The New EU Directive on Pay Transparency

How It Will Affect Your Organization and How You Should Prepare

Pay discrimination and the gender pay gap are persistent in the EU, affecting millions of workers and undermining social justice and economic efficiency. According to the EU, there is a gender pay gap of 13% and a pension gap of 30%. The European Commission has adopted the Directive EU 2023/970 on pay transparency to address these challenges. The objective is to ensure that workers have access to information on pay levels and pay differences and that they can enforce their right to equal pay for equal work or work of equal value.

Any EU Directive must first be transposed into national legislation, in this case until 2026. The first reporting obligation will not come into force until a year later, 2027. Legally, there is no hurry.

But practically, there is. First, the member states don’t have to wait until 2026. They already have legislation on pay transparency that can be easily updated. Second, the Directive is very detailed, which makes the national legislative process even quicker.

Third, organizations need a bit of time to prepare for their obligations. What should they prepare for?


The requirements of the EU directive on pay transparency

The Directive expressively comprises “equal work” and “work of equal value”. Member states will have to develop concepts to determine the value of work. This might include skills, competencies, stresses, responsibilities, or working conditions. Whatever they come up with will probably be contested and surely be interesting. No matter the outcome, the following three main requirements will concern all organizations – with some facilitation and longer deadlines for companies with less than 100 employees.


1. Pay information for job applicants

The first main requirement is that employers must provide information on pay ranges or starting salaries for advertised positions (including variable pay), and refrain from asking candidates about their pay history.

Why is this requirement important? According to the European Commission, pay discrimination and the gender pay gap are partly caused by the lack of pay transparency in the labor market. Employers do not usually disclose pay information in their job advertisements, and some prohibit employees from discussing their pay with others. This creates information asymmetry and bargaining power imbalance between employers and employees and allows pay discrimination and pay gaps to persist. Moreover, some employers base their pay offers on the candidates’ pay history, rather than on the candidates’ value and the job’s responsibilities. This can result in unequal pay outcomes, especially for women and other disadvantaged groups, who tend to have lower pay histories due to various factors, such as career breaks or part-time work.

Employers must decide which numbers to communicate and how, i.e., a salary, a pay range, or tariff provisions. They must be aware that their pay policy – often an important competitive factor – will become public knowledge at least partially.


2. Pay information for workers

The second key requirement is that workers must have the right to request and receive information on average pay levels and pay differences, broken down by sex, for categories of employees doing the same work or work of equal value, and the criteria used to determine pay and career progression.

Why is this requirement important? Many workers do not know how much their colleagues earn, or how their pay is determined and adjusted. This creates a barrier for workers, especially women and other disadvantaged groups, to identify and challenge pay discrimination and pay gaps, and to negotiate fair and equal pay. Some employers do not have clear and objective criteria for setting and reviewing pay and career progression and rely on subjective factors, such as personal preferences or negotiation skills. This can result in arbitrary and unequal pay outcomes and undermine the performance and motivation of the workers.

Employers must prepare a set of coherent criteria to determine their pay practices because they will need to inform their employees in detail whenever asked. If there is an unjustified pay gap, employees can claim their right to equal pay for equal work and – if applicable- compensation (see below). Employers also need to inform their employees actively and regularly about the right to ask and the respective procedure.


3. Pay reporting and action

The third important requirement obliges employers to report annually on the gender pay gap in their organization to the relevant national authority and take action if the gap exceeds 5%.

Why is this requirement important? Many employers do not measure or disclose the pay gap between men and women in their organization, or the causes and consequences of the gap. This creates a lack of awareness and responsibility for the pay inequality issue and prevents the implementation of effective measures to reduce the gap. Moreover, some employers do not take action to address the pay gap, or the action they take is insufficient.

Employers need to prepare a system for data collection, measurement, and analysis. If the pay gap is larger than 5%, they need to plan and implement measures to reduce the gap.


4. Compensation and protection for victims

The final main requirement of the EU directive on pay transparency is that employers must ensure compensation and protection for victims of pay discrimination. There are penalties or fines for employers who break the rules.

Why is this requirement important? Many workers who experience pay discrimination and pay gaps do not have access to effective remedies, such as back pay, damages, or injunctions, or they face obstacles and risks, such as high costs, long procedures, or retaliation, when seeking compensation and protection. As of today, most employers who practice pay discrimination do not face any consequences. This creates a sense of impunity and indifference to the pay inequality issue.

The state will have oversight over organizations’ pay practices and can impose coercive measures. If it was possible in the past to save money on salaries by not addressing pay gaps, the most budget-friendly way for employers in the future would probably be to eliminate all pay gaps. Even if it means raising salaries in some cases.


How to prepare for the new EU pay transparency legislation?

Here are some activities you can undertake, and how they compare in terms of time and cost:

1. Conduct a pay audit

Analyze systematically the pay structure and pay levels in your organization, to identify and measure any pay disparities between men and women, and the factors that contribute to them. You will need to compile data about your employees, from the payroll, for different periods, and total compensation. You should also include market rates and pay scales. This will enable you to determine average pay (gaps), and median pay (gaps), as a base for a potential action plan together with the necessary budget.

The audit will help you comply with the requirements of the directive, such as providing pay information for job applicants and workers, reporting, and taking measures on the pay gap. But look at it as an investment with a positive return: A pay audit will also help you improve your pay practices and policies, and enhance your performance and reputation.

This process can take several months to complete, depending on the size and complexity of your organization, and the availability and quality of your pay data. It can also entail costs, such as hiring external consultants, investing in software and tools, and implementing the recommendations of the audit.


2. Review your pay policies and practices

Your pay policy is the philosophy behind the principles and procedures for determining and reviewing pay and career progression. Your pay practice is the way you apply the pay policy in practice, such as how you set and communicate pay ranges or starting salaries, how you conduct pay reviews, or how you handle disputes.

A review of your pay policies and practices is necessary to identify where you need adjustments to comply with the requirements of the directive. But also this step is an investment with a return: Better pay practices will foster a culture of trust and openness in your organization with positive effects on the bottom line of the business.

This process can take several weeks to complete, depending on the scope and depth of the review, and the involvement of your stakeholders (get managers and employee representatives on board early). But the overall investment of time will be moderate and external support is likely unnecessary.


3. Communicate and engage with your stakeholders

The people who are affected by your pay policies and practices influence the process and its perception, such as managers, employees, employee representatives, investors, regulators, and even the public.

Communicating and engaging with your stakeholders might not be the first item on your list. But don’t underestimate the effect of knowing their concerns and expectations, and getting their feedback and public support. This will be an ongoing task throughout the process. Activities will depend on the outcomes of your audits and the measures you want to take. Count on the support of your colleagues in PR and marketing.

What’s the one thing you should start with?

We are biased, but our argument is solid: Start with a job architecture. The previous steps become easier, faster, and cheaper if you have a job architecture in your organization.

Your job architecture is the system that organizes the jobs in your organization along your value chain. The system goes beyond listing job titles and includes details about the skills and competencies required for each job, the grades and levels associated with them, and how they compare to similar jobs in the region or industry.

It’s the system that connects how your organization earns money (your value chain), with the people you need to develop your business (skills, requirements), their organization (job families, levels), and their relative value for the organization (position in the structure, pay), allowing for a comparison with your industry (benchmarking).

Your job architecture provides the main pillar to comply with the new EU Directive on Pay Transparency: It creates a coherent, efficient, comprehensible, and communicable structure that determines which compensation is being paid to whom and why.

We usually argue that you should get a job architecture because it creates a stable yet flexible structure for transformative times, enabling better strategic workforce planning, talent management, and technology adoption. A better pay structure is just one of the arguments. Let the preparation for the obligations under the pay transparency directive be the trigger for your organization to take advantage of all other benefits.

Have a closer look at our software to build job architectures or schedule a demo.