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Beyond the Minimum Wage – Focus on paying a Living Wage

By in Business, Economy, Finance on July 27, 2016

Perceived overpayment of executives has become a highly divisive issue, and is fuelling antagonism between labour and employers. It has also become a political football. But the underlying cause for the bitter resentment is the fact that the lowest paid workers are often unable to live decent lives. “The real issue we should be confronting is not just the minimum wage but what a Living Wage is, and how to begin paying it,” says Martin Hopkins, an Executive Committee Member at the South African Reward Association (SARA) and a partner at PWC in the People & Organisation practice.

The Minimum Wage is a statutory minimum that all employers must pay, whereas the Living Wage is a generally higher level of income that can provide for a “frugal but dignified life” for the employee and his or her nearest dependants. Paying a Living Wage is usually a voluntary measure adopted by an employer.

“Companies should see paying a living wage as a strategic imperative that will improve employee engagement, improve relations with important stakeholders and contribute to social stability,” says Hopkins.

National minimum wage debate
In South Africa at present, minimum wages are set by sector. There is a body of opinion that argues the need for a national minimum wage which, Hopkins says, would probably be between R3 500 and R3 700 per month. Whether a national minimum wage would have a positive or negative effect on unemployment generally is a hotly contested point.

However, it needs to be recognised that just paying the minimum wage creates a category of the “working poor”, people who simply do not have enough to live decent lives, and cannot afford to educate their children properly. The working poor are a destabilising force both in the company and in society in general because they support perceptions that “the system” is unfairly biased towards those at the top.

“However, we should not lose sight of the fact that there are relatively few people equipped to lead a large company, where the slightest miscalculation can have devastating consequences for share- and stakeholders,” says Hopkins. “These executives are global, so a company that does not pay the market rate runs the risk of losing its top talent.”

Balancing both sides
Balancing the need to retain and incentivise top executives with the moral imperative to treat the lower paid workers fairly is one of the biggest challenges for remuneration committees, says Hopkins. It is clear from the draft of King IV that the ethical implications of remuneration are to become part of the governance landscape. King IV gives remuneration committees the responsibility to ensure “fair and responsible remuneration” within the context of the wage gap between executives and the lowest-paid employees.

The argument for paying a Living Wage
Hopkins argues that remuneration policies should be seen as contributing to the company’s social licence to operate. It’s no mistake that in the United Nations Sustainable Development Goals – “inclusive and sustainable economic growth, employment and decent work for all” – are linked, he says.

The United Kingdom-based Living Wage Foundation cites an independent study showing that it improves the quality of work, reduces absenteeism, and enhances recruitment and retention. Seventy-five percent of employees reported that the quality of work they delivered improved as a result of being paid a living wage, while 50 percent said it predisposed them to adopt changes in their working practices.

“One should not underestimate the challenges that many companies would face in paying a Living Wage, which would be significantly higher than the Minimum Wage but, equally, one should not lose sight of the fact that it is imperative in order to rebuild social trust in business, and to defuse the antagonism that has built up between labour and employers—something that is impeding growth,” Hopkins concludes.

“We need a neutral, non-partisan body to be established to develop a rigorous methodology for establishing just what a Living Wage is, to advocate its implementation, especially in large profitable companies, and to conduct studies that measure its benefits.”