Debt has become a hidden epidemic that is crippling organisations and employees’ lives
We all talk about employee engagement as something organisations and leaders need to deliver as the driver of performance and profitability. But even the best leader won’t be able to be their best or get the best out of others if they or others are distracted by out of work issues outside of work. Yes, we all know of those sudden events that do distract, and understandably so (such as illness, bereavement or an accident). But there is another distraction which, for those affected, is often constant, insidious and crippling – personal debt. Debt causes the vast majority of those with it to suffer worsened mental health, which then causes problems at work and, in turn, can cause the debt to worsen.
The problem is that it’s rarely discussed, despite the fact that 40% of employees are worried about money and 23% have even thought of suicide because of financial concerns, as research revealed last week. The problem is real and serious. Just from an organisational perspective, employees worried about debt are six times more likely to deliver reduced work quality and five times more likely to have troubled relationships with colleagues which then impacts the performance of the whole team.
The simple truth for HR and organisations is that if say 40% of your employees are worried about financial problems, which is likely, it doesn’t matter how inspiring your leaders are or how good your strategy is, you won’t get the best from them.
So the question is: how did we get here and what can we do about it? Here, those well-paid senior leaders sometimes remark that employees shouldn’t have got into debt in the first place. Yet, research has shown that, for example, about 30% of the debt relates to unexpected costs of car breakdowns, the means by which the employee gets to work and thereby not a discretionary purchase. Over 70% of employees will experience a significant unexpected cost such as this every year.
So when this cost comes in they have to use credit to pay for it, unlike the senior leaders who are paid enough not to need to. This is where the real problem starts. The way financial organisations’ credit scoring works means that 75% of employees do not have a good or very good credit rating. This immediately means that the interest rate charged on the debt is crippling – 67% of employees paying more that 20% per year, 23% paying more than 100% per year and 5% paying over 500%. Read these again and think. These rates mean that, for the majority of employees, once they get into debt they are then trapped in a spiral they can never escape from. This is simply because financial institutions want to profit from them, even when interest rates are at their lowest for decades. Some might say that it’s their greed that is driving this hidden crisis.
Regulators have recognised this problem and told financial institutions to reduce this long-term persistent debt. How? Not by telling them to reduce interest rates but by telling them to tell customers to pay more each month to pay the debt off faster. So to help those struggling with debt we just tell them to pay more while we keep the interest rate high.
Some say this outrageous profiteering by financial institutions and a broken credit rating system is what has really caused this crisis. Whatever the cause, the costs are being born by employees, their employers and the country in terms of lost performance, mental stress, increased days off and higher NHS costs.
There is a solution that every HR professional should consider and investigate – bring in an organisation that takes over employee debt, reduces the interest rate to about 10% and takes payments directly via the employer. This could reduce the monthly debt costs for an employee by potentially 50% which would be truly life changing. I have seen videos from organisations who have done this of men literally crying on camera from the relief this can bring to them and their families.
Yes, it is sometimes difficult for employees to admit to their employers that they have financial issues but, if initiatives are well-communicated by HR and debt is kept confidential, it has been proven to work. With money worries resolved, employees can return to work energised, inspired, and with a belief in the organisation and its values. It also demonstrates the values of why I believe we all joined HR – concern for others.
We all talk of the importance of employee benefits. Many of these are good and received well but, if an organisation can lift the burden of debt for employees, it can transform lives.