Need to know:
- Where workplace loans and savings vehicles help to reduce high-interest lending, flexible paydays and wage streaming can aid employees with their day-to-day finances.
- Concerns about increased frivolous spending should be heeded, but if implemented correctly, alternative pay strategies can, in fact, help promote positive behaviours.
- Employers should be wary of the regulatory complications of changing pay strategies, particularly in a heavily controlled market such as the UK.
ADP’s Future of pay, published in September 2019, found that 58% of employers felt they would need to change pay methods to compete in the war for talent.
Michael Custers, chief marketing officer at SD Worx, says: “For over a century, HR has been very mechanistic, coming from the industrial age. Everything was set; it was very rigid. Today, we’re moving into the digital age and what that triggers is fluidity.”
Monthly pay cycles were instituted as the best option for the employer, reducing the cost and time implications of payroll to a manageable level. Now that automation is widespread the question is: should employee needs have the same influence on pay strategies as business demands?
James Herbert, founder and chief executive officer at Hastee, argues that they should: “The time value of money is really crucial. It’s not just the amount, it’s when you receive it. It seems unfair that people don’t have the same access to cash flow as businesses do.”
Modern options for pay
Initially, the ability to use payroll to provide more than just a monthly pay packet predominantly meant focusing on savings vehicles and workplace loans.
Steve Herbert, head of benefits strategy at Howden Employee Benefits, says: “There’s the idea of advancing loans to people who couldn't necessarily always get one and at rates they certainly wouldn’t achieve; lots of employers are doing this and there’s obviously a big appeal there. My question is whether [it is] for the right reasons, or just adding to the debt problem in the UK.”
So, how can employers move away from creating yet more debt, ‘good’ or otherwise, but still help employees with their finances? For some, the answer is flexible paydays, where an employee can choose at what point, or points, during the month they receive their wages. This allows staff to opt for more regular paydays, such as fortnightly, or shift their monthly payday to a date that works best around their bills.
Another alternative, and one that is being taken up with particular enthusiasm by employers with shift-based workforces, is to allow access to pay as it is earned. This might mean complete autonomy, giving employees the ability to access pay at the end of each shift, even, but in reality, it is almost always moderated, for example with a cap on the withdrawal amount and a maximum number of withdrawals per month.
Further into the realm of conjecture there is the potential use of cryptocurrencies, allowing employees to receive the same pay, but reap higher rewards. Although a distant concept in the UK, other countries have had notable uptake, including Estonia, the US and Japan.
Benefits for the employee
Hastee’s February 2019 Workplace wellbeing survey found that 88% of employees take pay frequency into account when considering a job offer, and 35% think more flexible options should be offered by employers. So, as the pay itself is not going up, why does this appeal to staff?
The most obvious answer is that it provides those with few savings the ability to deal with emergency expenses without resorting to high-interest borrowing.
It is not wholly the remit of low-income employees, however; Hastee’s research found that 53% of employees earning £100,000 and above would take pay flexibility into account when considering a new job.
“If halfway through the month [an employee has] earned enough to pay off [their] mortgage payment, then why not pay it, rather than earn two more weeks of compound interest?” says Hastee's Herbert. “[Flexible pay] can be used in a very positive, proactive way. It opens up a wide range of possibilities as to how people can manage their money better.”
This can also help when dealing with regular expenses, not just emergencies, adds Erik Porter, acting chief executive officer at The Money Charity. “I might have a monthly bill like rent, but I’m able to take a little bit out of my pay each week to smooth that out, breaking up bills to be more aligned with how we live, rather than this monthly pay cycle that our employers have imposed upon us,” he explains.
Ultimately, the argument across the board comes down to autonomy. Allowing employees to shape their pay around their own lives gives them the opportunity to save and budget in a way that works for them.
“[We are] putting people back in charge of their cash flow, and as a result they’re better able to make better decisions around their finances,” says Hastee's Herbert. “The average person is turning their monthly pay into weekly, but they’re in the app around three times as often, looking at what they’ve earned and making decisions about what they’re spending.”
Benefits for the employer
Although the move to flexible or non-traditional pay structures is arguably about focusing on the needs of the employee, it can also have positive effects for employers, particularly when the more complex logistics are taken care of by providers.
“If people [have] less financial stress, they’re going to be less absent, more productive, [dealing with] less stress, [and fewer] mental health issues,” says Howden Employee Benefits' Herbert. “You get [far] fewer employees looking to go elsewhere for just a few extra bucks.”
Indeed, Hastee’s research found that 44% of employees are more likely to stay with an employer that offers alternative pay structures.
But the benefits can go deeper than a shiny recruitment and retention lure; being able to see an immediate depiction of the value of a day's work, for example, can have an unexpected effect on productivity.
“One of the interesting things we’re seeing is that the link between effort and reward appeals to our very nature as humans,” Hastee's Herbert explains. “So actually, what [employers] are doing is linking pay back to the effort that earned that pay, and driving really positive behaviours.”
Porter adds: “It makes [employees] feel more in control and gives them some visibility about what’s the value of an hour of work, which is often easy to overlook in a monthly pay packet.”
Irresponsible spending
With loans facilitated via the workplace, the other side of the coin of preventing employees from getting into problem debt is the risk that those who might not have borrowed before are lured into it by appealing rates and tax breaks, ultimately creating more debt.
In much the same vein, while helping low-income staff with emergency expenses might be a valid cause, providing ready access to pay might also encourage poor spending habits, and be the death of budgeting and delayed gratification.
Jeff Phipps, managing director, UK and Ireland at ADP, says: “If [an employer has] employees that are struggling financially, the fact that [it has] effectively allowed them to get paid earlier may not make the problem go away.”
Depending on the service being used, charges for use can ultimately mount up, particularly for employees living payday to payday.
However, as with many other types of benefit, the key is in effective and responsible implementation; non-traditional pay policies should, therefore, be paired with financial education.
“If that’s a person’s answer to budgeting, that’s probably not sustainable,” says Porter. “But if that comes as a stepping stone to learn budgeting and get to grips with [their] wider financial situation then it’s a really good option.”
When paired with financial education the service can, in fact, have the opposite effect, helping employees become more responsible, rather than less.
“People are budgeting better because, rather than getting paid at the end of the month and then perhaps going on a splurge and spending it in one go, the opposite is true,” says Hastee's Herbert. “When people are actually able to budget and understand the effort that’s gone into earning it, they’re not spending irresponsibly, and it’s helping them get out of those cycles of putting stuff on their credit card.”
Issues for the employer
Although providers are popping up in the market, ready to make the move from monthly pay cycles as painless as possible, there are pitfalls to be considered for employers.
For example, HM Revenue and Customs (HMRC) has, as yet, been relatively quiet on the topic, and that employers should be wary of where new pay structures might place them from a tax perspective, says Phipps.
Custers adds: “Fluidity itself, with the [employee] being in control, is a very nice thing, but all of these elements still need to be captured in terms of data, and need to be governed by regulations.”
In addition, organisations must be wary of their own finance cycles, and may need to ensure that they have the liquidity to allow for earlier payments, for example.
Meanwhile, when it comes to more experimental methods, such as using cryptocurrencies, the relatively limited take-up in the UK stems from the fact that there are numerous stumbling blocks for employers, particularly in a market with so many employee protections. If the value of the currency dips, for example, the employer is still liable for the individual’s full salary and would have to ensure it is able to make up the difference.
There can also be a reputational element, says David Lorimer, director and employment lawyer at Fieldfisher. “Broadly speaking, [flexible pay] is better [than payday loans], but the problem is that people will say what [an employer is] doing is acknowledging that the conditions lead to people being deprived and not being able to afford to live. It’s a sticker, not a complete salve.”
The future of pay
For some, flexibility and autonomy is, without a doubt, the future. “Whether it’s five or 10 years, everyone will be paid this way," says Hastee's Herbert. "The employees will want it, the talent is going to demand it. This will drive the business leaders to be more proactive and take a better look at it, and see the business reasons.”
However, others are more reticent. “Monthly pay is much easier, time and cost-wise, to manage as an employer, so I can’t see there being any particular drive," says Howden's Herbert. "There may be one or two employers that go out against the flow, but they’ll be very much in the minority.”
Any change to remuneration, whether introducing cryptocurrencies, changing pay dates, allowing access to wages as they are earned, or the next big trend, is going to face significant roadblocks in the UK market, in particular, says Lorimer.
“Pay is heavily regulated in the UK; it’s guarded in a way that isn’t necessarily the case in other jurisdictions,” he explains. “[Employers] are really slow adopters of change in the area.”
However, for cryptocurrencies specifically, Lorimer sees a potential opening for introduction as a flexible benefit, or replacing other initiatives, such as employee share schemes.
Overall, most are cautious in suggesting that employers' approach to employee pay is going to change significantly in the near future. Nevertheless, the market can be fickle, particularly in an era characterised by new technologies and rapid, agile change, says Phipps.
“At this point in time, [flexible pay] isn’t something we need to have as a priority, [but] it definitely seems to have traction,” he concludes. “If a benefit takes hold and is seen as a differentiator, with the war for talent as strong as it is, it could mean [employers] move quite quickly to change their ways of doing things.”
