UK firms face productivity crisis as we drop further behind our rivals

RECENT UK economic statistics present a conundrum. While the country is experiencing the longest double-dip recession for more than 50 years, private sector employment is rising. What other factors are at play?

Our latest research into global employee trends suggests that productivity is an underlying issue. Employers are struggling to get the most of their investment in their staff. In the UK and Western Europe, productivity levels have fallen to worrying new lows.

During the downturn, productivity remained relatively stable as companies cut back on employee numbers. But this trend was reversed in 2011 and productivity has dropped sharply since. A number of issues contributed to this fall. Firstly, average employee costs per head have risen steeply since 2009. This increase is largely due to companies cutting back on the recruitment of lower grade employees, with many headcount reductions or freezes weighted towards the lower end of the pay scale. This has left companies with a higher proportion of experienced workers, commanding greater pay. Firms are paying out a lot more, for little or no increase in revenues.

This changing dynamic means that many companies are now getting a significantly lower return from their investment in their workforce. For every £1 paid out in remuneration, UK employers now only get the equivalent of £1.10 back.

While some firms have looked to experienced employees to guide them through the difficult business environment, this has left many with top-heavy structures and rising wage bills. These more experienced workers are also staying longer in their roles, which could also be contributing to depressed productivity levels if motivation is not maintained.

The higher proportion of experienced workers is also having a ripple effect on younger workers. They have been hit particularly hard by the downturn as they have seen their opportunities dwindle and their career paths blocked. So while cutting back on the recruitment of younger talent may save on bottom-line costs in the short term, it has stored up a number of different talent issues. Companies need to be careful that cost management does not translate into cutting off their talent pipeline.

So if productivity is on a downward trend, what should companies do to reinvigorate their workforce and improve their returns on investment? For many, it will require a back-to-basics approach to their performance management processes to ensure that people of all levels are delivering value for the business.

Companies will need to be more vigorous in identifying their best and worst performers, and will have to reward and motivate them in different ways. This does not always have to translate to higher pay – clear career progression paths, flexible working and more choice around benefits can be just as motivating. By thinking innovatively about how they motivate their staff, companies could reduce wage bills and improve productivity.

Companies also need to be thinking about the changing face of their workforce. People will be working for longer and firms must start to offer greater options for people nearing retirement. This will ensure greater motivation levels and also deliver more value for employers.

The steep fall in productivity levels also has ramifications for Europe’s competitive position globally. Our research reveals that European companies still lag behind their US and Asian counterparts when it comes to getting the most profit from their investment in their staff. Worryingly, this gap looks to be widening. Less prescriptive employment rules in the US allows companies to adapt staff numbers and salaries to market conditions. More regulated environments in the UK and Western Europe do not allow such agility. Companies therefore must find other ways to improve staff returns.

In their quest for growth, when every pound of investment counts, it is vital firms do not neglect to properly assess whether their employees, perhaps their greatest asset, are really delivering the full value they can. If they fail to do this, they could find the productivity gap between them and their global competitors widening even further.

Richard Phelps is the global network leader of PwC’s human resources management consulting division. The full report can be found at