Featured Customer

What impact do locked pay cycles have on employee financial wellbeing?

Research shows that locked pay cycles can have a negative impact on employee financial wellbeing.

No items found.

We know from the research that income, along with health, financial capability and financial inclusion, is a key influencer of an individual’s financial wellbeing. 

With salaries and wages being the main sources of income for seven in 10 Australians, employers are uniquely placed to positively shape employee financial wellbeing by rethinking how they pay.

It’s not only how much someone is paid that influences their financial health, it’s also how often they receive that income and how stable that income is.¹ 

But what impact do infrequent and locked pay cycles have on employee financial wellbeing?

1. Locked pay cycles increase the mental strain on employees

Not having much cash in the bank (low liquidity) makes it difficult for people to cover payments on time, which can result in late fees and charges. What’s not so obvious is that low liquidity increases psychological burdens, this is known as a ‘scarcity mindset’.²

This is increased when people need to make complex or time-pressed decisions about money. The research finds that scarcity mindsets brought on by money worries can result in negative outcomes, like forgetting things, impulse spending, anxiety and an inability to plan ahead.

As scarcity mindsets impact an individual’s performance at work, businesses also bear the impact. A US study found people on low incomes did worse on tests measuring cognitive performance before their payday, when they were likely to have less money in the bank, than after they had been paid.³

One experiment with two groups of individuals – one with high liquidity and one with low liquidity – asked people to consider a large financial decision then take an IQ test. Those with low liquidity dropped an average of 14 points – a deficit larger than that incurred by staying awake 24 hours.⁴

2. Receiving pay more frequently can make a positive difference

When people are paid more frequently, it tends to have a positive impact. Research has found that when retired couples are paid on separate days rather than once a month, they find it much easier to manage their day-to-day spending.⁵ 

Similarly, when low-income workers are paid more frequently rather than in one lump sum, economic security increases and reliance on credit decreases. People are more capable of covering childcare and education costs and worried less about their money.⁶ 

More than half of the Australian workforce are paid fortnightly. Typically, higher paid workers are paid less often and lower paid workers are paid more often. Research finds that when people are paid more often, they tend to pay closer attention to spending decisions.⁷

3. Locked pay can hold individuals back from meeting expenses on time

While fewer Australians fall prey to the ‘payday millionaire’ spending behaviour observed in the UK, where almost seven in 10 are paid monthly and 43% of income is spent on pay day, the higher levels of household debt in Australia means locked pay cycles hold them back.

In fact, seven in 10 Australians told consultancy EY that falling short on expenses between pay periods has a major impact on their life and wellbeing, and they’d benefit from access to earned income. Financial shortfalls are particularly common for Australian households.

  • 23% of households fall short on expenses between pay periods at least once a year
  • 36% of households fall short on expenses once or twice a year
  • 24% of households fall short three of four times a year
  • 11% of households fall short every month.

The most common expenses that Aussies struggle to pay on time are utilities payments, credit card payments, emergency expenses and everyday costs, according to EY.

Interestingly, 62% of people earning over $100,000 experienced difficulties meeting payments.

What next?

The misalignment between income and expenses has been identified by researchers as a key contributor to the impact of money worries.⁸ Indeed, one study found households are 18% more likely to fall short for every one-week increase in receiving income.⁹ 

While households can’t choose how and when they cover payments, they can choose how and when they get paid when they have employer-sponsored access to flexible pay. We’ve begun measuring the impact of flexible pay on employees. Take a look at our Impact Assessment.

¹ Muir, K. (2017) Exploring Financial Wellbeing in the Australian Context. Centre for Social Impact and Social Policy Research Centre, University of New South Wales, Sydney, for Financial Literacy Australia

² Mullainathan, S. & Shafir, E. (2013) Scarcity: Why having too little means so much. Macmillan

³ Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (accepted). Scarcity and cognitive function around payday: A conceptual and empirical analysis. Journal of the Association for Consumer Research

⁴ Dr Emily Heath, Karrikans Group, How to really build financial capability

⁵ Berniell, I. (2018). Pay cycles: Individual and aggregate effects of paycheck frequency (No. 221). Working Paper, No. 221, Universidad Nacional de La Plata, Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS), La Plata

⁶ Bellisle, D. & Marzahl, D. (2015) Restructuring the EITC: A Credit for the Modern Worker. Centre for Economic Progress Report

⁷ Spiller, Stephen (2012) Feeling Rich on Payday: When you are paid affects how you make your decisions

⁸ Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (accepted). Scarcity and cognitive function around payday: A conceptual and empirical analysis. Journal of the Association for Consumer Research

⁹ Baugh, B., Wang, J., (2018). When is it hard to make ends meet? Cambridge, MA: National Bureau of Economic Research

Continue Reading

Roundtable recap: Helping employees through the cost of living crisis

Retail and hospitality employers talk about helping employees deal with cost of living increases.

People of Humanforce Thrive: Emma Morgan

A conversation with Emma, our Engagement and Content Lead, who's an expert in financial wellbeing.

Is access to earned wages a responsible thing to offer your employees?

Explores three important considerations when it comes to offering access to earned wages.