Fascinating business

The rise and fall of the monthly salary

Jonathan David, Founder and CEO – FlexEarn

August 13, 2021

Our understanding of how employees are compensated has evolved over time. Salary and fixed compensation are now considered part of a “total rewards” system that includes bonuses, commissions, perks and benefits, and other tools that help employers tie rewards to measured performance of an employee. But the employee element of this package hasn’t changed all that much, has it?

In fact, it is. The monthly salary is relatively new. The period between 1870 and 1930 gave birth to the modern company. This era saw the widespread emergence of a class of executives and salaried administrators serving the new large companies being created. The new managerial jobs lent themselves to salaried employment, in part because the effort and output of “desk work” was difficult to measure by the hour. But, above all, people in the UK were still being paid weekly.

Then, in the sixties, the country went from a weekly wage to a monthly wage. Why did this happen? Were the workers demanding to be paid in installments of one-twelfth of the annual salary? Certainly not. It was not a workforce-driven decision. It was led by employers’ finance teams who were more interested in reducing payroll administration than the needs of their employees. The accountants didn’t care that the weekly paycheck helped employees smooth out expenses to match cash flow — they were too busy trying to cut costs.

Now, with advancements in fintech, the idea of ​​giving people the ability to get paid more regularly is back on the cards – but, this time, without the associated administrative burden. Tech HR like our Access to earned wages allows employees to withdraw a portion of their salary before their regular salary payment date without any changes to the employer’s payroll process and at no cost to employers. Employees pay a low fixed fee per withdrawal – usually £1.50 (although some employers may choose to fund themselves). We have now entered into an agreement with Sage to provide our on-demand payroll services to Sage Payroll users. As Sage payroll software is used by over 40% of UK private sector companies and pays more 25% of UK employees – Access to earned wages programs are now ready to reach maturity.

The demand for earned wage access programs is certainly there. Young workers expect instant access to their wages. They have earned the money and as far as they are concerned it should be available to them. Employees are more aware of the dangers associated with alternatives to access to earned wages. Forty percent of young people use payday loans and pawnshops to smooth their income. But payday loans can be expensive, with interest rates as high as 500%. At this price, it’s all too easy to get stuck in the debt cycle. The payday loan mis-selling scandal has generated great distrust of short-term debt providers – Wonga being the most infamous. Earned wage access programs are a great alternative. Having the option to pay £1.50 to get part of your monthly salary earlier is clearly a better bet than taking out a payday loan. With paid paid access programs, there are no hidden fees, credit checks or interest charges. This is a safe and secure way for employees to immediately access the salary they have already earned. Money that they would have in their back pockets if they received a weekly salary rather than a monthly salary!

Covid-19 has also boosted the popularity of Access to Earned Wages. Many furloughed people earn 80% of their normal salary and no doubt this has made it more difficult to make ends meet when unexpected expenses arise. Many of us will face the occasional emergency, whether it’s tires that need to be replaced or a fridge that breaks down. The pandemic has multiplied this threat as profits are down. Access to earned wages means no one has to depend on family, short-term loans or credit cards.

So what could compensation look like in the future? What could Earned Wage Access do to payrolls now that they are going to be so widely available? Well, given that I want to champion weekly pay, it won’t surprise you that I’m hoping we see people using them a lot more often to smooth out their income and enjoy a less lumpy paycheck. And at the very least, I’d like to work with employers to help put the payday loan industry out of business.