying and rocking but is staying afloat anyway and costing you a lot less to run. But along comes a small storm. Your inexperienced sailors are ill-equipped to handle it and it finally takes you to where you were headed all along but couldn’t see blinded by greed, to the imminent wreckage of your ship and the ultimate realization that the little treasure you managed to secure as a result of your cost-cutting methods is really nothing but Leprechaun gold.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2016 Irina M Wells

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