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.
Piloting the Beta Model with Companies
After extensive conversations and consultations with representatives of living wage benchmark methodologies and initiatives, accounting experts, companies and investors (see summaries), Shift and the Capitals Coalition have arrived at a Beta version of the Living Wages Accounting Model, that is now being piloted with companies.
The Beta model metrics are organized under three disclosures:
- The Living Wage Threshold
- The Living Wage Deficit
- Human Capital Erosion
These unique core metrics are accompanied by a broader set of proposed disclosures, which are organized according to the four-part framework set forth by the Task Force on Climate-Related Financial Disclosures (TCFD) and adopted by the International Sustainability Standards Board (ISSB), based on ‘governance’, ‘strategy’ and ‘risk management’ in relation to living wages, in addition to ‘targets and metrics’. This model is now being piloted by a select group of small and large companies, to assess the viability of the model and the value of the insights it brings. The pilots began in July 2022 and will finish in December. A final version of the model, along with accompanying resources, will be published in spring 2023.
“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.”
Interim Discussion Paper – Accounting for a Living Wage
This is an interim paper that was circulated among participants of multi-stakeholder consultations held in February 2022 to serve as a basis for discussion. It is intended as a working proposition, which is being further refined and tested by piloting companies. It does not represent the final output of the project.