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Information on Fair Wage
The Fair Wage Self-assessment tool enables a manager to assess the way their company handles wage issues. It covers many different aspects of wages, ranging from wage fixing to pay systems to the wage trends compared to changes in productivity and the cost of living. This self-assessment is not a pass-fail test. It is a way of assessing the company's strengths and weaknesses in the management of a key element in the employment relationship, namely wages. It will show where improvements can be made, including in areas like wage policy and procedure, training, communication and documentation. It also shows you how wages can be used as a human resource management tool to attract, retain and reward the best people. It can therefore be used as an annual reference tool by manager’s to build on their strengths and improve on their weaknesses in the area of wages.
Below you will find a definition of “fair wages” and a description of the dimensions or categories that we use to analyse fair wages.
1. Payment of wages
The payment of wages should be among the first criteria since it is of upmost importance for the workers that they be paid in exchange for their work. Non-payment of wages can take three possible forms: (a) simple non-payment of wages, representing part of or all of a wage that is due but never paid; (b) delays in the payment of wages, representing a wage payment that will eventually be paid but with a considerable delay (of a few weeks or months); (c) underpayment of wages, representing a payment that is made, but well below the legal or expected rate.
The self-assessment questionnaire helps to capture whether wages are paid and, if so, how regularly; it also helps to identify where is management may be having difficulty paying wages in full and if there are any sources of under-payment.
2. Living wage
To be fair, wage levels should also allow workers to have a decent living standard.
The living wage dimension measures the ability of wages to provide for the basic needs of workers and their families and thus to provide for decent living standards.
There have been serious attempts by individual enterprises and by NGOs to define living wages, but so far there is no universally accepted formula. The living wage function is approximated in this self-assessment through questions to managers about the capacity of the wage to provide minimum living standards and meet workers basic needs (with regard to food; accommodation; health care; education; clothing; vacation and entertainment).
3. Minimum wages
The third criterion is compliance with minimum wage legislation, if a minimum wage has been fixed, either by law or collective agreement.
Most codes of conduct – either of companies or of NGOs – already take into account this basic requirement.
This minimum wage dimension is related to many other fair wage dimensions, such as the living wage function (since the minimum wage is aimed at providing for basic living standards), or the payment of overtime (since national legislation on minimum wages generally requires that the minimum wage be paid to workers for normal working hours and not for extra hours).
4. Prevailing wages
At the same time, it is important to compare wages in the company with wage levels outside. Wages should, of course, be competitive since they are a key component of labour costs; however, if they remain artificially low compared to competitors in the same sector., there could be a downward pressure on wage costs in the company, which could lead to the payment of unfair wages and to de-motivation and high turnover of workers’.
Wage levels in the company will thus be analysed in comparison with the wage practices of similar companies and/or main competitors.
5. Payment of working hours
A fair wage should, first, not lead to an excessive number of working hours. Second, fair wage practices should also include the proper payment of working time. It makes a big difference if workers work 48 or 60 hours a week for the same pay, or whether or not their overtime hours are remunerated at premium rates (either in accordance with the legal rates or not at all).
The questions in the self-assessment help to identify whether the wage system in itself pushes workers towards excessive working hours and, second, whether working hours are properly remunerated, including overtime premiums.
6. Pay systems
In order to better capture the performance of individual enterprises with regard to the fair wage principle, pay systems should also be scrutinized to see whether they are balanced in terms of their structure and pay components. If pay systems are to be effective, they should reflect different levels of skill, position in the hierarchy, individual performance and the financial state and performance of the company. Certain bonuses strengthen the link to tenure (seniority bonuses), others the link to attendance (attendance bonuses) or to skills (skills bonuses). Others strengthen the link to collective performance (profit-sharing or profit-related pay schemes) or to individual performance (such as piece-rate systems). Certain bonuses however – such as the piece-rate system – may crowd out the basic wage or other wage components.
Certain elements of pay or wage-fixing may have a beneficial effect on workers’ well-being and living standards, such as free accommodation or meals.
The questions in the self-assessment will help the manager to form a comprehensive picture of all pay systems and pay components and their respective weaknesses and strengths.
7. Communication and social dialogue
To be fair, wage-fixing systems should provide workers with adequate information on wages, starting from when they are hired (through the individual work contract), during the production process (through regular communication channels) and at the time of wage payment (with an informative pay slip).
Wages can also be set by means of collective bargaining and lead to collective agreements, or be fixed through negotiation between the employer and individual workers. Alternatively, they can be fixed unilaterally by the employer outside any collective and/or individual agreement, something that would obviously lead to rather different outcomes in terms of wage developments.
8. Wage discrimination and wage disparity
Wage fixing should not lead to any discriminatory practices and the principle of equal pay for work of equal value should be applied. The statistical table that we request management to fill-in as part of the self-assessment exercise provides information about wage levels by category of worker in the company, and generally provides very rich and useful information to management.
Wage disparity should also be analysed over time, between different categories of workers within the company, between the top and the lowest grades, between skilled and unskilled and also between male and female workers.
9. Real wages
If they are to be fair, wages should evolve according to consumer price changes, so that workers do not suffer from an erosion of their wages in real terms. This requires some monitoring of nominal wages compared to inflation in order to better capture the evolution of real wages.
The managers will be able to assess how their wage policy is performing on this dimension through the analysis of their answers on the adjustment of wages to price increases.
10. Wage share
Fair wages would be wages that share in better company performance in terms of profits, profitability and sales growth. Workers’ wages should somehow reflect the contribution they make to the company. Several studies show that this has a beneficial effect on productivity and performance. This dimension will be analyzed through managers’ answers to the questions on company wages and company performance (profits, sales).
11. Wage costs
The payment of fair wages is also assessed through the analysis of the company’s wage costs, notably to identify sudden falls in wage costs in proportion to other production costs (raw materials, fixed costs, investments and so on).
A rapid reduction in wage costs may be due to a reduction in employment, but it could also be due to lower wage costs alongside constant or even increasing employment. The wage costs variable is thus a complementary fair wage element which should be analysed in relation to both total production costs and employment levels.
12. Wages and work intensity, technology and skill
Wages should also be related to changing employment composition. If a company reduces its labour force, while maintaining the same production volume, this automatically increases work intensity. This additional burden and stress should somehow be reflected in wage levels.
Similarly, the introduction of new technology requires some adaptation on the part of the workers and may generate additional stress and more intense working rhythms. Together with training received by the workers this leads to the upgrading of workers’ skills, which is particularly precious to the company in terms of productivity and competitiveness and should progressively lead to higher wages.
The importance of this fair wage dimension is growing among suppliers who increasingly need skilled workers. This fair wage dimension could help companies support changes in technology, work composition and workforce skills through appropriate revision of wage levels, but also pay systems – for instance, a pay system better related to skills and education, notably through a graded pay scale that is more appropriate to skilled workers than the piece-rate system.
13. Personal evaluation of necessary improvement
The self-assessment questionnaire has a section where questions are asked to the manager about the fairness of his/her company wage policy in general and in particular on the different fair wage dimensions discussed above. The manager is requested to specify the areas in which he/she believes the enterprise needs to make most progress, some progress, or has no need to change. This personal assessment will then be compared to the overall assessment based on the answers to other questions. This will allow the manager to assess not only where improvements could be made, but also to check whether his/her perception about the effectiveness and fairness of the company’ wage policy differs from the general fair wage findings.
14. Hours of Work in Fair Wage
Working hours management is another important element to be investigated in a wage system. Workers often are willing to work long hours because they earn low wages and want to maximize their income. FLA surveys have shown that factories that control hours of work within code limits coupled with a well prepared production plan have higher productivity, efficiency and income.
In this section, the manager is asked to briefly assess the hours of work management, e.g., having a clear policy, efficient implementation and systematic documentation etc..
A comprehensive assessment on fair wages:
From the self-assessment exercise we should be able to reconstruct the wage situation at individual companies and give an assessment for each fair wage dimension, as well as a general assessment of fair wages for the company as a whole. It should also help us to identify the major wage problems within the company and to help to avoid tensions and conflicts arising as a result. This work will be fruitful for local suppliers as well as for the buyers. Repeated on a regular basis, this will allow us to assess the evolution of a company’s fair wage policy and to progressively strengthen its weakest points with regard to both wage determination and wage development.
All the fair wage dimensions proposed here are necessary in the sense that they help to provide the complete wage picture. If one of them were missing we may not capture an essential dimension of wage practices at the company.
As an example, the minimum wage may not mean much if we do not know what is offered in terms of non-monetary benefits, which may help workers to cope with the cost of living. As another example, the minimum may not be enough to ensure the living wage function. Statistics show that, in many countries, the minimum wage remains well below the national subsistence minimum or poverty line, as in Russia and the CIS countries in Europe, Peru in Latin America and Bangladesh in Asia. Therefore, even workers who earn the legal minimum wage may find it insufficient to meet basic needs. The living wage dimension should thus clearly complement the minimum wage dimension.
Moreover, many workers’ concerns extend well beyond mere ‘bread-and-butter’ issues measured by such things as the minimum basket of basic goods and relate more to obtaining recognition from their employers for their work and skills (through better pay systems), or better communication (work contracts, communication on wages) and establishing a permanent relationship with their employer which would allow them to revisit and renegotiate wages and employment on a regular basis (social dialogue).
The picture of fair wages would also be incomplete without taking working hours into account. When workers are paid very low wages, they have a tendency to work excessive hours in order to make ends meet. Efforts to reduce overtime without tackling poor wages can therefore be problematic. On the other hand, efforts to increase wages are not enough without counting how many hours are worked and whether overtime is properly remunerated. As a final example it is also difficult and ineffective to try to change the wage-fixing system without consulting and involving workers’ representatives in the whole process, hence the need to include the social dialogue dimension.
Below you will find a definition of “fair wages” and a description of the dimensions or categories that we use to analyse fair wages.
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Definition of fair wages |
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General definition Fair wages refer to ‘Company practices that lead to sustainable wage developments’. |
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Extended definition Fair wages refer to ‘Wage levels, wage progression and wage-fixing mechanisms that provide a living wage floor for workers, while complying with national wage regulations (such as the minimum wage, payment of wages, overtime payments, provision of paid holidays and social insurance payments), allow proper wage adjustments and lead to balanced wage developments within the company (with regard to wage disparity, skills, individual and collective performance and adequate internal communication and collective bargaining on wage issues).’ |
The concept of fair wages is based on the identification and definition of fair wage developments. With this in mind, we identified 12 fair wage dimensions (below).
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The 12 fair wage dimensions |
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A fair wage could be defined as: |
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1. Payment of wages |
A wage which is regularly and formally paid in full to the workers. |
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2. Living wage |
A wage that ensures minimum acceptable living standards. |
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3. Minimum wage |
A wage which respects the minimum wage regulations. |
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4. Prevailing wage |
A wage which is comparable to wages in similar enterprises in the same sector. |
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5. Payment of |
A wage that does not generate excessive working hours and properly rewards normal working hours and overtime. |
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6. Pay systems |
A wage that leads to a balanced wage structure/composition between the basic wage and additional bonuses and benefits. A wage that reflects different levels of education, skills and professional experience, as well as rewarding individual and collective performance. A wage that complies with regulations on social insurance payments and paid holidays and is not dominated by disciplinary wage sanctions. |
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7. Communication and social dialogue |
A wage on which workers receive sufficient information in advance (through an individual work contract), in the course of the production process (through regular communication channels) and at the time of the wage payment (with a detailed pay slip). A wage that is negotiated individually (with individual employers) and/or collectively – notably through collective bargaining – between the employer and the workers’ representatives who are freely accepted in the company. |
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8. Wage discrimination/ |
An equal wage for equal work that does not lead to wage discrimination and does not generate unjustified, high and rapidly growing wage differentials within the company. |
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9. Real wages |
A wage that progresses at least in proportion to increases in the cost of living. |
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10. Wage share |
A wage that progresses proportionally along with enterprise sales and profit growth and which does not lead to a fall in the wage share in enterprise performance growth. |
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11. Wage costs |
A wage whose progression does not lead to a dramatic reduction in wage costs within total production costs and as a percentage of employment. |
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12. Work intensity, technology and increases in skill |
A wage that progresses along with changes in intensity at work, technological content and the evolving skills and tasks of the labour force. |
1. Payment of wages
The payment of wages should be among the first criteria since it is of upmost importance for the workers that they be paid in exchange for their work. Non-payment of wages can take three possible forms: (a) simple non-payment of wages, representing part of or all of a wage that is due but never paid; (b) delays in the payment of wages, representing a wage payment that will eventually be paid but with a considerable delay (of a few weeks or months); (c) underpayment of wages, representing a payment that is made, but well below the legal or expected rate.
The self-assessment questionnaire helps to capture whether wages are paid and, if so, how regularly; it also helps to identify where is management may be having difficulty paying wages in full and if there are any sources of under-payment.
2. Living wage
To be fair, wage levels should also allow workers to have a decent living standard.
The living wage dimension measures the ability of wages to provide for the basic needs of workers and their families and thus to provide for decent living standards.
There have been serious attempts by individual enterprises and by NGOs to define living wages, but so far there is no universally accepted formula. The living wage function is approximated in this self-assessment through questions to managers about the capacity of the wage to provide minimum living standards and meet workers basic needs (with regard to food; accommodation; health care; education; clothing; vacation and entertainment).
3. Minimum wages
The third criterion is compliance with minimum wage legislation, if a minimum wage has been fixed, either by law or collective agreement.
Most codes of conduct – either of companies or of NGOs – already take into account this basic requirement.
This minimum wage dimension is related to many other fair wage dimensions, such as the living wage function (since the minimum wage is aimed at providing for basic living standards), or the payment of overtime (since national legislation on minimum wages generally requires that the minimum wage be paid to workers for normal working hours and not for extra hours).
4. Prevailing wages
At the same time, it is important to compare wages in the company with wage levels outside. Wages should, of course, be competitive since they are a key component of labour costs; however, if they remain artificially low compared to competitors in the same sector., there could be a downward pressure on wage costs in the company, which could lead to the payment of unfair wages and to de-motivation and high turnover of workers’.
Wage levels in the company will thus be analysed in comparison with the wage practices of similar companies and/or main competitors.
5. Payment of working hours
A fair wage should, first, not lead to an excessive number of working hours. Second, fair wage practices should also include the proper payment of working time. It makes a big difference if workers work 48 or 60 hours a week for the same pay, or whether or not their overtime hours are remunerated at premium rates (either in accordance with the legal rates or not at all).
The questions in the self-assessment help to identify whether the wage system in itself pushes workers towards excessive working hours and, second, whether working hours are properly remunerated, including overtime premiums.
6. Pay systems
In order to better capture the performance of individual enterprises with regard to the fair wage principle, pay systems should also be scrutinized to see whether they are balanced in terms of their structure and pay components. If pay systems are to be effective, they should reflect different levels of skill, position in the hierarchy, individual performance and the financial state and performance of the company. Certain bonuses strengthen the link to tenure (seniority bonuses), others the link to attendance (attendance bonuses) or to skills (skills bonuses). Others strengthen the link to collective performance (profit-sharing or profit-related pay schemes) or to individual performance (such as piece-rate systems). Certain bonuses however – such as the piece-rate system – may crowd out the basic wage or other wage components.
Certain elements of pay or wage-fixing may have a beneficial effect on workers’ well-being and living standards, such as free accommodation or meals.
The questions in the self-assessment will help the manager to form a comprehensive picture of all pay systems and pay components and their respective weaknesses and strengths.
7. Communication and social dialogue
To be fair, wage-fixing systems should provide workers with adequate information on wages, starting from when they are hired (through the individual work contract), during the production process (through regular communication channels) and at the time of wage payment (with an informative pay slip).
Wages can also be set by means of collective bargaining and lead to collective agreements, or be fixed through negotiation between the employer and individual workers. Alternatively, they can be fixed unilaterally by the employer outside any collective and/or individual agreement, something that would obviously lead to rather different outcomes in terms of wage developments.
8. Wage discrimination and wage disparity
Wage fixing should not lead to any discriminatory practices and the principle of equal pay for work of equal value should be applied. The statistical table that we request management to fill-in as part of the self-assessment exercise provides information about wage levels by category of worker in the company, and generally provides very rich and useful information to management.
Wage disparity should also be analysed over time, between different categories of workers within the company, between the top and the lowest grades, between skilled and unskilled and also between male and female workers.
9. Real wages
If they are to be fair, wages should evolve according to consumer price changes, so that workers do not suffer from an erosion of their wages in real terms. This requires some monitoring of nominal wages compared to inflation in order to better capture the evolution of real wages.
The managers will be able to assess how their wage policy is performing on this dimension through the analysis of their answers on the adjustment of wages to price increases.
10. Wage share
Fair wages would be wages that share in better company performance in terms of profits, profitability and sales growth. Workers’ wages should somehow reflect the contribution they make to the company. Several studies show that this has a beneficial effect on productivity and performance. This dimension will be analyzed through managers’ answers to the questions on company wages and company performance (profits, sales).
11. Wage costs
The payment of fair wages is also assessed through the analysis of the company’s wage costs, notably to identify sudden falls in wage costs in proportion to other production costs (raw materials, fixed costs, investments and so on).
A rapid reduction in wage costs may be due to a reduction in employment, but it could also be due to lower wage costs alongside constant or even increasing employment. The wage costs variable is thus a complementary fair wage element which should be analysed in relation to both total production costs and employment levels.
12. Wages and work intensity, technology and skill
Wages should also be related to changing employment composition. If a company reduces its labour force, while maintaining the same production volume, this automatically increases work intensity. This additional burden and stress should somehow be reflected in wage levels.
Similarly, the introduction of new technology requires some adaptation on the part of the workers and may generate additional stress and more intense working rhythms. Together with training received by the workers this leads to the upgrading of workers’ skills, which is particularly precious to the company in terms of productivity and competitiveness and should progressively lead to higher wages.
The importance of this fair wage dimension is growing among suppliers who increasingly need skilled workers. This fair wage dimension could help companies support changes in technology, work composition and workforce skills through appropriate revision of wage levels, but also pay systems – for instance, a pay system better related to skills and education, notably through a graded pay scale that is more appropriate to skilled workers than the piece-rate system.
13. Personal evaluation of necessary improvement
The self-assessment questionnaire has a section where questions are asked to the manager about the fairness of his/her company wage policy in general and in particular on the different fair wage dimensions discussed above. The manager is requested to specify the areas in which he/she believes the enterprise needs to make most progress, some progress, or has no need to change. This personal assessment will then be compared to the overall assessment based on the answers to other questions. This will allow the manager to assess not only where improvements could be made, but also to check whether his/her perception about the effectiveness and fairness of the company’ wage policy differs from the general fair wage findings.
14. Hours of Work in Fair Wage
Working hours management is another important element to be investigated in a wage system. Workers often are willing to work long hours because they earn low wages and want to maximize their income. FLA surveys have shown that factories that control hours of work within code limits coupled with a well prepared production plan have higher productivity, efficiency and income.
In this section, the manager is asked to briefly assess the hours of work management, e.g., having a clear policy, efficient implementation and systematic documentation etc..
A comprehensive assessment on fair wages:
From the self-assessment exercise we should be able to reconstruct the wage situation at individual companies and give an assessment for each fair wage dimension, as well as a general assessment of fair wages for the company as a whole. It should also help us to identify the major wage problems within the company and to help to avoid tensions and conflicts arising as a result. This work will be fruitful for local suppliers as well as for the buyers. Repeated on a regular basis, this will allow us to assess the evolution of a company’s fair wage policy and to progressively strengthen its weakest points with regard to both wage determination and wage development.
All the fair wage dimensions proposed here are necessary in the sense that they help to provide the complete wage picture. If one of them were missing we may not capture an essential dimension of wage practices at the company.
As an example, the minimum wage may not mean much if we do not know what is offered in terms of non-monetary benefits, which may help workers to cope with the cost of living. As another example, the minimum may not be enough to ensure the living wage function. Statistics show that, in many countries, the minimum wage remains well below the national subsistence minimum or poverty line, as in Russia and the CIS countries in Europe, Peru in Latin America and Bangladesh in Asia. Therefore, even workers who earn the legal minimum wage may find it insufficient to meet basic needs. The living wage dimension should thus clearly complement the minimum wage dimension.
Moreover, many workers’ concerns extend well beyond mere ‘bread-and-butter’ issues measured by such things as the minimum basket of basic goods and relate more to obtaining recognition from their employers for their work and skills (through better pay systems), or better communication (work contracts, communication on wages) and establishing a permanent relationship with their employer which would allow them to revisit and renegotiate wages and employment on a regular basis (social dialogue).
The picture of fair wages would also be incomplete without taking working hours into account. When workers are paid very low wages, they have a tendency to work excessive hours in order to make ends meet. Efforts to reduce overtime without tackling poor wages can therefore be problematic. On the other hand, efforts to increase wages are not enough without counting how many hours are worked and whether overtime is properly remunerated. As a final example it is also difficult and ineffective to try to change the wage-fixing system without consulting and involving workers’ representatives in the whole process, hence the need to include the social dialogue dimension.