How businesses can achieve the living wage with surprising benefits

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Daan Wensing, Chief Executive Officer, Chair of the Executive Board, IDH – The Sustainable Trade Initiative

Inequality threatens global stability; as the gap between rich and poor increases, it places in peril the viability of the global economy. Companies and the financial sector have a vital role in creating an economy that supports decent livelihoods and sustainable growth and better wages are a big part of the equation.

According to the OECD, the average income of the richest 10% of the population is nine times higher than the poorest 10%. Rising food and energy costs, global conflict and the continuing fallout from the COVID-19 pandemic only exacerbate the problem.

At IDH, one of our goals is to achieve strong, resilient businesses that fuel prosperity for millions of employed people. When companies delve into the topic of living wages, they quickly find several potential benefits: greater productivity, lower turnover, more substantial worker commitment and a better quality of life that contributes to stronger communities.

Turning barriers into bridges

As we rebuild the global economy to confront the challenges we face, there is an opportunity to reconsider how business models can benefit wider society, break the cycle of poverty and strengthen business fundamentals. There is an increasing unity in the call for better jobs among businesses, workers and the financial sector.

Unilever, for example, has committed to living wages for every worker in their supply chain. L’Oréal has extended a commitment to paying living wages for the employees to all of its strategic suppliers’ employees by 2030. Companies have realized how the moral imperative for a living wage complements the business argument. Well-paid workers are integral to a profitable, sustainable and resilient business. Poverty wages no longer have a place.

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Well-paid workers are integral to a profitable, sustainable and resilient business. Poverty wages no longer have a place.”— Daan Wensing, CEO and Chair of the Executive Board, IDH

The journey can seem daunting for companies yet to explore the living wage concept. Currently, just 4% of all companies have targets or commitments toward paying a living wage. Moreover, it’s clear that numerous barriers give companies pause, some real and some perceived.

Chief among these is the cost. Without a proper understanding of the actual costs of paying a living wage, its scale and scope can make it seem impossible. A firm grasp on the numbers and the size of the gap between current wages and a living wage is crucial for making the seemingly impossible attainable.

Beyond the cost, other barriers frequently spoken about include:

• Price escalation – Good business practices, such as sharing responsibility among all supply chain actors, can mitigate or eliminate the impact.
• Limited impact of living wage support – When a supplier sells to many companies, the effect from committed companies can be limited unless every buyer is committed to a living wage. Achieving a living wage for workers across a supply chain requires strong relationships and a commitment to building the case for action among other buyers.
• How to best deliver benefits – This is where a thorough understanding of the supply chain comes in. Suppliers and workers know how to best manage the distribution of funds fairly and equitably. Good companies rely on trusted relationships with their suppliers yet verify and confirm delivery to ensure proper distribution of funds.

Follow a living wage roadmap

We have found that it is possible to turn these barriers into bridges. The IDH Living Wage Roadmap provides a useful framework and the necessary tools to guide you through the living wage journey.

The Roadmap was developed in partnership with brands, retailers, suppliers and sustainability organizations, including civil society and standards setters. Through our research, we have identified five steps companies can take to transform their approach.

• Identify the living wage – The first step is identifying the living wage levels in the regions where you are working or sourcing. There are numerous resources for finding appropriate wage benchmarks. Find different ways to identify a reliable, credible benchmark using the Benchmark Series or Benchmark Finder in our Roadmap.
• Measure the wage gap – The next step is comparing current wages with the benchmark to understand the size of the wage gap. The Salary Matrix is a free tool that evaluates total remuneration received by employees and compares it to the relevant living wage benchmarks.
• Verify calculation of living wage gaps – Verifying the data and information gathered is critical for building trust among management, employees and other stakeholders. With a clear understanding of the wage gap, you can begin exploring ways to close them.
• Close living wage gaps – There are four main areas to consider in closing wage gaps: facility performance, employment practices, procurement practices and the wider enabling environment (e.g. level of social safety net, access to additional support and social dialogue). Understanding how these areas contribute to wages and identifying where there are deficiencies can point you in the right direction.
• Share learnings – More companies are working towards paying a living wage. Sharing and learning from their experiences – or sharing your own – creates a virtuous cycle that improves livelihoods and creates resilient businesses.

Barriers to living wages differ among supply chain actors but the common thread to providing them lies in collaboration. We can only achieve a universal living wage when every partner assumes responsibility. Together, we can build a better, more resilient global economy that supports decent livelihoods. Learn more about how companies are working individually and collaboratively to make progress on living wages in global supply chains.