How the EU Pay Transparency Directive Will Impact Your Next Compensation Reviews

How the EU Pay Transparency Directive Will Impact Your Next Compensation Reviews 

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We’ve talked pretty extensively on this blog about the EU pay transparency directive. But there’s one area we haven’t covered: how it will impact your compensation review process.

The fact is, the directive is about to totally transform the way certain companies handle compensation. Because they’ll be open to a lot more scrutiny, employers will have to be 100% sure that their compensation systems are fair and unbiased — and that starts with the compensation review process. 

Read on to find out what’s about to change. 

Psst! This post is an edited excerpt from our recent report, Compensation Reviews in the Era of Pay Transparency. In it, we share insights from our latest compensation review survey, plus tips on running compensation reviews that comply with the EU pay transparency directive. Download the full guide here!

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What’s this pay transparency directive all about? 

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Need a quick refresher on the pay transparency directive? Here’s the lowdown: 

In 2023, the EU Parliament and Council approved a new directive that aims to increase pay transparency for companies in Europe. Member states now have until 2026 to transpose the rules into national law. 

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Here’s what will change once those rules are in force:

• Transparency around pay decisions: Employers will have to share the criteria used to determine pay and how decisions about career and pay progression are made. 

• Employee rights to pay information: Employees will be able to request information about average pay levels, broken down by sex, for employees doing the same work or work of ‘equal value’. 

• Rights for jobseekers: Employers will have to tell jobseekers the starting salary or pay range for a role before they apply. They also won’t be allowed to ask potential hires about their pay history. 

• Gender pay gap reporting: Companies with 250 or more employees will have to report annually on their gender pay gap, and those with 150+ employees will have to report every three years. Any company with a non-justified gender pay gap of 5% or more will have to take corrective action within six months or conduct a joint pay assessment (JPA) with workers’ representatives.

• Compensation for employees in pay discrimination cases: Employees who have experienced gender-based pay discrimination will be entitled to compensation, including full back-pay — and the burden of proof in discrimination cases will be on the employer. 

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Planning your next pay reviews: the impact of the EU pay transparency directive 

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So, what’s all this got to do with compensation reviews? 

As we’ve said, companies are about to have their pay practices put under the microscope. That means that you need to be absolutely certain that the way you make pay decisions is fair and equitable — or you could end up in hot water. 

And, since the compensation review is the moment when a lot of those decisions are made, reviewing your process is a good place to start. 

Building transparency into the process

The whole idea behind the directive is to improve transparency around pay, with the view to reducing or eliminating the gender pay gap and other forms of pay inequity. That means that your entire compensation review process is about to get a lot more open. 

Now don’t get us wrong: we’re not saying you’ll need to have confidential conversations about salary in front of your entire workforce. But the directive does specifically state that companies will need to be transparent about how they make decisions about pay. And naturally, these criteria need to be gender-neutral and objective. 

Now, most organisations probably don’t believe that they’re making decisions about pay based on the sex of the employee in question. But the directive is very specific that employers need to avoid criteria that are ‘ based directly or indirectly on workers’ sex’ — which requires a bit more investigation. 

In short, organisations will need to properly evaluate everything that goes into the way they make decisions around pay and pay progression — in other words, who gets a promotion or a pay rise and who doesn’t. 

Of course, organisations can choose how openly they want to communicate about their decision-making process. But once the rules set out in the directive are in play, they’ll need to be ready to justify their decisions if an employee asks for an explanation.  Even those who have good intentions might find that some elements of their pay structure won’t wash once the directive comes into effect. 

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Gender pay gap reporting 

Under the directive, companies with 250 or more employees will have to report on their gender pay gap each year. And those with between 150 and 250 employees will have to do this every three years. If your country doesn’t currently require companies of your size to carry out gender pay gap reporting, this might not be something that you consider during your compensation review process. 

However, a growing number of companies are already dedicating part of their compensation review budget to reducing their gender pay gap. While this is still relatively rare, it will likely become more and more common in the next few years. 

Once the rules set out in the EU directive are fully in force, companies that find a gender pay gap of 5% or more will have to come up with an action plan to resolve it — and setting aside a specific budget for this could be a valuable part of that. 

When you look at it that way, it makes sense to get a head start by getting a handle on your gender pay gap now. 

Depending on how you organise things within your company, this doesn’t necessarily have to happen at the same time as your general compensation review. However, it does make sense to group the two exercises together, so that you can use your compensation review to address your gender pay gap if you find one. 

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How to run compliant compensation reviews in 2024 

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With the EU pay transparency directive just around the corner, it’s never been more important to make sure your compensation review process is as fair and effective as possible. 

Thankfully, we have just the tool for you: our new compensation review module. You can use the module to run streamlined, effective compensation reviews in a fraction of the time it used to take. And our in-built intuitive visuals, analytics and smart salary recommendations will give you the confidence to make stronger, data-driven decisions about pay. 

Want to learn more about what Figures can do? Sign up for a free demo to see it in action. 

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Psst! Want more compensation insights? Download our guide, Compensation Reviews in the Era of Pay Transparency for everything you need to know to run effective, transparent pay reviews. 

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