Reference no: EM132927552
IKEA Tries to Provide a Living Wage
Along with a legal requirement to pay at least the mini-mum wage, some employers also see a social responsibility requirement to pay workers at least a living wage-that is, enough to provide themselves and their families with the basics of daily life. Paying a living wage is one way to treat employees with dignity.
Sweden-based furniture and home furnishings retailer IKEA is among the companies that have committed to paying a living wage. IKEA recently announced that in the United States it would raise the lowest hourly wage it pays, going from $9.17 per hour to a nationwide average of $10.76. The change affects about half of the employees in its 38 existing stores and will apply to those hired at new locations.
The $10.76 figure is not a set amount that will apply nationwide, but an average across facilities. IKEA intends to calculate a minimum for each store based on the local cost of living. It uses the MIT Living Wage Calculator, which factors in the costs of food, housing, taxes, and trans- portation. IKEA's wages will be based on the amounts cal- culated for a single person without children. In Pittsburgh and West Chester, Ohio, the minimum will be just $8.69; at the other extreme, workers in Woodbridge, Virginia, will receive wages starting at $13.22 per hour. Thus, wages are influenced by employee needs, not solely based on market rates. IKEA also said it would review wages every year but did not commit to raising rates every time the calculator shows a higher cost of living.
Before the wage increase, IKEA already exceeded the federal minimum wage of $7.25. IKEA also is generous relative to competitors. Gap, whose stores include Banana Republic and Old Navy, announced it would phase in an
increase to $9 in 2014 and then to $10 in 2015. Following IKEA's announcement of the new $10.76 minimum wage, Walmart's Twitter account sent a tweet saying its "average hourly wage for full and part time associates is $11.81." However, Walmart did not draw a comparison with its hourly minimum.
IKEA sees the establishment of a living wage as sup- porting its mission of creating a better everyday life for people-in this case, its employees. Rob Olson, IKEA's chief financial officer, indicated that the company does not intend to raise prices to make up for the added expense of higher wages. Rather, it hopes that because the company "invests in" its employees, they in turn will invest more of themselves in the stores and their customers.
Questions
1. What are some risks and challenges that IKEA is likely to face as a result of basing its minimum pay on the living-wage formula, rather than just legal requirements and the market rate?
2. Given that IKEA's management considers the living wage to be consistent with the company's mission, what advice would you give the company for implementing it successfully?