Toward Fair Compensation: What Is a Living Wage and Why Is It a Business Priority?

How much money must a worker make to afford a decent standard of living?

Near-historic price increases on everything have been drawing scrutiny to the question of the difference between “minimum wage” and the “living wage,” shaping conversations about what it means to make enough and why it matters.

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Minimum vs. the Living Wage

The minimum wage is the lowest legal pay rate a company can offer its workers. A living wage is a pay rate allowing a worker or household to afford basic needs, such as housing, food, healthcare, education, transportation and clothing.

Unlike the minimum wage, a living wage takes a more expansive view of household expenses, including cost-of-living differences across regions at a point in time.

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Why Pay a Living Wage

It’s not just a moral imperative. The push for a living wage is good for individuals, communities and businesses alike. Employees who feel they make enough to cover their basic expenditures are more productive, motivated and loyal to their employer. This translates to talent retention, better worker engagement and productivity, improved brand image and customer loyalty. Wage increases stimulate spending in the local economy, reduce inequalities and consequently lead to more social cohesion.

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Closing the Gap

Few countries have minimum wages equal to or higher than the living wage: WageIndicator finds that the statutory minimum wage is below what is calculated to be a living wage in most countries. This is where meeting the living wage will have the most impact for workers and economies alike.

Change starts within the business, but those seeking to promote living wages in their own operations and across their supply chains will need to navigate a number of complexities and wider implications as they develop and implement their strategies. Consideration needs to be given to how pay uplifts may be achieved by region or country while being aligned with broader workforce fairness strategies such as diversity, equity and inclusion (DEI) targets. Also, how can that be extended to include supply chain workers?

This reflects the importance of living wage benchmarks being consistent, up-to-date and publicly available.

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The Role of Benchmarks

Some databases are already available to businesses, such as the one provided by WageIndicator Foundation, which calculates a living wage across jurisdictions that can be used for a gap check or as a reference point. Living wage estimates will be freely available to all starting this May.

The Sustainable Trade Initiative (IDH) offers the Roadmap of Living Wages, a practical tool for performing a pay gap analysis across all regions within their own company, which also aims to provide more guidance on the use of living wage benchmarks. Moreover, efforts of living wage data service providers to increase standardization across methodologies are taking form in a collaboration called the Global Living Wage Coalition.

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A Push for Change

Factors that are relevant to any strategy are emerging regulations and the requirement for increased transparency. The EU Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) are prompting businesses to focus on social issues, including fair compensation. Not only this – there is also global momentum for action on living wages led by the UN Global Compact (Forward Faster). This increased interest from regulators and external bodies will undoubtedly be shared by workers and the public alike.

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Moving Toward Paying a Living Wage

There is a clear direction of travel in a world of growing pay transparency requirements but it’s clear that it is neither a clear-cut nor an easy task to tackle. But some are getting it done.

Pioneering companies like Unilever and DSM-Firmenich have publicly committed to advancing incomes in their own operations and supply chains. Leveraging EcoVadis supplier assessment and engagement solutions, they actively work with their partners to equalize and increase wages. Of course, such an undertaking comes with its own specific challenges. Hear from the companies’ representatives how they approach the complexities of implementing a living wage, as explored during our annual Sustain event.

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As the concept of living wages grows in the public consciousness, businesses have to consider their responsibilities under regulations and beyond, and how best to formulate a plan to pay a living wage in the future. Join us for the upcoming Living Wages Webinar on May 16, where we’ll cover these topics in real time.