Note: This is the second in a two-part series examining living wage. Part one looked at what constitutes a living wage, who is responsible for ensuring that it is defined, and the role of the company in providing it.

Rising poverty levels, stagnating standards of living, and high unemployment in many OECD countries have brought a sharp focus on the state of wages for manual and professional workers. At the same time, some governments in the European Union and G20 countries are trying to ensure international competitiveness by adopting policies that will reduce wage levels throughout their economies. Others are reducing public sector wages either directly or indirectly (for instance, by restricting collective bargaining rights) as a means to plug gaping fiscal deficits. In developing economies, lower wage levels remain a central part of efforts to attract foreign investment. And sitting atop all of these trends is a growing rate of income inequality within both developed and developing nations.

As central actors in the global economic landscape, private sector companies are (or will be) profoundly affected by these trends and will have to take action. One approach is to simply accept the wage outcomes associated with economic trends and government policies, and in this way be “wage takers” with little power to set wages. The other approach—that of the “wage maker”—is to proactively ensure that all workers receive, at minimum, an income sufficient to support the purchase of goods and services necessary to maintain a decent standard of living. In some countries, there may not be a contradiction between the two approaches; but in others, the pressure on wages for certain classes of workers may be so significant that, absent countervailing measures by companies, the standard of living would decline to poverty levels or below.

So assuming your company would like to be a “wage maker,” here’s an approach to consider.

How to Do It

There are a number of questions that a company must address when designing a living wage program, including:

  • Definition: The most useful and flexible definition refers to what a living wage is not—a wage that supports the purchase of goods and services that together provide a standard of living that exceeds the poverty level that is appropriate in a given society at a particular point in time. (For more about the definition of a living wage, read part one of our series.)
  • Calculation methodology: There are a variety of ways to calculate a living wage, including costing out a market basket of goods and services that are normally consumed by residents in a particular area. These items typically include housing, transportation, food, energy, education, and health care. From a per capita basis, the cost is then scaled up to reflect the average household size. Another approach is referential: A living wage is equivalent to 125 percent of the official poverty line or 50 percent of the average wage in manufacturing. And some calculations (the “London Living Wage”) rely on a mix of the market basket and reference approaches. More complex is to base the calculation on the cost of a model food diet across two expenditure groups (the Anker methodology). Finally, some stakeholders argue that living wage figures should be established through negotiation among the relevant parties at the appropriate operational level.
  • Scope of application: A key issue is determining which employees will be “covered” by a living wage: Will it be just direct, full-time employees from all countries, or will it also cover part-time and temporary workers, contractors’ employees that work on the company’s premises, or some combination of the above? Also important is whether there will be one living wage per country or variations by different regions or urban areas.
  • Consultation with operating units: It is also important to consider the extent to which different parts of a company will have an opportunity to participate in the design process. For example, allowing foreign affiliates to challenge a living wage figure by providing countervailing evidence can enhance buy-in to the program and ensure more accurate wage estimations. If such participation is supported, a company will need to set criteria governing acceptable types of evidence such as collective bargaining agreements, government statistics, or private sector reports.
  • Remediation process: When it is determined that worker pay is below the established living wage, the company needs to create clear guidelines governing what the appropriate entity (division, foreign affiliate, etc.) must do to correct the situation. Such guidelines should include a timeline for bringing the wage levels into compliance and the process for reporting the correction to the department administering the program.

Who’s Doing It?

Although a number of companies (including Adidas, Gap, Sainsbury, and Starbucks) have made commitments to pay a living wage, there are few public examples of global living wage programs. One exception is the program at the Novartis Corporation, which BSR helped develop and continues to facilitate. Novartis’ Corporate Citizenship policy states that it pays competitive and fair wages that exceed the cost of basic living needs, and that employees should have time for family, social activities, and leisure.

The Novartis program applies to direct full-time employees across the more than 40 countries where it has a substantial number of workers. BSR calculates the living wage figures for each country annually, and following their distribution by the corporate HR department, country business units can challenge them as being too high (or too low). In actual practice, this occurs in five to 10 countries each year, and BSR handles each of the consultations. This consultation process has proven critical to achieving wide acceptance of the program because business units have the opportunity to engage in the process and thus do not feel that the wages are being imposed from corporate headquarters.

A major challenge was to develop a methodology that could be applied in a wide variety of countries. To do this, BSR divided Novartis’ country business units into two categories corresponding to their level of economic and social development. In more developed countries, the calculation of a living wage starts with the price of a market basket of food in the United States for an individual, which is then extended to estimate total family expenditures using purchasing power parity conversion rates and a series of country-specific multipliers. (In these equations, the principal multiplier is the cost of food estimated as a percentage of the family’s income. This percentage varies depending on the country; it may be 7 to 15 percent in the developed world and much higher in the developing world.) This figure is then adjusted using a divisor that accounts for the fact that most families have more than one wage earner.

For developing countries, the basic needs wage is based on a market basket that captures the cost of meeting basic needs in one developing country for an average-size family. The resulting amount is then converted using purchasing power parity conversion rates. These calculations are then checked using market basket studies commissioned in various countries.

For both developed and developing countries, the living wages are checked against a country’s minimum and average wages, data on family expenditures, the previous year’s wage level adjusted for inflation, and, where available, other living wage calculations.

Although there have been challenges with some aspects of the implementation, including the availability of data and assuring that the living wage reflects national characteristics and not that of the pharmaceutical industry, Novartis considers its living wage program to be successful, and it has resulted in the adjustment of wages for staff in select countries around the world.

The Bottom Line

Implementing a living wage program requires dedicated resources and an approach that clarifies the key issues discussed above. It is also critical to include input from the operating units at various stages in the process, since these stakeholders will be required to adjust the pay of workers found below the established living wage. Developing a sound methodology is not impossible, and the use of local stakeholders in select countries to establish and/or confirm living wage estimates will add credibility to the overall process.