Opinion

An end to automatic pay rises is the best thing that could happen to the economy

4 min read

13 June 2013

This morning the CBI called on government to end automatic pay rises based on tenure. That's great news for business and the economy, says Jan Cavelle.

I see this morning that the CBI is calling on the government for an end to automatic pay rises based on tenure. While this may be set in stone currently in the public sector, the expectation is just as rock like in the private one. Surely this has to be one of the best things that could happen to the economy.

The current state of play is that if someone stays in the same job for years, they will be paid more for doing the same job. You could argue that this is both chicken and egg with inflation; the wage has to increase to keep pace, while this in itself causes inflation as the same product or service will have to cost more.

To me, however, the whole thing is based on a totally flawed premise. I do not agree with the argument that the longer a person does a job, the better they are going to get at it. If they are not doing it any better, exactly why should they be paid more for doing the same? Of course there are factors of training and recruitment costs to be taken on board but past this stage, an employee will only progress to the levels of their desires, their abilities and their development.

Now, if we discover more ability, we promote. That means more money, so time related increases become irrelevant. If, however, they have no wish or ability to develop further, they are going to reach a plateau of performance. Then you have the situation that by paying automatically, you are simply adding to your costs. 

Talking long term, this can have damaging effects – over and above you perhaps being less effective. Companies change but long term employees are not always willing to do so. They get out of touch with the company goals and values. There may be factors in people’s personal lives that cause changes in performance that are less easy to recognise in the long term employee. Above all, they become stale and have no inspiration, nothing new to bring to the table.

In theory, we are rewarding loyalty. But in reality a complacent, non-developing dinosaur develops, that costs you more annually for increasingly less return.

Consider a system where there is no expectation of increased reward for long term performance. This then becomes purely meritocracy-based. Even ignoring the inflation effect, you immediately have a total change to employer/employee relationships. 

From the employee’s point of view, they will only want to stay with a company if they are genuinely happy there. What develops is an immediate equation of needing to perform better for more money, a performance-only reward system. Many will still stay within a company long term – not because of some automated hand out, but because they feel valued and in tune with the company.

From the employer’s point of view, they lose the dead wood, concentrate more on enabling employee development, reward high performance – which encourages further high performance – and are enabled to produce better goods and service for an equally competitive price. 

Looked at like this, it is not surprising that the public sector has been so low on performance. Removing any expectation of long term reward in people’s minds in any sector surely has to be a no-brainer.

Jan Cavelle is founder of the Jan Cavelle Furniture Company.