A blog by FWF’s Kees Gootjes.
In 2003, an attempt at regulating some of the excesses of corporate governance had the unintentional effect of creating a ‘race to the top’ in top level salaries. While causing public outcry, there are some important lessons the millions of underpaid garment workers worldwide can learn from what happened in The Netherlands – with a little help from FWF’s new and improved Wage Ladder tool.
The Dutch Corporate Governance Code (or ‘Code Tabaksblat’) introduced a number of best practice principles that Boards of Directors of Dutch publicly traded companies had to abide by. One of the best practices affected executive compensation. In previous years, executive compensation had increased dramatically – even when companies performed poorly.
In an effort to reduce such excessive compensation, the Code Tabaksblat encouraged companies to publish the salaries earned by top management. In the years that followed, many companies implemented this recommendation and dutifully published executive salaries in their Annual Reports. What resulted was a ‘peer group’ of comparable companies and their executive compensation levels.
An unintended ‘race to the top’
Interestingly, instead of reducing excessive salaries, the following years showed a continued increase of compensation levels. Some claimed that compensation levels had actually increased more rapidly after the Code Tabaksblat recommendation.
This is how it works: in order to retain top management, boards felt obliged to offer competitive salary levels – to keep up with their peer group. This inevitably leads to a ‘race to the top’ for salaries: There are accounts of top executives walking into salary negotiations with arms full of Annual Reports supporting their demands for wage increases.
FWF Wage Ladder 2.0
FWF recently launched its new wage ladder. One of the most important elements of this new and improved online tool is its ability to track and compare wage levels across production countries by standardising the department names within each garment factory. The new wage ladder allows FWF to identify wage levels in any production country where it is active and compare this to any factory that it is auditing.
This is critical (and prior to the FWF wage ladder, largely missing) information for brands, factories and worker representatives seeking to make progress on living wages.
But when considered more broadly, the new wage ladder also may well be laying the groundwork for a beneficial ‘race to the top’ for garment workers.
A beneficial ‘race to the top’
While we do not yet have the data or processing capacity to do this, wouldn’t it be great if eventually FWF could include in the FWF wage ladder aggregate wage levels of garment factories in each production country? Benchmarks indicating average and highest wage levels could be included on wage ladders in FWF audit reports and also would be publicly accessible.
In this way, FWF member brands would be able to compare the wage levels of the factories where they source to the wage levels that have been proven possible in comparable factories.
And, because the wage ladder is open source and public, factory managers and garment workers (via local stakeholders) could also access the aggregated wage data. This would help address the massive information asymmetry that in part underpins garment workers’ low wages. Workers and their representatives would be empowered to approach factory management with a demand for higher wages, citing higher wage levels other comparable production sites.
Starting a virtuous cycle
For employees at the top of heap in terms of wages, increased transparency had an (unintended) negative consequence. The same principle, however, when applied to the bottom, could have tremendous beneficial impact for millions of garment workers.
Kees Gootjes is a member of FWF’s Verification team and worked on the launch of the FWF Wage Ladder 2.0. Kees also oversees FWF’s Macedonia project, where he test-drives FWF’s new costing sheets and works with brands, factories and stakeholders to increase wages through productivity gains and/or increased FOB prices.