Ensuring a living wage is one of the most impactful actions a company can take to help tackle social inequality.
The world’s current economic model – one that prioritizes short-term financial returns for shareholders over shared prosperity and decent pay, is unsustainable. Inequality is growing across the planet, and it has become one of the most pressing systems-level risks that societies face, alongside the climate emergency. A structural solution of the magnitude that is required demands that businesses, investors, standard-setters and civil society take action.
Companies – and their stakeholders – are starting to recognize the power that ensuring a living wage ( A living wage is the minimum income necessary for a worker to meet the basic needs of themself and their family, including some discretionary income. This should be earned during legal working hour limits (i.e. without overtime). The right to earn a living wage is enshrined in article 23 of the Universal Declaration of Human Rights. ) , in their own operations and across their supply chain, can play in this urgent transformation. It is also part of the responsibility that all businesses have to respect human rights in line with the UN Guiding Principles on Business and Human Rights. The good news is that more and more companies are recognizing the importance of paying living wages and making commitments and progress in that direction. The bad news is that there is a long way to go before this becomes the norm for all companies.
That’s at least partly because:
- Current accounting rules view wages as a cost on the balance sheet; failing to recognize the social and human capital value of people to the business.
- There is no generally agreed, straightforward and measureable way for companies to account for their work to ensure a living wage in their public reporting.
- Standard setters have therefore been constrained to looking at whether companies have made commitments to living wages, without a basis for seeking more rigorous information on the results achieved.
- As a result, investors, civil society and other interested stakeholders lack the information needed to compare companies‘ progress, assess which are contributing to the solution and push those sitting on the sidelines to play their part.
A shared and simple methodology to track and report on progress has been a key element of success in similar efforts to embed sustainability goals in business decision-making, for example, to reduce greenhouse gas emissions and close the gender pay gap.
An Accounting Model to Report on Progress Towards Living Wages
Shift and the Capitals Coalition have joined forces to develop an accounting model that companies can use to measure and report publicly on progress towards living wages across their workforces and supply chains over time. We aim to design a model that helps both businesses and standard-setters. For companies, it must help show the value both to society and to the business of living wages. For regulators, it must be capable of integration into accounting and reporting standards, as part of the developments in sustainability disclosures.
WE ARE DEVELOPING AN ACCOUNTING MODEL THAT CAN HELP:
The accounting model aims to:
- Enable standardized disclosures in a company’s annual report, much like those for greenhouse gas emissions or the gender pay gap.
- Apply not only to a company’s employees, but to its wider workforce (including those in forms of contingent labor) and workers in at least its first-tier supply chain.
- Look not just at the status of workers in relation to a living wage at a point in time, but measure progress over time towards living wages for workers who are yet to reach that threshold.
WHY AN ACCOUNTING MODEL?
An accounting model through which companies can publicly disclose the value of living wages can play a catalytic role in delivering greater transparency, informing new standards and creating incentives for improving wages and reducing inequalities. This is essential to rebuild economies that advance human dignity and equality – our social and human capital – across the world.
“To get more companies to walk the talk on paying a living wage, we need to define what success looks like, and how to measure progress along the way. And we need common metrics for companies to account for that change in their public reports. Only then can markets reward those companies that are part of the solution to today’s growing inequalities, and push others to play their part.”
“People are at the core of business, yet vital information about how to nurture this ‘stock’ of human capital is omitted from today’s accounting rules. This model will help companies to actively understand and prioritize where their impacts and dependencies on people lie; where they create or erode value for communities due to their wage practices and how to disclose the progress the are making towards addressing this by paying a living wage.”
The ‘Accounting for a Living Wage’ Project Team
The ‘Accounting for a Living Wage’ initiative is a partnership between Shift and the Capitals Coalition. The core project team involves a number of experts in living wage methodologies and initiatives, accounting and financial modelling, human rights, human and social capital, business practices and supply chains, and economics:
Accounting Expert; Audit Partner,
Director of Thought Leadership,
Technical Director of Economics,
Living Wages Expert
The Accounting for a Living Wage project is made possible thanks to the generous support that we’ve received from our funder.
An iterative process of research, consultation and gradual crystallization
The ‘Accounting for a Living Wage’ project is based on an iterative process of research, consultation with a wide array of stakeholders and other experts, and the gradual crystallization of ideas as we move towards the contours and content of a potential accounting model.
As part of our consultations, we are engaging directly with companies that are working on living wage issues. Our aim is to work with a few that are ready to test the approach we come up with. Through these pilots, we will fine-tune versions of the model to check its practicability, results and benefits.
Frequently Asked Questions
What is a living wage?
A living wage is the minimum income necessary for a worker to meet the basic needs of themself and their family, including some discretionary income. This should be earned during legal working hour limits (i.e. without overtime).
The Universal Declaration of Human Rights makes clear that, “Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity.”
Living wages can in turn contribute to the fulfillment of the human rights to food, water, health, adequate housing, education, family life, fair working hours and so forth.
Providing living wages can therefore contribute to the achievement of an array of Sustainable Development Goals, such as Ending Poverty, Ending Hunger, Ensuring Healthy Lives, Reducing Inequality, Decent Work, Gender Equality and others. (See this resource).
Why is it important to ensure a living wage?
- Implementing a living wage is a powerful tool in reducing inequality and its negative impacts across capitals.
Our current economic model is underpinned by practices that prioritize short-term financial returns for shareholders over sustainable prosperity within planetary boundaries that benefits all stakeholders. Coupled with the perception of wages as costs rather than investments, these practices directly contribute to growing inequality around the world with negative knock-on impacts on human and social capital and, in turn, on businesses, too.
- During COVID-19 we have seen both the disproportionate impacts suffered by low paid workers, and the dependency of businesses and society on their work and well-being.
The value of this business dependency is currently missing from company and investor decision making. Accounting for the value of a living wage will change that.
How does this project relate to other living wage initiatives?
Our focus is on developing an accounting model that can be used by companies not only for internal management purposes but also in public reporting to express in simple and comparable terms the progress toward living wages in their operation and supply chains.
We have been learning from a range of living wage initiatives, including those developing or assessing living wage methodologies and benchmarks, and those collaborating with companies in different sectors on practical ways to advance towards living wages.
We are also liaising with other initiatives that take an accounting lens to the question of living wages, notably Harvard Business School’s Impact Weighted Accounting Initiative, and the OECD’s Business for Inclusive Growth (B4IG) initiative on living wages. While each takes a distinct approach to our own project, we will focus on shared learning, complementarity and added value, distinguishing between value to workers, value to companies and value to society.
Will you develop a methodology to measure what living wages should be across different geographies?
No. Rather, we look to learn from those who have developed respected methodologies and how we might use them as an input to the accounting model.
I want to help. How can I get in touch?
We are always pursuing opportunities to expand and test our thinking. If you are an expert, have done research related to this topic, are a stakeholder who is interested in taking part, or know of inputs that may be valuable to our work, please contact us.