Businesses must treat their employees better to help solve the UK's productivity problem

Last month, official government data showing that over the last decade the UK’s labour productivity growth fell to a level lower than at any time in the 20th century, let alone the 21st, went almost unnoticed. Yet productivity matters. It is the foundation stone on which economic growth, good jobs and higher wages are built. Frustratingly, the UK’s productivity puzzle remains unsolved.

So, what to do? When firms cast around for ways to improve their productivity performance, much of their time, money and effort are invested into new (and existing) technologies to get more out of their business. And rightly so, as rapid tech and digital advances are creating new and better ways of working. In parallel, businesses are investing heavily in the skills of the future that they and their staff need.

But new research from the CBI and McKinsey suggests that too many businesses are missing a trick by not investing more into how they engage with workers. The size of the opportunity here is massive. We estimate that by improving the average quality of people management in the UK by just 7 per cent against global indicators, £110bn could be injected into the economy. That would be equivalent to adding the entire construction sector over again.

It’s not about people working harder and longer. It’s about getting the right kind of habits and behaviour into the DNA of a business and how it leads, develops and engages its staff to lift performance.

An overwhelming number of businesses know this matters and many are taking action, with some doing it very well. But lots still have work to do. The hard truth is that many firms over-estimate how good they are, in part because they lack effective measures or benchmarks. Nearly two-thirds of chief executives think their business has been quick to adopt good practices, even though we know that just under 80 per cent of businesses perform below global competitors.

Our research has identified key habits that the very best businesses focus on to lead, develop and engage their workforce.

First, leaders must make good people practice a shared priority across the business. Major organisational changes are four times more likely to succeed when those at the top act as role models demonstrating the behaviours they want others to follow.

Second, putting people management targets on a par with company commercial targets. Impossible? Not at all. Look at Bristol Water – a 170 year-old utilities firm providing water to 1.2 million people every day – where the senior leadership has embedded people objectives from top-to-bottom of the business, with personal goals linked to a set of cultural values.

Third, skills and competencies should be at the heart of recruitment – successfully recruiting higher performers into management roles has been found to generate nearly 50 per cent higher profits for businesses.

That should be accompanied by a common set of objectives and values that everyone in an organisation can get behind. Such shared purpose has been proven to reduce absenteeism.

The fifth key habit is to accurately benchmark your performance against your competitors while the penultimate effective habit is to provide high-quality on-the-job development and support. Firms that do this well can see a reduction in staff turnover of up to 72 per cent, according to research.

Finally – and perhaps most importantly – companies should be open about how they are performing on people practices, good or bad. Employees, customers and the public respect this. There are significant reputational benefits for businesses that are honest about their people practices – in one poll, 69 per cent of the public said that treating staff well is the number one way to improve the reputation of the business.

The government knows low productivity has been a drag on the economy for a long time. The size of the prize here is so great that they too should do everything they can to accelerate progress.

What could the government do to help? They could start by creating a race to the top, perhaps through kitemarks, a competition or even a new charter. They could increase opportunities for more business to be able to benchmark their performance. And they could create the right incentives for firms to enable more staff to have a shared stake in the success of the business

It feels like momentum is building. Over the past week, Capita has announced employee directors on its board. Staff at Richer Sounds have been granted a majority stake in the business.

By working together in this way, business and government can take significant steps to solving the productivity puzzle by harnessing the power of people.

Matthew Fell is CBI UK chief policy director