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October 30, 2024
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Key Points
- Adequate Wage is defined as a wage that meets the needs of a worker and their family, considering the national economic and social conditions of a country, and is influenced by several factors based on location, industry, union strength, and economic conditions.
- BSR’s Human Rights team unpacks the differences in terminology, provides practical guidance on how companies can determine the Adequate Wage for a location, and shares what companies can expect to come from reporting and human rights due diligence requirements.
The term “Adequate Wage” has emerged across several EU legislations and the International Labour Organization’s (ILO) first ever guidance on Living Wage. As employers navigate complex regulatory environments, we have seen widespread confusion on how Adequate Wage compares to Living Wage and Minimum Wage.
Latest Developments
The recent advancements to drive improved wages both in the EU and globally include:
- ILO Position on Living Wage: The ILO came out with an official definition for Living Wage and published principles that data providers can follow. It is the first ILO framework to guide data providers and employers on Living Wages.
- EU Directive on Adequate Minimum Wages: A 2022 directive that requires EU countries to increase their Minimum Wages to align with “Adequate Minimum Wages.” This is defined as a 'double decency threshold' in which no Minimum Wage should be set below 60 percent of a country’s median wage and 50 percent of the gross average wage. Minimum Wages of EU member states that are below this threshold are expected to increase.
- EU Pay Transparency Directive’s (EU-PTD) Focus on Gender: To align with the EU-PTD by April 2026, companies must conduct gender pay assessments using specific standards, remediate those impacted by identified gender pay gaps, and publish the results of the gap analysis for the public.
- Corporate Sustainability Reporting Directive’s (CSRD) use of Adequate Wage: In order to comply with CSRD’s requirements, companies should work toward collecting, analyzing, and reporting data that address any Adequate Wage gap.
- The Corporate Sustainability Due Diligence Directive (CSDDD): CSDDD requires companies to evaluate and adapt their business plans, strategies, and operations, including purchasing practices, to ensure that they contribute to “Living Wages and incomes for suppliers and employed workers.”
How does Adequate Wage relate to Living Wage, Minimum Wage, Average Wage, and Collective Bargaining?
Minimum Wages are the lowest wage allowed by law. Collective bargaining agreements, driven by unions, also can shape wage rates for a particular industry or job position in a country. Many people question why evaluating Living Wages is necessary when the concept of a Minimum Wage was originally intended to reflect the wage rate required for a worker and their family to live a decent life.
In practice, Minimum Wages are shaped by governments, meaning that the level and frequency at which they are increased to align with costs of living varies, and is often insufficient. Similarly, collective bargaining agreements only exist with strong working unions. Beyond legally compliant wage obligations, compensation teams pay close attention to average wages that reflect labor market conditions. A Living Wage, on the other hand, is based on cost-of-living, and is not shaped by politics, negotiation, or economics conditions.
The concept of Adequate Wage aims to take into account the different roles each of these wage rates play. According to ILO, an Adequate (Living) Wage is “a wage that meets the needs of a worker and their family, taking into account the national economic and social conditions of a country.” While the implementation of Adequate Wages at the country level is still underway, this guidance will aim to inform companies on how to measure Adequate Wages to prepare for CSRD requirements.
How can companies prepare to meet Adequate Wages in the coming years?
The CSRD explains that companies must “disclose whether or not its employees are paid an Adequate Wage.” Companies should start by evaluating if Minimum Wages are paid. This is an important first step, but due to the fact that in some countries a Minimum Wage may not be enough to cover the needs of a worker and their family, a secondary level of analysis is required to determine if the Minimum Wage is an Adequate Wage by looking at Living Wage benchmarks and the double decency threshold.
Understanding the Adequate Wage for a country or region is dependent on each location’s context, in order for companies to close any pay gaps to meet regulations like the CSRD, companies will need to conduct a gap analysis for Minimum Wage, Adequate Wages and Living Wages.
In many cases, Minimum Wages may be sufficient for reporting. Nevertheless, it is important to compare it to Living Wages and the double decency threshold to anticipate where Minimum Wages will likely be increasing. According to WageIndicator’s Adequate Wage Guide, the Adequate Wage is determined by whichever figure is highest. Follow these steps to start your gap analysis:
- Step 1: Check the Statutory Minimum Wage as applicable in the country, sector, industry, region, age-level etc. The Minimum Wage is the law and the minimum threshold.
- Step 2: In countries where there is no Statutory Minimum Wage, where applicable and possible, check the lowest negotiated wages as stipulated in Collective Agreements for your sector, industry, or company.
- Step 3: Check the ‘double decency threshold’ for a country (50 percent of the average wage and 60 percent of the medium wage) as well as the Living Wage estimates for a country and region. In cases where the Living Wage estimates are highest, use those.
- Step 4: If the ‘double decency threshold’ exceeds the Living Wage estimate, consider the Adequate Wage, but first verify regional Living Wage variations.
- Step 5: The CSRD requires companies to report on an “Adequate Wage.” Depending on the country, this could be the Statutory Minimum Wage, a collective bargained wage, an Adequate Wage, or a Living Wage estimate.
How BSR can help
BSR has worked with dozens of companies for twenty years to conduct Living Wage gap analyses and advance their Living Wage programs. For more information on BSR’s services on Living Wage, please contact us.
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