The intention of the agreement is to solidify the principle of equal pay for equal work through enhanced transparency and enforcement. The focus of the incoming regulations is on the pay differences between men and women.
Taking a broader view, the Pay Transparency Directive aligns with another signature regulation the EU has recently passed: the Corporate Sustainability Reporting Directive (CSRD). Set to be finalized in June 2023, this directive will require companies to disclose the percentage gap in pay between men and women, in addition to the total compensation ratio of the highest paid individual to the average total compensation for all employees.
“The pay transparency directive will nicely complement the CSRD directive and help companies ‘walk the talk’ when it comes to pay equity,” says Frederique Lange, Aon’s head of environmental, social and governance (ESG) advisory for EMEA. “Board members, labor unions, employees and investors are increasingly scrutinizing and tracking pay-related KPIs. This reinforces that pay and the surrounding topics of equity and transparency are no longer nice-to-haves, but key pre-requisites for an ESG and DE&I [diversity, equity and inclusion] strategy that will last in the long term.”
The EU directive contains many details for companies to consider but, overall, the best course of action is to act now. Organizations that plan for change will experience numerous benefits that extend beyond the regulatory compliance, such as career planning, employee attraction and retention, advancing ESG initiatives and building trust.
Here’s what to expect and how to best prepare.
EU Directive Requirements on Pay Transparency
When the directive comes into effect, employers with at least 100 employees will need to publish information on the pay gap between female and male workers. In the first stage, employers with at least 250 employees will report every year, and employers with between 150 and 249 employees will report every three years. Where a gender pay gap of 5 percent or above exists, employers will also be required to work with their employee representatives/works councils to conduct a deeper analysis and develop a corrective action plan. Additional key requirements include:
- Job applicants will have the right to receive information on the initial pay level/range for any advertised position and employers cannot ask about previous or current pay.
- Employers cannot prohibit employees from disclosing their pay details (e.g., pay secrecy/confidentiality clauses).
- Employers must share information on how pay is set, progressed and managed. They similarly are required to disclose details on their promotion and progression criteria. Any pay differences must be related to objective criteria (e.g. performance/market premium), not related to gender.
- Tools to compare and assess pay levels must be based on gender-neutral criteria and include gender-neutral job evaluation/classification systems. This could represent a significant change for any employers who do not have a job architecture underpinned by a recognized analytical job evaluation methodology.
- Although most countries already have pay equity mechanisms in place, they will have to certify they meet the terms of the directive and as a result additional changes are anticipated. For those without pay equity programs, this will be a substantial change.