The EU Pay Transparency Directive

The world of wage equality and salary transparency has recently been in greater focus due to the European Union’s new (EU) Pay Transparency Directive. The directive’s stated purpose is to eliminate pay discrimination, promote equity, and provide a level playing field for all working professionals. The legislation holds immense potential to reshape the organizational landscape and has sparked intense discussion due to its pervasive and wide-ranging impact.

During Payscale’s recent Compference, I had the opportunity to have a conversation with Michelle Gyimah, pay gaps consultant, and Rameez Kaleem, founder and director of 3R Strategy and author of A Case of the Mondays.

Bridging the pay gap

Primarily, the directive targets three potential stages of an employee’s career: pre-employment, during employment, and instances of pay discrimination. Crucially, organizations will soon be required to provide candidates with a defined salary range for their job role before the interview stage. Candidates will also have the right not to be asked by a prospective employer about current pay or pay history. Both these interventions are aimed at reducing chances of disadvantaging those who previously earned less.

The directive also goes a step further by establishing a clear framework for fair pay during employment. It mandates that employees may request salary information for a specific job category, ensuring prevalent pay scales are made transparent. Furthermore, organizations will no longer be able to enforce confidentiality clauses in contracts, unshackling wage discussions from the binds of secrecy.

The directive also includes an extensive plan for victims of pay discrimination, from the establishment of legal rights to compensation prospects and a paradigm shift in litigation. Moving forward, the burden of proof and the responsibility for establishing a fair pay culture will lie with the organization, thus magnifying their responsibilities while diminishing those of the victims.

Spurring organizational change

As discussed during our panel at Compference23, the introduction of such a directive prompts a pivotal shift in organizational dynamics, pushing orgs to tackle income disparities proactively and reposition their approach towards salary transparency. Employers will need to combat existing reluctance to disclose salary information and foster a culture promoting fairness and openness.

“With issues around Black Lives Matter, the global pandemic, and the ways in which these have made us think about work very differently, add to that the recession that we’re going through and the impact that has on the job market — and what you have is a collision of societal issues. Add to that the pay legislation making its way through. The directive has taken a subject that once was very niche and something that maybe only a few people talked about at recruitment or promotion time and made it very, very visible. Now, pay transparency is being seen as a systemic issue that employers need to address — and I think it reflects the shift in the power dynamics between employees and employers, because now pay transparency is being seen as a really high employee value proposition,” says Michelle Gyimah.

Indeed, concrete measures to eradicate pay gaps could result in a definite value addition to the talent acquisition process. The inclusion of pay ranges attracts more applicants and facilitates the process of hiring better quality candidates in less time. Additionally, it helps address labor shortages in today’s high-demand professions driven by evolving macroeconomic environments.

The intricacies of compliance

Compliance with the EU Directive presents an intriguing challenge, particularly for multinational organizations operating across multiple EU states. Ensuring adherence to the directive in every nation will increase jurisdictional risk due to possible multiple interpretations by each state in the EU. Yet, the immense impact of the directive will propel organizations to home in on these issues, ultimately serving as a catalyst for broader societal change.

Despite the complexities involved, adopting a clearly defined pay philosophy, transparent salary determination processes, and effective pay communication mechanisms can help counteract perceptions of unfairness. Viewing pay equality as an opportunity for talent attraction and retention provides an edge to increase competitiveness.

The EU directive brings to light the significant role of legislation in shaping public opinion and expectations concerning fair treatment. However, organizations need to be mindful that transparency is not just about disclosing individual salaries, but about sharing organizational pay structures, ranges, and the rationale behind their determinations. Notably, there has been an observed generational divergence on views towards pay transparency, with young professionals displaying greater comfort with open salary discussions.

“The vast majority of organizations are reluctant to share this pay information with employees because leaders are nervous about everyone wanting a pay rise. They’re not sure how to communicate pay,” according to Rameez Kaleem. “So that is what’s happening on the organizational side. And then we know that employees and candidates are really seeking transparency. A recent Gartner survey found that last year, almost half of the candidates in the job market didn’t apply for jobs because there was no salary range. For Gen Z employees, that number jumps to 80 or 85 percent.”

Despite its potential benefits on talent engagement and acquisition, some organizations remain reluctant to adopt pay transparency. In these cases, a cultural change is required to make sure that they are in a position to meet requirements as and when each EU member transpose the directive into law. In addition to having systems in place that enable pay transparency, organizations need to consider employee readiness for this monumental shift. Preparing and educating employees on communication etiquette and various scenarios that could arise is just as monumental. Including discourse on pay fairness within the organisational culture can promote openness and fairness.

While the EU directive primarily targets EU organizations, the conversation surrounding equitable remuneration is global. The legislation’s intent resonates with all striving for a just, equal, and open pay culture worldwide. Whether you’re an EU organization or not, this directive has widespread implications. Navigating the EU Pay Transparency Directive will be a learning curve for all, but a necessary one in our shared pursuit of corporate justice and equality. This marks an important opportunity to redefine traditional norms and evolve towards a world where pay transparency becomes creed, not just a compliance necessity.

To listen to the full conversation, sign up here to access the on-demand recording.

This article was originally published by the Reward & Employee Benefits Association (REBA).