Our thinking

Pay: the hole in the foundations of responsible business

11 February, 2022

The primary importance of pay

Every single business should pay its employees enough for them to live by. This is the most fundamental responsibility of business, and the lynchpin of creating a fair society. If a business is only profitable if it pays employees poverty-level wages, its business model isn’t viable.

Tell us if you disagree.

Because to us, these are simple and obvious truths that should be the foundations of the modern economy, and a sine qua non for any company making claims around responsible and sustainable business.

Most people in the UK think the same way. A recent poll found that 55% of people in the UK think that businesses’ first priority should be on looking after their employees. This is significantly more than the 44% who think they should focus on protecting the environment.

Yet at the moment, this is a missing link in the progressive corporate agenda.

The imbalance of corporate focus

Analysis by the Social Market Foundation found that companies are 64 times more likely to address environmental issues than to discuss poverty in their statements about Environmental, Social and Governance. 53 of the FTSE 100 companies made no mention of poverty in their reports, despite fulsome commitments to ESG and being a responsible and sustainable business.

Meanwhile, in-work poverty for full time workers is steadily rising. It stands at around 13% and is higher for Black, Asian and other minoritized groups. In London the proportion of households who are in poverty where at least one adult works full time has increased 50% in a decade. Three quarters of the children living in poverty in London are in working households. And the numbers are far higher for those who work part time.

The reality of the climate crisis has, rightly, spurred businesses to take action.

Companies don’t just proclaim their commitment to managing their environmental impact. They measure and report on their carbon emissions, and those that want to be taken seriously sign up to science-based reduction targets and net zero goals.

It’s time to apply the same approach to poverty and the cost-of-living crisis.

And pay is the best place to start.

Pay is the new carbon

The causes of in-work poverty are complex, but poor pay sits at the heart of the problem and the solution. And has a knock-on impact on multiple other inequalities and social issues.

We’d like to see pay become the social equivalent of carbon.

You can’t reduce all social issues down to pay, just as you can’t reduce all environmental issues down to carbon. But it’s hard – if not impossible – to see that an organisation could create genuine change on social issues without having tackled pay. Just as it would be hard to take a company’s environmental claims seriously if it wasn’t addressing carbon.

And having a single clear metric to focus on helps drive action, as the flurry of business Net Zero announcements has made abundantly clear.

So what would this mean in practice? Well, just as carbon emissions are classified into scopes 1, 2 and 3, so too with could action on pay. The new Pay Protocol (see diagram below) would map the three scopes of necessary activity on pay.

 

Scope 1: the real living wage

Every UK company that pertains to care about social issues should adopt the real living wage for direct employees. This is ‘scope 1’ in the movement towards fair pay. And those that don’t should be automatically excluded from any sustainability index or rating. Companies should be challenging themselves to go further and do more – pay more whenever they can. They should also be looking at the ratio between executive pay and those on the lowest rates, exploring the whole wage and benefits package, and making sure that part time and contract workers are treated in the same way as everyone else.

Creating a positive pay environment helps create a positive working environment. When people feel they are paid fairly they are more likely to contribute their best, remain loyal, support each other, and stick around. Organisations that pay well reap these benefits, as do the individuals that make them up.

Scope 2: pay progression

One of the biggest contributors to in-work poverty, and one of the reasons why it can be so intractable, is that many low-paid workers have little or no opportunity to pathways to progression. As recent work by the Department of Work and Pensions has shown, this is in turn closely linked to skills and training, as well as the structure of organisations, and internal drivers such as confidence and self-esteem.

Employers can and should engage with their workers to overcome the barriers that exist to pay progression so that as many people as possible have the chance to progress out of low pay roles.

And just as with Scope 1 activity, organisations that take this on will reap benefits. The action needed to address barriers to pay progression has a strong overlay with diversity, equity and inclusion, as it creates positive pathways for those what might not otherwise be represented at higher levels. And the impact it can have on the culture of an organisation, and its ultimate long-term productivity, is considerable.

Scope 3: pay throughout the supply chain

Progressive companies recognise that their impact, and responsibility, extends beyond the people they employ directly. This should apply to pay just as it does to standards of conduct and behaviour. They should have transparency over pay for individuals throughout their supply chain, and report on the minimum levels of pay received by individuals by country. The Global Living Wage Coalition provides benchmarks for 33 countries, so it’s a good place to start.

Again, this action makes good business sense. In an age where supply chain issues are often a significant challenge, having a justly rewarded supply chain is one of the best ways to deliver continuity and minimise disruption.

Call to action

As we emerge from the pandemic, and the world of work reshapes itself, surely now is the time for change. The immediate context of a cost-of-living crisis, with rising inflation and spiralling energy costs, makes it even more urgent.

Our call to action is for businesses to start thinking of pay in relation to society as we think of carbon in relation to the environment.

And to move swiftly to start with the basics.

First gathering data, building understanding, and moving to transparency. Companies need to be able to report on pay in relation to their own direct employees. They need to be able to map pathways to progression in their organisation, and work to understand barriers and how to unlock them. And they need to map pay throughout their supply chain.

This will enable organisations to demonstrate that they are working to meet the primary expectation people have of business, over and above all other sustainability and ESG related issues, of looking after their employees. It will go a long way towards ensuring their workforce feels valued and respected, with direct implications for their performance. And it will ensure that our corporate sector responds to and works to meet the social landscape of our day.

This is urgent, and important. Hiding from pay should no longer be an option. It’s time to close the gaping hole in the foundations of responsible business.