How to Calculate a Living Wage for Employees and Contractors?

How can a company ensure that it pays a living wage to its own employees, as well as those employed by its subcontractors and business partners?

October 7 is the World Day for Decent Work. It is a day to demonstrate, organize round tables, talk about the notions of decent work and vital work in a context where the number of working poor is increasing. Vital work is in vogue, promoting it is an objective of the G20, but it is far from being a reality as the “over-profits” are skyrocketing. The question is all the more acute when it arises in the context of a country that does not offer a minimum wage, or when this minimum wage does not guarantee an income that can provide for the daily needs of an employee and his or her family (living wage), and to have a minimum amount of savings in addition to that to cover every hard blow (decent wage). Let me share some thoughts about this.

Guaranteeing a Living Wage is Respecting a Fundamental Human Right

This week I was participating in a debate organized in London in partnership with The Guardian. An opportunity to exchange with about a hundred participants on the feedback of companies such as Novo Nordisk, Telenor and Hitachi on their work in the field of human rights.

We can start with a simple point of consensus: the Universal Declaration of Human Rights (Article 23) stipulates that “Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by all other means of social protection”.

The 2011 Guiding Principles on Business and Human Rights hold companies accountable for their responsibilities: if there is any risk of non-compliance with a human right, wherever it occurs (in the company, in the value chain, through relationships with business partners, etc.), the company must take appropriate measures to address the risk, and have procedures in place to verify that the measures put in place have the desired effect.

Guaranteeing a living wage is above all a question of respect for human rights. It is also a question of managing the risk of legal compliance with minimum wages or ensuring that there is no qualification as a risk of forced labor.

Living Wage is Good Question to DiscussThe role of Companies in the Service of Human Being

Studies show that the share of workers’ wages represents 1.5% to 3% of the selling price of a pair of jeans. Faced with this reality, there are many ways to improve purchasing power and the question of living wages.

On the one hand, decision makers have a genuine responsibility to encourage their employees, subcontractors and other business partners to work on the issue of overtime. For example, social audits can make it possible to work on specific priorities:

  • Clarify rules and expectations regarding the processing of orders (strongly encourage a partner not to make someone work 100 hours to pay them 40…),
  • Onboarding partners in programmes that improve productivity and reduce labor intensity, but also in programmes that improve the training of local managers in order to enable the parties to better understand their rights, duties and responsibilities,
  • Demand a simplification of the systems for calculating the hours to be paid,
  • Question your own order intake procedures, in order to smooth orders as much as possible and not to force the partner to manage production peaks at impossible cadences.

Beyond that, the issue of decent wages should not only be a question for subcontracting located in exotic countries. Indeed, a worrying category of working poor is developing across OECD economies as well, in a context of high living costs and the increasing impoverishment of a section of the population.

It remains for any company and compensation teams, in discussion with relevant parties, to be vigilant and explore the question whether wages are sufficient to guarantee a decent wage for its own employees in costly urban areas.

Setting a decent wage remains a sensitive and controversial issue

The most difficult part remains: how to define a decent wage and give figures? There is no single definition or methodology for calculating a decent wage. Different approaches are being explored, and allow very concrete progress to be made on these issues. For example:

  • First of all, there are countries where the minimum wage is a relevant basis. In France, for example, the minimum wage and its annual update process works quite well and is close to the figures provided by other methodologies. But it is the exception more than the rule. In many countries where there is a minimum wage, there are significant differences between, for example, a minimum wage and a decent wage, ranging from 1 to 10…
  • In response, there are available bases, giving fairly precise figures for local calculations. In the United States or England, these figures are considered fairly reliable by stakeholders
  • Other methodologies are based on a basket of products, making it possible to calculate an indicative value of a minimum purchasing power to be given to employees. The Asia Floor Wage thus offers a multipartite-defined framework for setting “floor” wages in the textile sector in Asia. Also worth noting is the BSR database – Business for Social Responsibility, Fairwage Network Database, Global Living Wage Coalition,
  • Finally, other more pragmatic approaches are based on listening to the relevant stakeholders (e.g. low-wage workers, trade unions, local development NGOs). Listening to needs that often revolve around concrete everyday concerns (health, transport, for example), companies are studying the provision of free goods and services, such as transport, which improve employees’ purchasing power, or health coverage. This makes it possible to move away from a frontal (and not always possible) reflection on the question of salary and rather to define a holistic approach. These approaches can also be applied not at the level of a company but at the level of an industrial zone, for example in a shared way

In any case, the human resources departments (compensation or payroll services in general), purchasing and other executives must not move forward alone on these issues. Success in creating a consensus on the issues and assumptions surrounding decent pay is to successfully integrate the following elements into the reflection:

  • Give a voice to the employees themselves (and therefore to the unions where possible),
  • Reflect with a broader socio-economic vision to understand the needs according to the employee populations (country, age, socio-cultural specificities…),
  • Integrate actors in charge of the development and attractiveness of territories

This last point is fundamental, because it is a question of putting the actors in charge of the development of a territory in front of their responsibilities. It also highlights the decency of employees’ lives as a value creation for an economic actor and as an issue that contributes to the dynamism and attractiveness of the territories.

Putting people at the heart of the economic system

The question of living wage is all the more interesting because it pushes the company to change its perspective. Instead of seeing the employee as a burden and salary as a cost, the question of living wage encourages the company to see the employee first and foremost as an asset of skills and productivity.

Instead of seeing a territory as a production area lacking humanity, the living wage opens a reflection on the company as an actor investing or producing in territories whose externalities are factors of attractiveness, competitiveness and productivity. Instead of seeing the employee as a mere labor force, we can also consider him/her as a consumer. And even a low-wage worker is a consumer… There is a whole reflection on workers at the bottom of the pyramid that it would be worthwhile to connect with issues of living wages.

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Author of several books and resources on business, sustainability and responsibility. Working with top decision makers pursuing transformational changes for their organizations, leaders and industries. Working with executives improving resilience and competitiveness of their company and products given their climate and human right business agendas. Connect with Farid Baddache on Twitter at @Fbaddache.

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