Minimum' vs. 'Fair' vs. 'Living' Wages

Use multiple data sources to set compensation rates overseas.

June 1, 2012 | Eric Krell

At first blush, a country's minimum wage rate may look like a definitive starting point for compensation planning. Upon scrutiny, however, global minimum wage rates raise more compensation and workforce planning questions than they answer, according to human resource professionals, compensation consultants, and labor and economic experts.

As globalization intensifies—and as more countries establish legal minimum wage rates—HR professionals in global operations should familiarize themselves with minimum wage rates through data from public and private sources. They should recognize what this standard can—and cannot—tell them about:

A country's total compensation standards.
A country's wage inflation.
Wage levels that would comply with ethical sourcing guidelines.

Minimum Wages and Human Resources

Managed effectively, a minimum wage rate can reduce poverty and deliver significant societal and economic benefits, World Bank economist Jan Rutkowski has written. From a workforce planning perspective, however, minimum wage rates are not terribly useful in isolation.

"If I were working with my executive team, trying to decide where in the world to open a new factory, I wouldn't look that closely at a country's minimum wage rate," says Adam Goldman, vice president of human resources for Safariland, a Jacksonville, Fla.-based provider of law enforcement and security products and services, and a subsidiary of BAE Systems.

Yet Goldman monitors minimum wage rates in Mexico, where manufacturing operations employ half of Safariland's 1,700 workers. Minimum wages are "an indicator of wage inflation," he explains. "In a previous job, I worked with operations in Brazil. When the minimum wage increased by 5 percent [in Brazil], we essentially increased our entire salary structure by 5 percent."

Global minimum wage rates also influence Goldman's role in another capacity. He is responsible for complying withthe ethical purchasing guidelines some Safariland customers require of vendors. Some "municipalities want us to prove that we are not only paying above a minimum wage, but also demonstrate that we are paying a living wage," Goldman says.

These exercises represent a challenge because definitions of "living" and "fair" wages continue to evolve; different organizations publish different standards, which often requires translation into local currency—in this case, U.S. dollars.

"I track what we pay in Mexico by the peso," Goldman explains. "Some of our customers want us to report our compensation in [U.S.] dollars." Of course, exchange rates change daily.

Another customer requires Safariland to comply with a poverty wage table that setsa dollar-per-hour base line. Exchange rate fluctuations and differences in average workweeks—40 hours in the United States and 48 hours in Mexico—complicate these requirements. Goldman is not concerned about compliance per se—Safariland pays workers more than minimum wage rates everywhere, he says—but completing each set of purchasing requirements grows more time-consuming and challenging. "It is very difficult to make apples-to-apples comparisons based on minimum wages," Goldman explains.

Emerging Definitions

A "living wage" refers to a threshold that allows workers and their families to have decent living standards. Location-specific living wage standards usually identify a minimum amount of money required to cover food, basic nonfood items and other discretionary expenditures.

Recently, organizations such as the Fair Labor Association and the Fair Wage Network have worked to identify what a "fair wage" should be. These definitions use a living wage concept as a foundation and incorporate compensation dimensions, such as the proper payment of working time (including overtime) as well as the adjustment of wages in response to factors such as inflation and enterprise profits. The Fair Wage Network, co-founded by Daniel Vaughan-Whitehead at the International Labour Organization and Washington, D.C.-based Fair Labor Association President and Chief Executive Officer Auret van Heerden, defines a fair wage as:

Wage levels 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), ensure proper wage adjustments and lead to balanced wage developments in the company (with regard to wage disparity, skills, individual and collective performance, and adequate internal communication and collective bargaining on wage issues).

Minimum Wage: Minor Part of Total Comp

Minimum wage rates in Mexico, where Safariland has operations, "would not tell you what it actually costs to employ someone there," advises Safariland Vice President of Human Resources Adam Goldman.

HR professionals can check the International Labour Organization's database of minimum wage information, but they should also consider a range of compensation conventions and issues within a country.

For example, Mexican Federal Labor Law applies to all employees in Mexico regardless of nationality or place of entering into an employment agreement. The law establishes a minimum amount employers should pay in cash to employees weekly or biweekly, without deductions or withholdings. According to PricewaterhouseCoopers-México, the minimum wage is determined every year by the National Minimum Wage Commission. Mexico is divided into three zones, and daily minimums vary for each. In 2011, daily minimums by region varied from 59.08 pesos to 62.66 pesos—all less than $50, as of the March 30 exchange rate.

Besides the minimum wages, however, employers must include in an employee's compensation package an annual Christmas bonus of at least 15 days' wages, vacation pay of 125 percent of daily wages for up to 12 days, a percentage of profits, training costs and Social Security benefits.

A Wage Floor

The minimum wage is important for HR professionals, asserts Geneva-based Daniel Vaughan-Whitehead, who helps set wage policies at the International Labour Organization, a United Nations agency. "It represents a wage floor in the country below which no workers should normally be paid—unless the legislation provides exceptions," he notes, adding that a minimum wage represents a "starting wage" for the least-skilled employees.

The International Labour Organization promotes employee rights, encourages employment opportunities and fosters dialogue on work-related issues. According to its research, an estimated 90 percent of countries have minimum wage policies. The laws protect "most vulnerable workers, as well as playing an economic function as a reference for the labor market," Vaughan-Whitehead explains, pointing to the European Unionas an example. Twenty of 27 European Unioncountrieshave national statutory minimum wage rates.

Vaughan-Whitehead tracks how minimum wages compare to national average wages. In the majority of European Union countries, minimum wages represent 40 percent to 50 percent of average wages. The Social Charter of the Council of Europe recommends a threshold of 60 percent for the minimum-to-average-wage ratio. In the United States, the 2011 minimum wage was little more than 30 percent of the average wage.

"During the last financial and economic crisis, half of countries in the world decided to increase the minimum wage rather than freezing it in order to protect most vulnerable workers," Vaughan-Whitehead reports. For example, although Poland has one of Europe's lowest minimum wage rates—roughly $527 a month—it has steadily increased its rate in recent years.

That said, there is room for improving wages."In a number of countries," Vaughan-Whitehead continues, "the minimum wage is too low." Cambodia, Bangladesh and Russia are commonly cited examples of countries with minimum wages well below poverty lines. These rates, as well as low wages in certain industries—such as the garment and manufacturing industries—within low-paying countries have motivated a growing number of nongovernmental organizations to promote adoption of living and fair wages.

Total Compensation

Wages don't stand alone as a base for comparing employee costs.

"Although minimum wage is one variable in looking at costs of doing business in a location, it should not be used as a benchmark of what you would expect for employee costs or used as the primary basis for comparisons with other countries," notes Carolyn Gould, a principal with PricewaterhouseCoopers LLP in New York. "In many countries, the minimum wage is a small piece of the total compensation and benefits package delivered. In some countries where salaries are low, there are many additional benefits and statutory payments provided, such as vacation allowances and statutory bonuses and benefits. "If you look only at the minimum wage, you could grossly understate the employee cost."

Total compensation includes components such as housing, children’s education, retirement benefits, loans or vehicle allowances.

For example, although a minimum wage exists in India, few multinational companies employ minimum wage workers, according to Gould's colleagues with PricewaterhouseCoopers Pvt. Ltd., in Bangalore. Besides, minimum wages in India vary by location, job and level of experience. Additionally, minimum wage employees are often paid in cash and tend to receive salary components as one lump sum.

For a typical job at a multinational company, Gould's Bangalore colleagues report, the basic salary makes up only 40 percent to 50 percent of total compensation. Total compensation also includes components such as housing allowances or rent-free accommodations, children's educational expenses, retirement benefits, interest-free loans, vehicle allowances, and more.

The complexity of compensation conventions within countries frequently drives employers to purchase country-specific benchmark reports from consulting firms. Mercer's 2011 Worldwide Benefit& Employment Guidelines report on Vietnam, for example, contains 28 pages of analysis on general compensation conventions, statutory benefits, typical benefits practices and employment conditions. Available from many vendors, these types of reports can cost up to $10,000.

Goldman has used such reports. He finds them useful, although he points out that they can be expensive for smaller employers. He notes that any wage data—publicly available or paid for—typically need to be supplemented with other research, especially when a company is considering entering a city or region in a developing country outside of the two or three largest urban areas.

In those cases, "the HR professional really has to morph into a compensation consultant," says Ed Hannibal, the Chicago-based leader of Mercer's Global Mobility business for North America. "Collect every piece of information you possibly can." He says many clients gather data by talking with HR professionals in similar industries and by contacting local chambers of commerce.

Goldman says a chamber of commerce in northeast Brazil was helpful in giving him the lay of the compensation land when he worked for a company whose executives were setting up operations there. He advises HR professionals to do the research before making the strategic decision to expand to a new location.

And while minimum wage rates should be a component of international compensation research, Goldman and others agree that they remain just a starting point.

The author is a business writer based in Austin, Texas, who covers human resource, finance and social marketing issues.