EU Pay transparency: Corporates still in 'wait-and-see mode'

06 March 2024 Consultancy.eu 3 min. read
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Europe is rolling out new laws that will force large companies to be more transparent about their pay practices. Research from Korn Ferry shows that companies have not yet moved into action and are still in ‘wait-and-see mode’ as they gauge the impact of EU regulation.

Pay transparency is starting to be targeted by governments for regulation – especially in advanced economies like those in Europe. This has become a hot topic in recent years with pay gaps remaining a lingering issue. In response, new regulations are beginning to emerge that require greater transparency from employers.

The EU Pay Transparency Directive, which came into force on 7 June 2023, introduces new obligations on employers to publically disclose salaries, share information on how pay is set, and provide salary details to job applicants.

Where are you with your current pay transparency efforts

Source: Korn Ferry, Global Total Rewards Pulse Survey

These rules are designed to back up the principle of ‘equal pay for equal work’ by enhancing transparency and enforcement, with the hope of finally bridging stubborn pay gaps, like those related to gender or race. It is an ambitious piece of legislation and it is not yet clear how thoroughly it has been implemented.

According to research from Korn Ferry, a global consultancy specialized in human capital, corporates are aware of what’s coming at them, but have not yet shifted gear. While greater transparency seems to appeal to organizations, there is some apprehension over what compliance with new regulations will look like in practice.

A total of 45% of respondents said they want to first see how the regulatory environment unfolds before taking concrete action. For its study, Ferry canvassed the views of over 2,500 managers and HR leaders worldwide.

Pay transparency relative benefits vs costs

Source: Korn Ferry, Global Total Rewards Pulse Survey

“When it comes to pushing pay transparency efforts, whether in compliance with local regulation or not, business leaders are mostly taking a wait-and-see approach,” said Erik-Jan Vegers, partner at Korn Ferry.

As far as the concrete effects that greater pay transparency could have in their organizations, most respondents were clear on how it could be beneficial to their organizations. When comparing the benefits to the costs, the benefits slightly outweighed the potential costs.

The majority (82%) see it as beneficial to applicants and current employees, with far fewer (42%) believing that it would have a positive impact on the organization’s financial effectiveness.

Pay transparency - view and perceptions

Source: Korn Ferry, Global Total Rewards Pulse Survey

Most respondents see greater pay transparency to be linked with closing inequities across gender, race, ethnic and others, certainly a win in most contexts. But many also expressed concerns, noting pay transparency measures could disrupt and diminish pay-to-performance relationships. A majority also regard the EU Pay Transparency Directive as potentially resulting in less negotiation on compensation.

Responses were mixed on whether the legislation will cause higher turnover rates or potentially flatten pay rates for all employees, even if some perform better.

Beyond the EU

Besides in the EU, pay transparency laws have also recently been passed in the UK and regulations already exist in several US states. For example, New York has long had rules that force firms to be more up front about the salaries that they pay employees.

The Nordic countries (Norway, Sweden, Denmark, Finland, and Iceland) have exceled in their efforts to cut back on pay inequities. The pressure on Nordic firms to bridge pay gaps came first from labor unions, with government regulation coming later.