Victoria Milford Consulting

Dixons Carphone – Case study

The client

Between July 2015 and April 2016, I worked on a new retail pay framework with Carphone, Europe's leading specialist electrical and telecommunications retailer and services company, employing over 30,000 people in the UK alone and operating in 8 other European countries. The brands best known in the UK are , PC World, and .

The brief

The initial brief was to design a new pay framework for stores, ie Currys and PC World across the UK, Dixons Travel in airports and also the Dixons run electricals concession within Harrods. As I explain below, the need to harmonise across not only all the Dixons brands but also the Carphone Warehouse ones became apparent early on. And then the Government announced the introduction of a new National Living Wage...

Key challenges

The existing Dixons framework had 6 steps driven by elearning and colleagues would progress up these pay levels on a quarterly basis unless under formal sanction.

This lead to a number of issues:

 some colleagues were being paid at the top level having done lots of elearning but in roles where this was not put into action eg in the warehouse  quite a lot of the budget was tied up in those on higher level pay  entry level pay was therefore pretty low, generally at or just above National Minimum Wage, thus not always attractive to new recruits  there was an expectation of pay rises each quarter  it was time consuming for the Reward team combining elearning results and regional managers feedback calculating for around 14,000 colleagues  colleagues were paid for knowledge, without requiring that to be translated into skill or a customer result

The desire to break with training was clear, for the issues identified above. Some parts of the Dixons business including Commercial relied on the elearning system and colleagues being incentivised to complete hence this was one challenging area. The Exec were supportive that colleagues should be paid for their outcomes in customer service and sales made via bonuses and that learning enabled them to be successful and therefore should not be explicitly paid for.

Add into the mix the merger with Carphone Warehouse. Whilst this had already been in place for just over a year when we started the review of the reward framework, the stores were still run separately from an operational and HR perspective but we were already seeing over 250 Carphone concessions inside Dixons stores. The future strategy was 3 in 1, that is units containing Currys, PC World and Carphone, with one overall manager. The structure, number of roles, entry and progression pay rates, bonus

Email - [email protected] www.victoriamilford.co.uk 07776 166087 Victoria Milford Consulting schemes and how elements like breaks and Bank Holidays were paid were quite different between the two businesses. There was therefore a real desire to harmonise, both to minimise differences and promote fairness in store but also to promote career pathing.

The context of the new National Living Wage

The Exec team of philosophically wanted to pay the (voluntary) Living Wage and this was already on the table, however the increase in cost was huge and they were adamant from the start that reducing hours or removing levels of management was not an option- they did not want fewer hours in front of the customer. As the Living Wage does allow for the inclusion of bonuses, average earnings in the Carphone business were comfortably above the Living Wage and very close to the London Living Wage inside the M25 however this was not the case within Currys PCWorld where average base and average bonus were lower. Whilst the number - then £7.85- was a work towards, the business would have found Living Wage Accreditation impossible owing to the requirement to ensure that all suppliers also paid the Living Wage and the very large number of suppliers that it deals with, particularly on the Dixons side.

On July 7th 2015 the Chancellor announced the National Living Wage, taking most by surprise, and adding further measures of success and constraints to the project. This meant we now had a new legislated National Living Wage for age 25 and above following very much the same framework as the exiting National Minimum Wage ie just on base pay. At this point there was only the headline with very little detail below and a desire from most senior teams in businesses to understand the implications. With a range of outstanding questions, and no one able to answer them, I set up a Reward Forum of Reward Managers and Heads of Reward across the Retail sector. This proved extremely useful in clarifying where we should model for the following 5 years in terms of expected pay points both for NLW and NMW, and understanding what in effect was the market, as traditional benchmarking became out of date and invalid.

Principles of the new pay framework

I wanted to first establish what the business wanted to pay for and how, if at all, should it use base pay to differentiate between colleagues. Hence the key questions I had for the Exec team were around:

 Will we have everyone in the same role on the same rate (ultimately if not immediately) and recognise expertise and knowledge through the bonus scheme or will we have more than one rate per role recognising specialists  Will there be progression within role eg after a certain period of time  Will we have one rate across Dixons Carphone, all formats, for similar roles or continue to have different rates eg within Dixons Travel and Carphone Warehouse  Will we have one rate for all non-management colleagues in store whether sales, support or warehouse or different rates for each role

Email - [email protected] www.victoriamilford.co.uk 07776 166087 Victoria Milford Consulting

 Will everyone be able to access bonus or will we pay only for exceptional performance  Will we continue to have a range of location allowances depending on town and fascia or streamline this  Where do we want to be in the market eg on a par with the competition, and who do we consider the competition or market to be eg retailers for Dixons and networks for Carphone?  Do we want to pay the (voluntary) Living Wage  Will we harmonise terms for similar roles eg Bank Holiday premia, paid breaks

Overall, we wanted a pay framework that was much more transparent and simple and enabled colleagues to progress their careers through the Dixons Carphone organisation rather than vertically within their own brand.

One objective in the original brief was to help reduce Labour turnover at around the 12 month of service which data showed to be a key issue, ideally by increasing pay at this point. In an early design, we were able to reflect this and had planned a 50p increase at that point, but with the arrival of NLW this simply became uneconomic.

Some specific challenges

Neither business made any age distinction in their existing pay frameworks, paying at least the adult NMW to all colleagues in retail. There was never any question of making age a differentiator until announcement of NLW. Philosophically, the Exec were not supportive of paying different rates based on age and not on experience or results, but recognised that the cost implications were significant. This point provoked the most debate and different sets of modelling over the subsequent months, not least in seeking to understand what other employers in the market were intending, notably those in the similar position of not having existing age distinctions.

Airports were also in the mix and you would expect wage rates to be higher than core stores, not least because the travel time from car park to shop floor is significantly higher. There were two rate tables, one covering Heathrow, Gatwick and Bristol and one for all other airports, refered to as regionals. For the regionals, level 1 and level 6 were higher than core but all other levels were lower. This was not a strategic decision but more to do with rate tables not being set together. The three premium airports did have higher rates but not at a consistent interval. Bristol had historically been hard to recruit in but we really wanted to challenge where an extra premium was paid and align this to regional allowances in main chain.

One further issue was a large number of red circled colleagues already, driven by previous frameworks, with more being created in this new simplified framework. However, with the NLW projected to increase 6-7% per annum for the next 4 years, this would be a dwindling issue and analysis showed that numbers affected would drop very quickly and hence be an entirely reasonable approach,.

Email - [email protected] www.victoriamilford.co.uk 07776 166087 Victoria Milford Consulting

First line managers, called Team Leaders with Dixons and Assistant Managers within Carphone, wee a key focus and it was clear from the Reward Forum that the rate offered at this supervisor level was a critical one. In this role bridging colleagues and management, quite a lot can be expected for not much more pay and NLW was squeezing the differential with this group. Most businesses decided not to increase management pay at April leaving that for their own annual cycles

We settled on £1.20 over entry or 50p over specialist rate which was broadly in line with the market.

One unanticipated issue was that Dixons Carphone would not be able to have one framework for the whole of the U.K. and Ireland, which was the original desire. This was because no age distinction would be possible in Ireland without being discriminatory and to pay the highest rate to all colleagues in Ireland would be unfair to their counterparts in the UK, which after all is where the NLW legislation was enacted. As no decision on a Living Wage had been taken by the Irish Parliament, although mooted, before the UK go live of April 2016, the decision was taken to retain the existing frameworks in Ireland anticipating that such legislation would not be too far in the future.

It is not appropriate for confidentiality reasons to outline all of the ways which the business considered to fund the increase driven by NLW but the desire was to avoid consultation for year one and harmonisation of terms and bonus schemes to result in savings rather than seeking savings up front. A small amount was taken out of bonus pots across the business to part fund year one with the remainder to come from efficiencies.

As a significant change was being made particularly on the Dixons side, it seemed a great opportunity to harmonise regional allowances across the combined business and deal with some anomalies. There was no cost saving to be made but rather a redistribution and a move towards supplements only inside the M25. However, it was not clear whether this could be done without consultation and so after considering various paths, the decision was taken not to tackle this for April 2016. What was implemented was a location supplement in the Travel business rather than the previously different rate table.

After a significant amount of modelling of many different options and discussion on the impacts of a range of changes on groups within the population, the final decisions were taken and implemented effective 1st April 2016. Given the scale of change and complexity of what needed to be implemented, this went very smoothly and drew broadly positive feedback, with most colleagues receiving a pay rise.

The future and its challenges

One of the key challenges for the business going forward is the uncertainly in what the NLW rate will be each year. At best the LPC will publishing the previous October. The UK has already seen significant change since the implementation of NLW in the Brexit referendum and change of PM and most of the Cabinet. Whilst I was able to model based

Email - [email protected] www.victoriamilford.co.uk 07776 166087 Victoria Milford Consulting on logical assumptions and feedback from the Forum, these are subject to change and have a strong political influence as well as economic.

Even with a known cost, like most businesses the ‘low hanging fruit’ has gone and in order to prevent an escalating wage bill, the business is likely to need to consult over different parts of the pay package. There are only three groups who can bear or share the cost – customers - through higher prices – the whole market would need to do this and with online now so significant this is just not going to happen; shareholders through lower profits and hence dividends - too much shareholder pressure ; or employees , through redistributing pay from bonus and benefits to base. We can see that this latter group is where most businesses will need to go.

A specific challenge for the Currys and PCWorld stores will be in maintaining engagement in learning as this has traditionally been paid for.

Conclusion

This was a very exciting project for me, not least in working with a large and complex household name which had wanted to land a new pay framework for some time. The context of the National Living Wage brought both challenges and opportunities, in enabling me to set up a Forum of other reward people in Retail, a group which has continued to meet and share ideas and questions. The result is a much more simple framework, inherently fairer and promotes career progression both within and across brands.

Email - [email protected] www.victoriamilford.co.uk 07776 166087