Pay Transparency – no more secrets?

The thing about secrecy is that everyone wants to know the secret! From buying a coffee to buying a house, price plays an important role in our decisions. But many employers still subscribe to the age-old philosophy of secrecy when it comes to pay. The talent marketplace is changing, current and prospective employees can now use public sources to get pay information (e.g., LinkedIn, Glassdoor) and seem happy to share information with each other.

Governments are responding too. Several states in the US have pay transparency laws, while the EU has passed the Pay Transparency Directive, which requires companies to be more transparent on pay from 2026 onwards.

Employers with an EU presence will be within the scope of the Directive in each member state where they operate.   Whilst‘UK only’ businesses are not directly within scope of the new Directive, inevitably, there will be increased pressure to be transparent on pay. UK employers could be affected if they don’t follow suit and lose out to their EU competitors in the race for talent.

Employers who are subject to the Pay Transparency Directive will have the following obligations:

Pay structure

• Employers must have pay structures in place, which categorise equal work or work of the same value (a complex assessment) and enables comparison of pay.  

Transparency

• Employers must provide information about pay, pay ranges, collective agreements and pay progression at the start and during employment. This will help individuals understand how they compare to the average – potentially a significant negotiating weapon.

Gender pay gap reporting

• Employers will be required to report on their gender pay gap (which compares male and female pay across the whole workforce).

Joint pay assessments

• In a trail-blazing step, employers must also report their pay gap by categories of worker (e.g. IT programmers) and, where there is at least a 5% difference between male and female pay, carry out an assessment and address any issues.

Enforcement

• The Directive also contains enforcement measures, giving workers the right to claim compensation for infringing equal pay principles. Unusually, the burden of proof is on employers to demonstrate that there was no discrimination in relation to pay.

In short, there will be fundamental changes to the availability of data to employees and their power to enforce their right to pay transparency where employers are subject to the Directive, or choose to adopt its disclosure requirements as best practice.

Despite this, many employers are not ready for these changes. KPMG’s 2023 Reward Trends study revealed that only:

• 47% of respondents had considered pay transparency in their organisations;
• 29% of respondents published pay rates in job adverts and;
• 18% published pay scales.

We also found that, of the companies that had considered pay transparency, nearly 60% were based in the UK and only 40% were based in the EU where the Directive will be mandatory.   

In the UK we do not have pay transparency laws, but the concept of equal pay has been enshrined in law since 1970. More recently, the UK introduced gender pay gap reporting requirements, which aim to reduce pay differences between men and women, encouraging employers to analyse and address the reasons for any pay or bonus gaps.

The UK government encourages employers to undertake ethnicity pay gap reporting on a voluntary basis, and some choose to do in support of their Inclusion, Diversity and Social Equality (IDSE) strategies.

In March 2022 the UK government launched a pilot program, with the aim of breaking down barriers for women. Participating employers would run pilots aimed at closing salary gaps by publishing salaries on all job adverts. Evidence suggests that this provides women with a firmer footing to negotiate pay on a fairer basis. More progressive companies in the UK are already publishing pay rates on job adverts.

The Pay Transparency Directive introduces new obligations which will set employers apart and produce a new playing field for reward. HR and Reward professionals – and others in leadership positions – who want to compete as employers of choice, need to put pay equity at the heart of their ESG agenda.

In our experience there are four areas to focus on:

1. Effective structures: Employers need to be confident that infrastructure has been implemented effectively. Inequities will be built-in without robust grading structures, application of job architecture and pay ranges. These will likely come to light with greater pay transparency. For instance, if a role (let’s say a male dominated role) has been over-graded then pay levels attached to this role will be too high compared to other (potentially female dominated) roles.
2. Prepare now and take action to address any pay gaps : Dry run the mandatory reporting to test the methodology and calculations. Employers will need to address issues that have been discovered and justify any gaps on the basis of gender-neural criteria. Help line managers and Reward Partners gain insight into how pay disparities have arisen, alter policies that are causing disparities and consider more immediate action e.g.  using up-coming pay reviews to alleviate disparities.  
   
3. Governance – getting it right every time: Even if structures were initially implemented effectively, over time, without strong governance, it is easy for inequities to creep in. From a pay transparency angle, it’s critical to have good governance mechanisms in place. When we work with clients, one of the root causes is inconsistency of application, for instance too many exceptions that then start becoming the norm. Typical areas of risk are around new role creation, pay management and new hires. Ask yourself: Is job levelling being applied consistently? Are pay decisions consistent across teams? How are you deciding on new hires and their pay levels? Think about stress testing the system, run equal pay audits, or review and assess the effectiveness of your reward structures periodically.
   
4. Be prepared to communicate more about pay: Publishing pay levels creates risk as it is likely to expose pay inequalities and, even if inequalities do not exist, more data transparency will lead employees to question the status quo. HR and line managers will need to be able to respond to challenges confidently and should seek advice from their legal advisers to devise an effective communication strategy. As part of this, it is important to educate both managers and employees on the reward structures.  
   

For employers with operations in the EU, pay transparency is really coming. The new laws may not be implemented until 2026 but changes to an employer’s reward structures can require significant effort and, most importantly, time. Forward thinking employers have already started to review.

Protect your brand: Employers would benefit from advice under Legal Advice Privilege/Client Attorney Privilege, protecting the advice they receive regarding the Pay Directive and any issues they uncover in their pay practices. There are significant reputational risks in getting this wrong, affecting an employer’s ability to attract and retain talent and new business. There are also financial risks for employers through potential equal pay claims. 

If you have questions on the best way to get ready for increased pay transparency, please contact Donna Sharp (solicitor), Scott Cullen, or Vijay Solanki.