The Big Picture
The gap between the richest and the poorest U.S. households is now the largest it’s been in the past 50 years—despite the median U.S. income hitting a new record in 20181 and despite 10 years of low unemployment and economic expansion. This is not just a U.S. phenomenon, as we have seen protests break out across the globe in frustration of social, economic and racial inequalities.
On the issue of income inequality, inflation-adjusted wage growth has been more modest with the lowest wage workers experiencing little to no growth in real wages. The top 1.0% of earners now earn 157.3% more than they did in 1979 and with more than double that wage growth, up 343.2% since 1979.2 In contrast, wages for the bottom 90% only grew 22.2% in that time.3 Highly visible CEO and senior management compensation has increased, most notably through the now-public measure of CEO-to-worker pay ratios, which have gone from less than 20 times in 1965 to over 200+ times currently.4 While there are nuances and challenges related to this single metric, it does speak directionally to the underlying wage issue trends that have developed over this timeframe.
Why Does It Matter?
The impact to investors, as noted by the PRI, is that income inequality has the potential to negatively impact institutional investors’ portfolios as a whole, increase financial and social system level instability, damage output and reduce economic growth, as well as contribute to the rise of populism, extremism, isolationism and protectionism.5
A strong middle class creates a stable source of demand for goods and services and underpins a healthy economy. Corporations are significant contributors to employment, of which 85% of 140 million non-farm payroll jobs are in the private sector6 and can help to make contributions to employee wage growth and upward mobility.
How Do We Engage as Investors?
In our role as investors who engage companies on a range of sustainability issues, we seek to understand how multinational corporations can contribute, in a positive way, to reducing economic inequalities. The biggest takeaway from speaking to companies on how they take fair living wages into consideration is that there is no one-size-fits-all. In most cases, companies are being thoughtful in how they structure pay packages and benefits across the organization. In addition, many companies also implement programs to enhance upward mobility by offering tuition reimbursements, training and mentorship programs.
Some specific examples of employee wages include:
- Many companies have an annual process in place to review wage data and take minimum wage changes into consideration globally. Companies often consider employee surveys and feedback to help drive decisions around total pay packages.
- An auto parts retailer extended employee stock options to front-line employees, and is investing in supply chain hourly employees where turnover is extraordinarily high.
- A consumer goods company conducted a living-wage analysis across the company and adjusted wages as necessary.
- An auto parts supplier in Mexico and China provided benefits such as meals, transportation, pension, paid time off, flex working arrangements and tuition reimbursements.
- A healthcare company, looking across its manufacturing base, a medical device company aims to determine what portions of compensation would be included when benchmarking a living wage.
- An industrial distributor includes retirement profit-sharing for everyone. All jobs have career-pathing to identify objective milestones and next steps for career growth.
- A forestry company, with employment primarily in rural areas, benchmarks wages across industry and geography to ensure fair levels and maintains good union relations. Each individual employee has a development plan that they work on with a supervisor.
- An equipment rental company conducts an annual deep analytic process utilizing the Economic Data Institute, Mercer and other resources. More than 99% of employees are full-time, benefits-eligible and are paid a living wage. This has led to long tenure for hourly workers. The company also aimed to address the retirement gap by offering a 401k with company match linked to auto enrollment, which led to a 90%+ participation rate.
- In some cases, where applicable, companies conduct a living wage analysis across their own operations and/or supply chains. Companies identify regional living wages by working with third-party organizations, then adjust wages based on those findings.
As with many ESG issues, there is a spectrum for how far along companies are in their journey for arriving at a true living wage. One of the main challenges of paying a living wage is that all parties must first agree on what exactly that number or total package should be. This of course differs from state to state, country to country, and region to region, globally. Some organizations are focused on the fair/living wage issue, attempting to benchmark what a living wage standard should be across different regions globally; they include the Fair Wage Network, the Living Wage Network and the Global Living Wage Coalition. The Workforce Disclosure Initiative (WDI) further aims to enhance disclosure around workplace practices and wage standards.
Over the years, we have engaged companies on what they can do to narrow the income inequality gap. Aside from income inequality, we similarly focus on addressing other forms of inequality, such as minimizing the gender pay gap, racial inequity and healthcare disparities. We will continue to engage and track these developments across our portfolio holdings.