Business

FLA Expects New Compensation Plans In 2018

Fair Labor Association Reports Compensation Figures for Factories In 21 Countries

The Fair Labor Association (FLA) released its first annual compensation report in August, publishing data on the earnings of workers in 124 mostly apparel and footwear factories assessed by the FLA in 2015. This first-of-its kind collection and publication of wage data and analysis is part of a commitment by the FLA and its affiliates to improve compensation for workers in global supply chains.

For each factory where FLA assessors collected compensation data, the FLA has produced a chart depicting how much workers are earning, compared with other local benchmarks, such as the legal minimum wage, World Bank poverty levels, and cost-of-living figures developed by governments, unions, non-governmental organisations (NGOs) and others. Intended to place workers' compensation in a local context, these "wage ladder" charts provide a snapshot of workers' purchasing power at current compensation levels in each of the 21 countries where FLA assessors collected data.

At the four factories assessed in Bangladesh in 2015, the FLA found average compensation (including benefits and incentives, and excluding taxes, legal deductions, and overtime) fell below the World Bank poverty line for a three-adult-equivalent household. Compensation for workers in assessed facilities in Cambodia, the Dominican Republic, India, the Philippines, and Sri Lanka (and for migrant workers in Jordan) averaged above World Bank poverty lines, though the FLA found that purchasing power of compensation for these workers remained relatively weak in these countries. Average compensation was found to be highest relative to the World Bank poverty line in the 14 factories assessed in the United States.

"Companies that affiliate with the FLA affirm that workers have a right to fair compensation in every country where they source," said Sharon Waxman, president of the FLA. "Historically, brands have found it challenging to determine how close they have come to achieving this commitment. The FLA's annual compensation report will help focus attention on regions and facilities where workers' purchasing power is shown to be weakest, and where action is needed most."

The annual compensation report also shares the FLA's 2015 findings of legal pay violations, with 20% of the factories assessed found to have miscalculated overtime pay, and 6% of factories found to have minimum wage violations. The FLA will continue to collect compensation data in its 2016 factory assessment cycle and in subsequent years, helping steadily to increase the awareness companies, unions, NGOs and other interested stakeholders have of the areas where workers are at the greatest risk for their wages being insufficient to provide for their needs in the local context.

Legal pay violations continue

FLA factory assessors found that while legal pay requirements were respected in approximately two-thirds of suppliers assessed by the FLA, pay violations occurred in the remaining one-third of suppliers. Overtime pay violations were found in more than 20% of factories assessed in 2015. The frequency of minimum wage violations has been falling over the past five years, but 6% of factories assessed in 2015 were found to be violating minimum wage laws.

FLA compensation data indicate where average worker compensation buys the least

The FLA found that for factories assessed in Bangladesh the purchasing power of average compensation - a measure that includes base pay, and some benefits and incentives, but excludes overtime - fell below the World Bank poverty line. While above the poverty line, purchasing power of compensation remains relatively weak for factories assessed in Cambodia, the Dominican Republic, India, Sri Lanka, and the Philippines, and for migrant workers in Jordan - where the legal minimum wage is set lower than the legal minimum for local workers. In these countries, workers may be least likely to earn enough to meet the FLA Code of Conduct standard of "basic needs and... some discretionary income."

Purchasing power of average compensation was found to be around 2.5 times the poverty line in factories assessed in China and Vietnam - two giants of apparel and footwear production - and was found to be highest in Turkey, Taiwan, and the US.

Legal minimum wages appear to be a primary factor in determining factory compensation levels. In half of all factories assessed and in two-thirds of countries covered in this report, average compensation hovers near the legal minimum, with workers earning between one and 1.5 times the minimum wage. Average compensation in the other half of factories assessed was more variable - falling mostly between 1.5 and 3.75 times the legal minimum.

Average compensation that is anchored to minimum wages has a negative impact on workers where the purchasing power of minimum wages is weakest - Bangladesh, Cambodia, the Dominican Republic, India, and the Philippines.

In these countries, there is an important opportunity for active engagement between brands, suppliers, national policy-makers, unions, and others to advance fair and inclusive minimum-wage setting, and to support the building of effective frameworks for industry bargaining. Non-payment of benefits is another recurrent issue. For example, assessments in China illustrate an industry-wide problem - routine and widespread deficiencies in social insurance and housing provident fund coverage:

- 69% of 39 FLA assessments in China in 2015 found workers not being provided with one or more of the five types of social insurance (pension, unemployment, medical, work accident, and maternity)

- 79% of the assessments found that social insurance benefits were calculated using an incorrect contribution base, such as the minimum wage as opposed to workers' actual earnings

- All assessments but one found insufficient or no contributions by the employer into the Housing Provident Fund.

Minimum wage, average factory wage, and World Bank poverty lines

The figure (Minimum wage, average factory wage, and World Bank poverty lines) shows that both the legal minimum wage (red) & the purchasing power of average monthly compensation (blue) fall below World Bank poverty lines in Bangladesh. Compensation in Bangladesh (PPP$ 154) is less than half the compensation level in the next country on the chart-Jordan, at $ 341 -and significantly below all those that follow, such as Cambodia ($360), Dominican Republic ($455), India ($461), Sri Lanka ($491), the Philippines ($512).

Average compensation compared to the World Bank poverty line for a family with the equivalent of three adults reinforces the analysis above. Purchasing power of compensation in factories assessed in Bangladesh is only 85% of the World Bank poverty line. Purchasing power is less than twice the World Bank poverty line in Cambodia, the Dominican Republic, India, Sri Lanka, the Philippines, and in Jordan (for migrant workers). The purchasing power of compensation is around 2.5 times the poverty line for two giants of apparel and footwear production - China (2.4) and Vietnam (2.6). Finally, average compensation is highest among the higher-income countries - Turkey, Taiwan, and the United States.

The right-most column in the table (Minimum wage, average factory compensation, and World Bank poverty lines) shows the relationship between the purchasing power of average compensation and the applicable minimum wage. The ratio is close to one where the purchasing power of average compensation and minimum wage are closest. This indicates the importance and power of minimum wage-setting in determining the value of actual compensation for workers.

Five countries in which the purchasing power of average compensation is weakest exhibit a relatively strong correlation between minimum wages and average compensation: Bangladesh (1.31), Cambodia (1.52), the Dominican Republic (1.27), India (1.19), and the Philippines (1.03). In these countries, this correlation represents an opportunity for stakeholders to have the greatest impact for workers by supporting strong minimum wage-setting mechanisms or engaging in sectoral bargaining.

The Next Step

The FLA and other stakeholders will use the data in this report to drive engagement with approaches like the following, for making progress towards fair compensation:

At the factory level, the incidence of pay violations suggests that there is significant room for efforts involving workers, unions, brands, and suppliers to find and remediate pay violations, and to create systems that help ensure that workers are paid what the law requires. Pay systems that are accurate, transparent, and clearly communicated are a core requirement for FLA-affiliated companies.

At the national level, opportunities for pursuing fair compensation through advocacy of higher legal minimum wages appear in countries where the data indicate that the purchasing power of the current legal minimum falls below or near the World Bank poverty line. Active engagement between national policy-makers, unions, brands, and suppliers to advance fair and inclusive minimum-wage setting and to support the building of effective frameworks for industry bargaining is a component of the FLA's Fair Compensation strategy.

At the brand level, where the data suggest that compensation does not meet workers' basic needs and provide discretionary income, companies will need to investigate appropriate strategies for adjusting their sourcing model to account for the cost of fair compensation. These adjustments may be related to improved productivity or efficiency, may be reflected in the prices paid by brands, or may derive from emerging research on new strategies for fair compensation. Just as some FLA-affiliated companies have pledged to "incorporate locally negotiated wage increases into our FOB prices" in support of workers' collective bargaining efforts, companies may follow similar strategies to enact their commitment to fair compensation.

Implementation Roadmap

For the FLA and other stakeholders, next steps include the drafting of a guidance document proposing elements of fair compensation strategies, such as changes in purchasing practices, multi-stakeholder collective action at the sectoral or national level, and factory-level due diligence and planning. The FLA roadmap will not name specific compensation figures that affiliated companies have to meet, but will outline goals that FLA-affiliated companies and stakeholders are expected to work into their plans.

The FLA, affiliated companies, and others will use the implementation roadmap - and their own considerable experience with costing, sourcing, collective bargaining, brand/supplier collaboration, and policy advocacy - to draw up progressive and practical compensation plans. Implementation is planned in 2018.