Erik-Jan Vegers (Korn Ferry) on EU's new pay transparency rules

27 March 2024 Consultancy.eu 5 min. read

New rules on pay transparency are coming to the European Union. To help understand what implementation of these new rules might look like, we sat down with Erik-Jan Vegers, Senior Client Partner at global consulting firm Korn Ferry.

In April 2023, the European Council adopted the Pay Transparency Directive, a new set of rules that will oblige organizations to inform their employees on a wide range of salary information. It is mainly aimed at closing the gender pay gap, ensuring men and women receive equal pay for equal work.

Though the EU has made more progress than other regions in gender wage parity, the gender pay gap in the bloc still stands at around 13%. In comparison, the United States currently faces a gender pay gap of around 16%.

Erik-Jan Vegers (Korn Ferry) on EU's new pay transparency rules

Transparency

“In the next few years, the EU Pay Transparency Directive will substantially accelerate progress in the area of gender pay equality. This effect is caused by a combination of measures,” said Erik-Jan Vegers, who is based in the Amsterdam office of Korn Ferry.

“The Directive provides employees with the right to request their individual pay level and average pay levels, broken down by sex, for categories of workers doing the same work or work of equal value. Employers must provide the information in writing within two months and inform employees of this right on an annual basis, outlining the steps needed to make the request.”

Reporting

The new rules also require employers to release reports on base pay and other pay considerations. These reports must be released annually by companies with over 250 employees and every four years for those with 100 to 250 employees. Companies with fewer than 100 employees can voluntarily report, but are not required to.

“The reports must include: the overall mean and median pay gap; mean and median gap in ‘complementary and variable’ pay like bonuses; the proportion of female and male workers in each quartile band; and the pay gaps between ‘categories of workers’ – those performing the same work or work of equal value – calculated from both base pay and complementary and variable pay,” Vegers explains.

For employees who have been victims of gender pay discrimination, compensation can be imposed. “This could include full recovery of back pay and related bonuses or benefits of any kind.”

Member states are currently working on establishing their country-specific sanctions for violations of these regulations, including the height of fines.

Being prepared for compliance

Organizations within the EU should already be looking to how they will comply with the Pay Transparency Directive. In order to ensure a smooth transition, leaders can already begin to take a few actions.

“There are several initiatives that employers should take. Make sure there is an objective, proven, and accepted methodology in place for the classification of jobs,” says Vegers.

“Also advised is to run an analysis on the current situation, in order to assess whether there are any pay gaps. Differences that are larger than 5% which cannot be explained through objective criteria require further investigation and action.”

Some of the new rules will trickle down into the recruitment process. Employers must ensure that recruitment processes are gender neutral and should be aware that it is prohibited to ask applicants about previous remuneration packages. Applicants have a right to know the pay range for any advertised position.

“Inform and educate all people involved in the recruitment processes. They need to be willing and able have the right conversations with employees on pay. It is also recommendable to engage with the work council and trade unions as they will have the right to act on behalf of employees in judicial or administrative proceedings,” says Vegers.

Making these changes in large organizations might come as a challenge. That is because it is not strictly only about pay – there are other considerations at play too.

“The causes of pay gaps are often related to many HR, strategic, and leadership elements that are not obvious, or have been ingrained in organizational behavior for decades. The challenge is to recognize these and to develop strategies to solve them in a sustainable way. This requires a multidisciplinary approach and inclusive leadership and possibly a culture change,” Vegers noted.

Benefits

For organizations that successfully align to the Directive, the benefits will extend beyond compliance, said Vegers. “A transparent baseline of levels and grades across all staff will provide organizations with clearer career planning, which will help reduce turnover levels as employees have more insight and confidence in how their careers can progress – in an equitable manner.”

At the same time, equitable pay supports an organization’s DE&I ambitions, as well as the path towards broader ESG target. Most importantly, Vegers said, “it will inspire trust in both the organisation as well as leaders – one of the most pivotal factors for employee attraction, retention and engagement in today’s market.”

Smaller organizations

For organizations with fewer than 100 employees, there is not yet any reporting obligation in place. However, these smaller organizations will still need to comply with employees’ right to information on pay.

“This means that small organizations should also provide an appropriate job classification and a transparent remuneration policy, in order to have fair and explainable remuneration,” Vegers says.

A journey of equals

This is not the first push towards gender equality in the workplace: France already requires companies to disclose gender pay gap information, and in 2022, the EU adopted the Gender Balance Directive, aimed at equalizing the gender balance among the directors of large companies.

But it is not just the EU: the UK government (outside the purview of the EU) launched its own pay transparency pilot scheme in 2022; Japan has put rules in place that require companies to post wage gaps online; and local regulation in New York requires companies to disclose salary information to job applicants.