CORPORATE SUSTAINABILITY ACCOUNTING: WHAT CAN AND SHOULD CORPORATIONS BE DOING?

CHAPTER 5 Fair Remuneration

Introduction

Since the turn of the millennium the concerns of the international development community regarding social dimensions of development have broadened beyond issues such as health, , poverty and social exclusion to also include income and wealth inequality.104 More recently the SDGs, and SDG 10 in particular, have further reinforced the notion that vertical inequality in the distribution of economic 104 Social scientific Humanity” prompted resources needs to figure centrally in efforts analysis has played by advocacy work by to promote sustainable development.105 This a key role in this groups like Oxfam have process, not least via also fixed the spotlight chapter examines what corporations can do to a series of flagship on vertical inequality effectively measure sustainability performance and other reports (Oxfam International related to income inequality within the firm. by United Nations 2019). agencies, the World 105 This requires going beyond conventional Bank and think tanks In a context where international metrics associated with unequal pay for equal (UNDP 2005, 2005, UNRISD development agencies work, or indicators that compare levels 2010a, Anderson and think tanks were highlighting multiple to the or industry norms. and O’Neil 2006). Academic research by negative impacts of Here the focus is on measuring and assessing Piketty and others has inequality in relation fair remuneration along two dimensions, provided evidence of to poverty reduction, the growing disparities social cohesion, namely, CEO-worker pay ratios, and wage levels in income and wealth efficiency and growth, compared to the . In subsequent associated with it became apparent the top 0.1 percent that inequality chapters, other aspects of unfair remuneration (Piketty 2014, Piketty was a blind spot are addressed, in particular, gender inequality and Saenz 2003). in the Millennium Development Goals associated with the (Chapter Banner headlines such as “Last Year (MDGs), and one 6) and skewed power relations associated with 26 People Owned the that needed to be addressed in any post- collective bargaining and corporate policy Same as the 3.8 Billon People Who Make Up MDG agenda, as it is influence (Chapters 8 and 9). the Poorest Half of now in the SDGs.

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Income inequality within the firm • the remuneration of the CEO is relatively lower; The CEO-employee pay ratio is an emerging • the proportion of variable performance indicator within corporate remuneration (such as bonuses or stock sustainability reporting. This reflects not only options) within the total CEO package media and civil society concerns about now is relatively lower; widely publicized disparities in income and • there is less leverage in the bonus wealth as well as how corporate elites appear (difference between target and to be driving this perverse phenomenon, but maximum bonus); also growing concern among governments and • increasing or decreasing the use of long- investors. Policy makers have been confronted term incentives is not important; and with a wealth of evidence about why inequality • the CEO-employee pay ratio is lower. matters from the perspective of economic and social development as well as good governance Other research suggests that an extremely high (see Box 5.1). Investors are paying more attention level of executive pay may be partly determined to the issue of vertical inequality partly because by performance, but corporate culture may be of increasing evidence that CEO pay may as, if not more, significant: not reflect corporate financial performance. The package … stands as evidence of Research conducted by the Vlerick Business the potential strength of the company, of School into 861 companies in six European its capacity to play in a special league. It is countries found that firms which delivered a straightforward means to demonstrate strong financial performances over a sustained reputation, legitimacy, and financial period shared the following characteristics power. Put simply, it is the economy’s (Baeten and Said 2016):106 unique impression tool.

Box 5.1. Why does inequality matter?

The intellectual struggle to reincorporate vertical inequality in the portfolio of mainstream development concerns was intense as it involved overcoming not only a blind spot in conceptualizing and measuring development but also convincing key actors that inequality actually mattered both from a moral and a development perspective. Academic studies have highlighted multiple economic, societal and public policy implications.

Referring in particular to the United States, Boushey et al. (2017:14-16) note the following: • “[I]nequality is a factor that leads enormous investments in resources to deliver little of ultimate value in the sense of human well-being and human satisfaction”, as noted in the case of the distribution of medical care in the United States. • Established or inherited wealth “is by its nature hostile to the creative destruction that accompanies rapid economic growth”. • “[H]igher inequality will slow growth by depriving the nonrich of the resources to invest in themselves, their children and their enterprises … [and] by focusing effort on helping the rich keep what they have at the cost of squelching the development of the new”. • Elites are opting out of public schools (and health services) and, as a result, may be less inclined to support the tax regimes underpinning public services. Furthermore, “reliance on private wealth to finance higher education has already made that sector far more unequal…”. • As a result of increased political and policy influence, elites can manipulate governments to “solve 106 See “The Best problems of concern to the plutocrats and not the people”. Performing Companies • As elites gain first-mover advantage in new sectors involving, for example, platform-based firms, their Pay their CEOs Relatively Less”. influence may make it extremely difficult for policy makers “to rein in the anticompetitive bent of … Vlerick Business those who arrive first”, thereby stifling innovation. School (20 December • Inequality can reinforce the ability of employers “to pick winners and losers” and drive them “to 2017). Accessed 30 indignant outrage by the idea of a collective worker voice”. It can also lead to greater segmentation or November 2019. “fissuring”* within the workforce, which can marginalize the position of manual workers. https://www.vlerick. com/en/research-and- • “An unequal society is one in which who you know matters more to your ultimate well-being than what faculty/knowledge-items/ you know … [A] society in which the distribution of well-being is determined by ‘who the rich like’ is knowledge/the-best- unlikely to preserve the gains of racial and gender equality made during the Social Democratic era”. performing-companies-pay- their-ceo-s-relatively-less * Boushey et al. 2017 citing Weil (Chapter 9).

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This game is a ‘ballgame’ too, although Similarly, what CEO remuneration should not one played on the pitch, but in the be compared to also varies considerably. Most company’s pants, and the masculine indicators focus on “employees” as opposed smell is no coincidence. Whether to “workers”. The relevant GRI standard (see the individual manager is worth the Annex 8) considers the legitimate comparator money and whether he or she meets to be the median of the and of all the behavioural and performance other employees. Some ratings agencies allow expectations is not unimportant, but it companies to report either the median or the is distinctly – secondary. Reward systems mean average. are a show of power (Wetzel 2014). Given that workers, managers and other C-suite In other words, the issue of income and wealth officers are all factored into the category of inequality is intimately connected with that of “other employees”, the median and mean the ongoing empowerment of corporate elites average can vary depending on the and the disempowerment of workers, issues that and pay structure. While mean averages may be are addressed in later chapters of this report that easier to calculate, given the information already deal with labour rights and corporate political on hand, the median—the mid-point of a set of influence. values—is generally considered to reflect more accurately the pay level of “typical” employees, 107 “… a company will be permitted to select The upshot of this restructuring of economic notably in contexts of skewed distribution. The its methodology and power relations has been a shift in (i) the average pay of “other employees” may or may for identifying its median employee functional distribution of income, that is, the not bear a close relation to the wages of the and that employee’s ratio of profits to wages which, over time, has lowest paid workers, who presumably should compensation, including through moved in favour of profits, and (ii) the capacity be a key focus of attention in any assessment statistical sampling of senior management to claim a greater share of inequality. Accordingly, when calculating of its employee of the income pie. A convenient indicator pay ratios, the EPI focuses more directly on population or other reasonable methods.” that sheds light on this situation is the ratio of “workers” as opposed to employees, defining Further, “[t]he workers’ pay to that of the highest paid executive workers as employees in production and non- rule also permits companies to make in a particular company. Generally, this would supervisory positions when calculating pay the median employee be the CEO. ratios in the United States. determination only once every three years and to choose This discussion suggests that the following KPIs In its 2015 ruling related to the implementation a determination date within the last three are relevant: of the Dodd-Frank Wall Street Reform months of a company’s • CEO-worker or -employee pay ratios; and Consumer Protection Act, the United fiscal year. In addition, and States Securities and Exchange Commission the rule allows companies to exclude • percentage annual increase in CEO (SEC) requires publicly traded companies non-U.S. employees or senior management remuneration to disclose, from 2017 onwards, the ratio of from countries in which data privacy laws or compared to that of workers or other the compensation of the CEO to the median regulations make employees. compensation of employees. The ruling, companies unable to comply with the rule however, provides companies considerable and provides a de CEO-worker pay ratio leeway regarding the methods used.107 minimis exemption for non-U.S. employees. Methods for calculating CEO-worker pay The rule does not apply ratios vary considerably. The calculation of What might a fair CEO-worker to smaller reporting CEO salaries often omits certain elements pay ratio target look like? companies, emerging growth companies, that make up the full compensation package. Various reference points could inform the foreign private issuers, A comprehensive definition is that used process of determining fair benchmarks and MJDS filers, or registered investment by the Economic Policy Institute (EPI) for targets. companies.” U.S. its study of CEO-worker pay gaps in the Securities and Exchange Commission. United States. This includes salary, bonuses, Historical norms that characterized periods that 2015. Accessed 10 restricted stock grants, long-term incentive were considered “fair” are often referenced. September 2019. https://www.sec.gov/ payouts and options realized or options During the so-called golden age of , news/pressrelease/2015- granted (Sabadish and Mishel 2013). or the era of “embedded liberalism” in the 160.html

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decades following the Second World War, Table 5.1. CEO pay to average income* ratio economic growth and public policy in many (Selected countries, 2015-2016) industrialized countries worked relatively well 541 for both corporate elites and workers (Ruggie India 483 1982). During this period, the CEO-worker pay US 299 ratio was approximately 20 or 30 to 1. It has UK 229 been noted that during the 1970s a criterion Canada 203 for the determination of CEO pay in the Switzerland 179 United States was intra-firm equity, that is, how Germany 176 CEO remuneration compared to that of other Spain 172 employees within the same firm. In subsequent Netherlands 172 decades, however, there was a shift from this Israel 119 internal equity to what can be called external Republic of Korea 114 equity, that is, the determination of CEO Australia 113 salaries focused more on what other CEOs earn Norway 101 (Clifford 2017). Denmark 82 Sweden 75 Another reference point could be pay ratios France 68 associated with what one might term gentler Hong Kong 66 varieties of capitalism, as in Nordic countries Malaysia 66 like Denmark, Finland, Norway and Sweden Singapore 65 where Bloomberg data comparing CEO pay Japan 62 to average income reveals ratios of 61-101 to 1. Finland 61 Similarly, in several Asian jurisdictions (Hong Austria 47 Kong, Japan, Malaysia and Singapore) ratios are China 43 in the 60 to 1 range. This is well below the level Poland 24 108 The author of the found in countries like Canada, the United Thailand 4 South Africa study Kingdom, the United States, India and South Source: Lu and Melin 2016. points out, however, * “average income” refers to per capita gross domestic that the reported pay Africa, where ratios ranged from 203-541 to 1 product adjusted for purchasing power parity. ratios would likely (see Table 5.1). have been significantly higher had outsourced workers also been One might also look to other enterprise compensation level for the CEO was below included in the 111 calculations. models, such as large or state- USD 500,000. Taking United States GDP per owned enterprises (SOEs). The Mondragon capita adjusted for purchasing power parity,112 109 See “The land of less pay: China Corporation, for example, which has this CEO remuneration level would amount to combats corruption approximately 75,000 employees, has a pay a ratio of about 11 to 1. through cap.” World Finance. 6 November ratio of 9 to 1 (Heales et al. 2017). Government 2014. Accessed 30 regulations introduced for French SOEs in In Canada, the Wagemark Foundation oversees November 2019. https://www.worldfinance. 2012 capped CEO pay at 20 times the average an international wage certification system for com/strategy/china-the- salary of the lowest paid 10 percent of workers. organizations with a ratio of 8 to 1 or less. land-of-less-pay Similarly, among a group of South African The Wagemark Standard compares the total 110 KLD was acquired by SOEs, the highest ratio was around the same earnings of the highest paid employee with the RiskMetrics in 2009. level (Francis 2017).108 A ratio of 10 to 1 was average pay of the bottom decile of earners.113 111 See Appendix A. Criteria of RiskMetrics- proposed as a new benchmark for SOEs as part KLD social ratings in of China’s anti-corruption drive in 2014.109 The highest bar for fairness, however, seems to Becchetti et al. 2013. be set by the general public. A survey of some 112 World Bank data Various ratings, certification and research 55,000 people in 40 countries found that indicate that US per capita GDP at PPP was organizations have also provided guidance for perceptions of an ideal ratio between CEO and USD 46,437 in 2006. determining fair pay ratios. During the boom unskilled workers’ pay ranged from 2 (Denmark) 113 See Wagemark.org at years prior to the 2008-2009 global financial to 20 (Taiwan, Province of China) to 1, with 4.6 http://www.wagemark. 110 org/about/. Accessed crisis, the well-regarded ratings firm KLD to 1 being the global average (Kiatpongsan and 30 November 2019. assessed a company positively when the total Norton 2014).

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One study of fairness in relation to CEO- rate would rise in subsequent pay ratio bands, worker pay ratios makes the point that there is reaching 5 percent above 500 to 1.116 a need to distinguish between fairness from a utopian perspective and fairness in the context In the run-up to mandatory disclosure of CEO- of actually existing systems and institutional worker pay ratios, called for under Dodd-Frank settings (Venkatasubramanian 2017). Recent and the SEC ruling, regulatory proposals fiscal regulations and policy proposals provide were tabled in several other jurisdictions pointers as to what fair ratios in the real world including Minnesota, Massachusetts, Illinois, might look like. Several initiatives in the United Connecticut, Rhode Island and San Francisco States have emerged at local, state and federal (Center on Executive Compensation 2019). levels. A number of cities and municipal These initiatives aimed to impose fees or varied authorities have enacted, or are considering, rates of tax based on pay ratios (Mishel and fiscal policies that target corporations with Schieder 2018). A Senate Bill in Rhode Island high CEO-worker pay ratios. An initiative proposed to give corporations with CEO-worker introduced in Portland, Oregon in 2018 set a pay ratios of no more than 25 to 1 preferential threshold of 100 to 1. Above this level a surtax treatment in state contracting. Similarly, in of 10 to 25 percent is levied depending on the Canada, the Québec solidaire party proposed ratio (Anderson and Pizzigati 2017).114 Branko in 2018 the introduction of the “Bombardier Milanović observes that this “seems [to be] Clause”, under which state aid in the form of the first tax that targets inequality as such … It subsidies or tax credits would only be provided treats inequality as having a negative externality, to companies with a 30 to 1 ratio (or lower) for like taxing carbon emissions” (The Guardian, CEO to lowest paid employee.117 114 Tax revenues will be 2016). channeled towards affordable housing and Depending on the country and institutional other local needs. Under a legislative proposal introduced in 2014 context, the above yardsticks suggest that 115 See California in California (California Senate Bill 1398) the normative targets that reflect a fair pattern of Legislative Information. Accessed 20 tax rate of publicly traded companies would allocation associated with principles and goals December 2019. vary depending on pay ratio (see Table 5.2), of equality and sustainable development should Available at: https:// leginfo.legislature.ca.gov/ remaining at 8.8 percent for companies with a lie in the range of about 10-50 to 1, if not below. faces/billTextClient pay ratio of 50 to 1 or below, and increasing .xhtml?bill_id=20192 thereafter by 1 percent for every additional Other dimensions of vertical inequality 0200SB37 band, up to a maximum of 13 percent for Beyond the question of income inequality 116 See “Sanders, Lee, and Tlaib Partner to companies with a pay ratio over 300 to 1. While within the firm, there is also that of income Combat Outrageous this initiative was not successful, a similar inequality within the broader value chain. CEO Pay.” Accessed 115 3 December 2019. proposal (SB-37) was reintroduced in 2019. Only touched upon in this report, this is https://www.sanders. an issue that deserves considerably more senate.gov/newsroom/ Fifty to one is also the ratio established in the attention. Here, too, structural conditions press-releases/sanders-lee- and-tlaib-partner-to-combat- Tax Excessive CEO Pay Act, introduced at the are key, including the concentration of higher outrageous-ceo-pay federal level in the United States in November value-added economic activities in specific 117 See Québec solidaire. 2019. Under this proposal, large corporations jurisdictions and significant variations in “Lier la rémunération des patrons à celle with ratios between 50 and 100 to 1 would bargaining power among actors within a de leurs employés, un incur an additional tax of 0.5 percent. The value chain. As discussed in Chapter 8, choix responsable”. Accessed 30 even among corporations that adhere to November 2019. principles of sustainability and corporate https://appuyez. Table 5.2. Variations in tax rate by pay ratio responsibility, aggressive purchasing practices quebecsolidaire.net/ salaire-maximum band (California Senate Bill 1398) may seriously constrain not only income but 118 This issue has recently Pay Ratio Tax Rate also what suppliers can do vis-à-vis social and gained attention in a 0 to 50 8.84% environmental upgrading. Also important is context where several large food corporations 50 to 100 10% the extent to which corporations engage in are withdrawing from 100 to 200 11% meaningful forms of fair trade that boost the the international Fairtrade certification 200 to 300 12% incomes of raw material producers and their scheme. See 118 Over 300 13% communities. Subramanian 2019.

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The contemporary enrichment of the business of corporations—adidas, PUMA, Unilever, and financial elite is not a function simply of H&M, IKEA, AstroZeneca, Vodafone and their skill set and contribution to economic Standard Chartered Bank, for example—are growth, but also of rent-seeking (Reich 2007, now referencing fair remuneration or the living Stiglitz 2016, 2018, UNCTAD 2017). In other wage in their pay strategies.120 words, it is associated with the power and influence they have due to their position and From the perspective of the 2030 Agenda, fair ability to influence shareholders, politicians, remuneration in terms of wage levels is a key public policy and the media. Oxfam’s work on element as it would simultaneously contribute inequality highlights the role of cronyism and to multiple goals, not least SDG 1 (poverty monopoly power as two key determinants of reduction), 5 (gender equality), 8 (decent work), perverse inequality, along with inheritance and and 10 (reduced inequalities), as well as improved tax-dodging via tax havens and other means access to food (2), health and well-being (3), (Oxfam 2018). Rising vertical inequality is also education (4), clean water (6) and energy (7). a function of changes in power relations that involve the strengthening of the managerial class The concept of fairness in relation to vis-à-vis both shareholders and trade unions. remuneration should involve both the question These issues are addressed in subsequent of allocation—that is, fair patterns of distribution chapters dealing with corporate taxation, within the corporate structure—and establishing labour rights and corporate political influence. a sustainability threshold, in other words a level of wages conducive to human well-being.

Living wages Corporate sustainability reporting frameworks and practices often adopt a minimalist A common response to the issue of vertical interpretation that judges fairness in terms of inequality within corporate sustainability compliance with minimum wage regulations accounting is to bypass what is happening or industry norms (see Annex 8). Even an at the top of the corporate pyramid, and indicator as basic as real wages, that is, nominal focus instead on efforts to improve working wages adjusted for inflation, is often ignored. conditions related to occupational health This is of particular concern given that real wage and safety (OHS), pay violations, workplace trends have declined or remained flat in many discrimination, , and compliance countries, notably in the G20 (ILO 2018a). 119 Previously, in 2011, with minimum wage regulations as well as “the FLA enhanced the compensation element norms or regulations related to equal pay for Indicators for transformative change need to in its Workplace Code equal work. More recently, the principle of fair go well beyond these minimalist yardsticks by of Conduct, affirming remuneration and the concept of the living considering progress towards the payment of a workers’ right to wages that meet the wage have gained currency within corporate living wage. worker’s basic needs sustainability discourse. and provide some discretionary income”. What is the “living wage”? This work plan charts In 2015, the Fair Labor Association (FLA), The concept of the living wage refers to wage the path forward for implementing for example, enhanced its work on the com­ levels that allow a full-time worker, working that element of the pensation element of building socially re­ normal hours, to provide for their family code, providing fair compensation for sponsible supply chains by implementing the via a wage that covers basic food, housing, workers, one of the FLA Fair Compensation Work Plan.119 Similarly, transportation, health, education and some biggest challenges the 2016 revision of the King standards for other costs, as well as a small proportion in building socially responsible supply corporate governance in South Africa introduced for discretionary expenditure and savings. chains. See: http:// the principle that “[t]he governing body should Calculations of living wages are site-specific, www.fairlabor.org/blog/ entry/fla-board-directors- ensure that the organization remunerates fairly, that is, they refer to geographical areas (such as approves-implementing- responsibly and transparently so as to promote countries, provinces, urban/rural areas) where fair-compensation-work- plan the achievement of strategic objectives and costs of living are fairly similar. Furthermore,

120 positive outcomes in the short, medium and they must be periodically adjusted to factor in See Vaughan- Whitehead 2019:18. long term” (Principle 14, King IV). A number price changes.

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How the term is interpreted and applied can vary • Level 1 – Marginal survival wage: Wage considerably. Sometimes, it is used loosely by level does not provide for adequate organizations to embellish performance related nutritional needs. Starvation is to compliance with minimum wages. In other prevented but malnutrition, illnesses instances, organizations may adopt a principle and early deaths are the result. associated with the living wage but, in practice, • Level 2 – Basic survival wage: Wage focus on minimum wage norms that consider level allows for meeting immediate some level of living costs related to basic needs. survival needs including basic food, used clothing, minimal shelter and fuel Indeed, this has occurred in the case of the for cooking. International Labour Organization (ILO). Over • Level 3 – Short-range planning its 100 year history, the ILO has referenced wage: Wage level meets basic survival the notion of a living wage, or the need for needs. Possibility of small amount minimum wages to cover basic needs, at pivotal of discretionary income allows for moments.121 Part XIII of the Treaty of Versailles, minimal planning beyond living from which established the ILO in 1919, refers to paycheck to paycheck. Allows for the need to urgently improve poor labour occasional purchase of needed item(s) conditions via “the provision of an adequate as small amounts can be set aside after living wage”. The 1970 ILO Convention 131 meeting basic survival needs. and Recommendation 135 on Minimum Wage • Level 4 – Sustainable living wage: Fixing call on governments to consider “‘the Wage level meets basic needs including needs of workers and their families as a criterion food, clothing, housing, energy, to determine the level of minimum wages, transportation, health care and taking into account the general level of wages education. Ability to participate in in the country, the cost of living, social security culturally-required activities (including benefits and the relative living standard of other births and related celebrations, social groups” (Reynaud 2017: 24). Focusing weddings, funerals and related on fixing or defending minimum wages is not activities). Also allows for the setting the same, however, as actively promoting the aside of small amounts of money concept of the living wage (Reynaud 2017, (savings) to allow planning for the AFWA 2017a). future purchase of items and the meeting of needs. In addition to In some contexts, a hybrid term has emerged, as meeting basic needs and allowing the in the case of the United Kingdom. In 2016 the worker to set aside money for future government introduced “the minimum living purchases, allows for the availability wage” which simply added 50 pence onto the of enough discretionary income minimum wage for anyone over 25 years of age. to allow the worker to support the development of small businesses in The task of defining norms associated with a local community, including the 121 These include the 1919 Treaty of more expansive definitions has fallen to others, support of cultural and civic needs of Versailles which notably standard-setting and certification the community. Wage levels allow for established the organization, the bodies, advocacy NGOs and academics. long-range planning and participation 1944 International (CREA 2019). Labour Conference A second issue concerns what basic needs in Philadelphia, which reviewed and household expenditure elements the From the perspective of sustainable the organization’s living wage should cover. While it is generally development and transformative change—or mandate in the wake of the Second World understood that the living wage should cover thriving—definitions and long-term targets War; the context of basic needs, what constitutes basic needs can should, presumably, be associated with level 4. decolonization in the 1960s; and in 2008 be viewed quite differently. This is illustrated In regulatory and advocacy circles, however, the when the Declaration in the following typology of wages proposed by dust seems to be settling on a definition that is on Social Justice for a Fair was the social, economic, research and education somewhere between levels 3 and 4. adopted (Reynaud organization CREA. 2017, AFWA 2017a).

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Drawing on over 60 living wage descriptions and In contrast, typical methodologies definitions, the Global Living Wage Coalition rely on available expenditure data to (GLWC), for example, defines a living wage as: estimate housing costs and so replicate remuneration received for a standard current (often substandard) housing work week by a worker in a particular conditions. Our methodology also place sufficient to afford a decent better allows for different living wage standard of living for the worker estimates for rural and urban areas, and her or his family. Elements of a as housing costs are usually the most decent standard of living include food, important cause of differences in living water, housing, education, health costs. Our methodology also increases care, transport, clothing, and other transparency, because the size of the “all essential needs including provision for other essential costs” bucket is much unexpected events.122 smaller and examined more thoroughly (and adjusted when necessary) than in Measurement issues typical approaches.124 While a consensus may be emerging around the definition of a living wage, methods for The Asia Floor Wage Alliance (2017b) adopts calculating the living wage vary. Significant the following assumptions: issues concern, for example, what constitutes • A worker needs to be able to an adequate diet in terms of calories per adult support themselves and two other per day, the relative weight of housing costs, “consumption units” (1 consumption the composition of discretionary spending unit = 1 adult or 2 children). and savings, how many income earners and • An adult requires 3,000 calories a day dependents make up a family or household, to be able to carry out their work. what constitutes wages, and how many hours • Food makes up half of a worker’s of work are required to earn a living wage. monthly outlays; housing, health, Furthermore, national figures may mask education, transport and fuel make significant variations within countries. These up 40 percent; 10 percent is for difficulties suggest a role for an international discretionary income associated with organization like the ILO, which has long entertainment, savings, and acknowledged the principle of the living wage, redundancy of the main earner. to facilitate work towards a more standardized • The Asia Floor Wage is calculated methodology that can be applied globally. in purchasing power parity (USD), or PPP$, which allows the standard Basing their work on what is known as the of living between countries to be Anker Methodology123, GLWC (undated) notes compared regardless of the national some of the differences in methods, stating that currency. theirs: is a practical compromise between For its calculations relevant to garment workers 122 See https://www. globallivingwage.org/ separately estimating the cost of each in other regions, the Asia Floor Wage Alliance about/what-is-a-living- and every expense families have, and the adapts these assumptions to local context: wage/. Accessed 28 November 2019. most common approach currently used The Asia Floor Wage calculation cannot

123 for estimating living wage in developing be simply applied to other regions as See Anker, Richard and Martha Anker, 2017. countries, which uses just two expense some of the assumptions do not apply, Living Wages Around groups (food costs based on a model diet for example, food costs accounting for the World: Manual for Measurement. and nonfood costs based on secondary half of income. This is the case in Asia Cheltenham UK: data). Using normative standards for where food costs are relatively high and Edward Elgar. decent housing and estimating housing standards of living such as housing 124 See https://www. globallivingwage. costs separately (not as part of nonfood are very low, however in other regions org/about/anker- costs, as in typical methodologies) such as Eastern Europe food costs are methodology/. Accessed 28 ensures that living wage estimates enable relatively lower when compared to November 2019. workers to afford decent housing. housing (AFWA 2017b).

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Work has been carried out by the GLWC125 to meet basic needs. As noted in a study of inform auditors and certification organizations compensation by the Fair Labor Association associated with six of the standards systems (FLA) in Viet Nam: that operate under the ISEAL Alliance, a The FLA’s data show that although global membership association for credible the average worker in FLA affiliate sustainability standards.126 GLWC guidance on factories in Vietnam earns more than what constitutes wages is outlined in Annex 9. double the minimum wage, a worker would need a pay increase of almost Comparing actual wages 25 percent to adequately provide for with the living wage themselves and their family according Several organizations and studies are now to the Global Living Wage Coalition generating useful data to measure not only benchmark. Those workers who earn what the living wage is in specific countries an adequate wage can do so only or geographical areas, but also how actual through long hours and excessive days wages compare with the living wage. This of work without rest, in clear violation evidence is exposing the acute inadequacy of of international standards. While all the conventional focus on minimum wage of the regional legal minimum wages compliance as a yardstick to measure worker in Vietnam fall well above the World well-being. It also reveals that in many countries Bank Poverty line, none meet even the and supply chains, it is only through excessive lowest living wage benchmark (FLA 125 The Global Living Wage Coalition was overtime that workers can earn enough to 2019:11). founded by several standard setters to design, promote and implement a living Figure 5.1. Minimum, living and actual wages per month, USD equivalent* (Selected countries, 2020) wage for workers within the sphere of labour standards. 4,029 1 Minimum wage 4,000 The organizations 2 Living wage: Individual agreed on a common 3 Living wage: Standard family ** definition of a living 4 Living wage: Typical family ** wage, use the 5 Wage: Low-skilled worker same methodology 6 Wage: Medium-skilled worker for estimating a 7 Wage: High-skilled worker living wage, and have committed to * The Wage Indicator Foundation presents both a low and high 3,000 working towards the estimate for living and actual wages. The data reported here long-term goal of improving wages and correspond to the low estimate. 2,678 to involving brands, ** The “standard” family and “typical” family vary in number of buyers, retailers children and hours of paid employment. For definitions, see link in and other relevant figure source. stakeholders in this 2,065 process. See: https:// 1,963 2,000 www.globallivingwage.org/ 1,871 1,893 about/, accessed 30 November 2019. 126 The six entities are Fairtrade International, Forest Stewardship 1,189 Council, GoodWeave International, Social 1,000 1,000 Accountability International, Sustainable Agriculture 504 Network, and UTZ 452 384 Certified. Some 295 248 19 sustainability 168 188 standards and accreditation bodies Mexico 1 2 3 4 5 6 7 Germany 1 2 3 4 5 6 7 are full members of ISEAL. See: https:// www.isealalliance. org/about-iseal/iseal- Source: Based on data from the WageIndicator Foundation. Wages in Context. https://wageindicator.org/salary/wages-in-context. members, accessed 30 Accessed 10 August 2020. November 2019.

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neither they nor medium-skilled workers earn Table 5.3. Minimum wage versus living wage anywhere near the living wage for a family. This Minimum Living Difference*** contrasts with the situation in Germany where Country wage* wage** (%) the minimum wage approximates the living (euros) (euros) wage for a standard family and even low-skilled Bangladesh 49.56 259.80 19 workers earn above the living wage. Cambodia 72.64 285.83 25 China 174.60 376.07 46 India 51.70 195.30 26 Concerned by low wages in the garment Indonesia 82.14 266.85 31 industry in Asia, the Asia Floor Wage Alliance Malaysia 196.06 361.21 54 (AFWA) was formed to promote the living wage Sri Lanka 50.31 259.46 19 concept in this region. The AFWA measures * The method for calculating the minimum wage may vary by country. how salaries based on the minimum wage ** The living wage is based on the Asia Floor Wage 2013 figure of PPP $725. compare with the living wage. Data for 2013, *** Minimum wage as a percentage of the living wage. presented in Table 5.3, suggest that the gap is Source: Merk 2014. http://asia.floorwage.org/wp-content/ significant, with the minimum wage standing uploads/2019/10/LW-in-Asia-AFWA-CCC.pdf, accessed 20 April 2020 at approximately 50 percent of the living wage in the case of Malaysia and China, and just 19 The Wage Indicator Foundation calculated percent in Bangladesh and Sri Lanka. the living wage for 76 countries in 2019.127 Furthermore, the data compare the living wage The use of different methods to calculate the to the minimum wage and to the prevailing living wage has led to concerns that different wage of different types of worker categorized by organizations—say, governments or NGOs or skill levels (low, medium and high). Data reveal trade unions—tend to adopt methods that significant variations in wage relationships. suit their particular preferences in terms of low or high valuations (Vaughan-Whitehead Regarding high income countries: 2019). However, it can be argued that high • with a few exceptions the minimum valuations are not realistic from a business wage approximates the living wage of a perspective, given the economic constraints “typical family”;128 experienced by firms. In the case of the Fair • wages of the low-skilled often exceed Wage Network, this concern has led to a the living wage;129 focus on the requirement that management • in a few countries, the wage of low- systems be in place—such as a fair wage policy, skilled workers is below the living wage needs assessment, social dialogue—in order of the “typical family”. to gain certification (Vaughan-Whitehead 2019). In relation to developing and transition economies: While such an approach is important for • in many countries the living wage engaging companies in a fair wage strategy, 127 For specific country data see: https:// exceeds not only the wage of low- it should not be seen as an alternative to a wageindicator.org/salary/ skilled workers but also that of performance-based assessment process guided living-wage, accessed 10 December 2019. medium-skilled workers; by ambitious targets. In keeping with the

128 • In contrast to the in just a few countries, the wage of low- focus of this report, such targets are key for “standard” family of skilled workers exceeds the living wage; corporate sustainability accounting, as they two adults and two children, the number of • at the extreme, there are instances suggest thresholds that need to be met from children in the “typical” of countries where even the wages the perspective of sustainable development. family is calculated of high-skilled workers are below the It may well be that a company cannot bridge on the basis on the national fertility rate living wage. significantly, in the short or medium or even (Guzi and Kahanec long term, the gap between actual wages and the 2014). Figure 5.1 shows data on the minimum wage, living wage. From an accounting perspective, 129 The Nordic countries have no minimum the living wage and the actual wage of different however, we at least know where that company wage but tend to rely skill categories of worker in Mexico and is positioned in relation to this dimension of instead on sectoral collective bargaining to Germany. In the case of Mexico, low-skilled sustainable development and whether or not provide benchmarks. workers earn just above the minimum wage but any progress is significant.

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⚫ Concluding remarks

The above discussion regarding fair remu­ner­ could also adapt the WageIndicator method, ation suggests the following take-aways. which compares the living wage with the wages of different categories of worker, by referring In a context where trends in income and to the median wage of each quartile of wage/ wealth inequality are undermining the salary earner. attainment of several SDGs, it is crucial to assess what corporations are doing both to Other key performance indicators related measure their impacts in this area, and to to fair remuneration should include real, as adhere to sustainability principles and norms opposed to nominal, wage trends and the by correcting skewed patterns of distribution. comparison of wage trends with those of As regards intra-firm inequality, the CEO- labour . employee pay ratio is a convenient indicator.

While standard-setting organizations are paying more attention to such disclosure, there are considerable variations in methodologies and metrics used. Such inconsistencies need to be addressed to ensure, for example, that the median or the mean average wage reflects the prevailing wages of typical workers and that CEO salaries factor in the multiple sources of income that make up the CEO salary package.

As regards possible long-term targets for assessing progress, several of the initiatives and experiences reviewed in this chapter suggest a threshold of about 50 to 1 as an acceptable CEO-worker pay ratio within large corporations. From other vantage points, however, this remains excessive. From the more ambitious perspective of distributive justice associated with sustainable development and Achieving progress related to fair remuneration transformative change, a ratio in the range of and living wages often requires a sectoral 10-30 to 1 might be considered fair. or regional approach to prevent responsive companies from losing competitive advantage. The living wage is another convenient reference It also requires far greater attention to labour point for gauging a company’s contribution rights and enhancing the capacity of workers to sustainable development in relation to bargain for improved pay and conditions, to fair remuneration. While it has a long the issue discussed in Chapter 8 below. pedigree in terms of conceptualization, it has remained under the radar within both labour From an accounting perspective, where market policy and corporate sustainability consistency and comparability are important accounting. Recently, however, it has gained principles, variations in methodology suggest traction within these fields. Companies the need for different organizations and should provide metrics that allow stakeholders stakeholders to come together to harmonize to compare actual wage levels with not only methods. Given its long association with the the minimum wage or industry norm but also principle of a living wage, its global regulatory the living wage. It would be of interest to know and normative stature, and its convening the percentage of employees in a company power, the International Labour Organization who earn below the living wage. Companies seems well placed to play a facilitation role.

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