Companies that pay fair wages weather downturn better

Just Capital research finds that firms that pay employees living wages performed 12.3% better than their peers

Illustrations by Pete Ryan

Determining just what makes a company socially responsible involves an ever-growing list of factors, from producing safe, reliable products and minimizing pollution to community development and protecting consumer privacy. But according to Just Capital, a New York–based association that measures and promotes positive business practices, there’s one indicator that the public considers most important: how companies invest in their workforce.

In simplest terms: do firms pay their employees a fair wage – or the lowest amount they can get away with?

Just Capital compared the financial performance of companies that pay relatively high wages to all their workers against industry peers that don’t offer premiums. Grinding through those companies’ financials through the economic downturn, job title by job title, Just Capital’s researchers found that the top 20% of firms enjoyed a 6.5% higher average annual return versus their industry peers. Companies whose miserly pay packets landed them in the bottom quintile were found to earn 3% less than their industry peers.

According to researchers Charlie Mahoney and Steffen Bixby, these results disprove the Dickensian notion that business profitability stems from keeping wages low and reducing labour costs. “Leading research shows that investing in workers – raising wages and providing strong benefits – improves business outcomes,” they write. “As companies are developing strategies to weather the current recession, they should start by considering how to improve the financial security of their workforce.”

In a similar study, the authors analyzed companies that pay a “living wage”; that is, enough money to enable a family to cover their minimum needs – including food, childcare, health insurance, housing, clothing and transportation. Again, generosity paid off.

The second study found that over the past 12 months, the top quintile of companies doling out a “living wage” achieved 12.3% better performance compared to their industry peers. Even the flintiest companies in the bottom quintile of the living wage bracket performed 1.1% better than the industry average.

Just Capital hopes this heaping helping of common sense will encourage more employers to offer employees higher wages and benefits. “Years of research have found that workers who do not have to stress about things like whether they can afford a doctor’s visit or medication stay with their companies longer, and are more engaged,” Mahoney and Bixby say. “It’s expensive to replace an employee, and a more engaged workforce is more productive.”

But common sense is never common. Prior to the pandemic, compensation surveys indicated that employers in Canada and the U.S. were expected to boost pay this year by 3.3% – a rate largely unchanged over the past nine years.

Rick Spence is a business writer, speaker and consultant in Toronto specializing in entrepreneurship, innovation and growth. He is also a senior editor at Corporate Knights.

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