This report proposes an alternative accounting approach for wages paid below the local living wage level. The authors suggest a double-entry bookkeeping approach, where wages below the living wage threshold create a leverage effect and lead to increased stakeholder risk. This leverage effect can then be recorded on a company’s balance sheet. By doing so, investors, policymakers, customers, corporate managers and other stakeholders can assess a company’s exposure to human capital erosion. This approach challenges the current accounting system that records employee wages as an expense on the income statement.

Companies paying below the living wage expose themselves to reputational and operational risks. Recent surveys indicate that consumers believe businesses have a duty to pay everyone a living wage. At the same time, investor activism is growing, and dialogue between investors and companies on paying living wages is increasing. Companies may also face regulatory pressure, i.e., minimum wage requirements, and increased scrutiny of wage practices, as stakeholders focus on organizational impacts on employees.

Low wages can negatively impact a firm’s sustainable operations, and lead to a decline in employee well-being, a proxy for poor mental health. The leverage effect can increase over time, reflecting an increased borrowing from society and adding to stakeholder risk.

Therefore, companies must practice transparency and standardisation of accounting for wages. The new approach allows for a verifiable and tractable process of the evolution of the leverage effect. It can also incentivise adequate employee compensation by introducing two accounts on a parallel balance sheet, a wage liability account, and a social goodwill equity account.

Thus, the authors recommend that companies adopt a double-entry bookkeeping approach to account for living wages. By doing so, organisations can avoid reputational and stakeholder risks and move beyond simply treating wages as an expense on the income statement. Instead, they can adopt a more transparent approach that allows for greater growth in earnings through adequate employee compensations.

Recommendations

• Companies should adopt the accounting approach that includes a double-entry bookkeeping system on a company’s balance sheet to account for wages paid below the local living wage level.
• Companies should shift their focus to adequate employee compensation rather than merely minimising their wage bill.
• Companies should move towards transparent and standardised wage accounting to enable stakeholders to understand the borrowing amount from society.