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Pay Transparency Uncovered: A Comprehensive Guide

Workplace fairness and pay transparency have been increasingly under the spotlight, recently. Understanding these terms is a crucial element in building fair and equitable workplaces.

As we delve into these topics today, we’re lucky to get insights from Rachel Gibbs, an experienced Compensation & Benefits specialist. Rachel's unique perspective, shaped by her extensive experience in various sectors and her current focus on pay transparency and pay equity, offers invaluable insights into this evolving landscape.


What is Pay Transparency?


Pay transparency involves employers providing detailed information about how they determine employee pay, allowing comparisons with colleagues’ earnings, and understanding of potential pay increments, including bonuses.


The extent of information varies across industries and job levels. For example, in union-recognized manufacturing jobs, there can be significant transparency - employees know how their pay and any overtime are calculated, the processes for pay reviews and they comfortably anticipate that the rest of the team will be earning the same - whereas sectors like banking and pharmaceuticals tend to be less transparent, especially at higher job levels.


Pay Equity vs. Pay Transparency


While often conflated, pay equity and pay transparency are distinct concepts, however, although there is an overlap between pay transparency and pay equity, they remain different. Pay equity ensures that employees with similar job functions receive comparable pay, irrespective of their gender, race, ethnicity, or other status. It is a concept that has been around for many decades.

Despite legislation in various countries, the gender pay gap persists, partially due to issues like different professional valuations, maternity breaks, and a lack of transparency in pay negotiations. The recent legislation on pay transparency has sought to address this latter point.


There has been a requirement in several countries (eg UK, Austria, Iceland, Sweden) for companies to report their Gender Pay Gaps. However, progress on reducing the pay gap has been perceived as insufficient so politicians and legislators have sought to find alternative mechanisms. Some US states and cities have introduced pay transparency rules to ensure candidates understand the pay available or the pay range for an advertised open role and to remove pay secrecy clauses in employment contracts. The rules impact existing employees as they can compare their pay with that of the advertised range.


EU's Pay Transparency Directive


The EU Pay Transparency Directive, effective from June 7, 2026, sets a standard for the 27 member states to ensure pay equity through enhanced transparency.

The countries now have a deadline to introduce legislation onto their statute books using the Directive as the minimum standard.


This means that there could be different reporting cycles and standards, making it more complex for multi-national employers, but the minimum requirements are:

  • Transparency of pay setting and pay progression policies. This will require some employers to document their pay programs, for example, how pay decisions are made, what factors are considered when setting pay review budgets, and so on. The key requirement will be the need for all pay determinants to be gender-neutral.

  • Employees will have a right to information about their individual pay level and average levels, by sex, for categories of employees undertaking the same work as them, or work of equal value.

  • Employers will also need to report on their gender pay gap data annually and this must be publicly available.

  • Where there are pay gaps that cannot be explained, then the Directive includes joint pay assessments, involving social partners (e.g. works councils) to address these in partnership with the employer.

  • Another significant change to the legislation is a shift in the burden of proof. Employers will need to prove they are paying workers in a fair and gender-neutral way, rather than on the employee to prove they are being discriminated against.

  • Right to compensation, where a claimant is successful, is clarified and will include back-pay, related bonus payments, compensation for lost opportunities, interest on arrears, and damage caused by other relevant factors.


Combined, these new rules (plus any additional requirements in individual countries), seek to ensure that females are paid equally alongside their male colleagues for the same work or work of equal value. If they are not paid equally, then the reason for the difference should be explained.


The Pay Transparency Scale


Developed by Rachel, the Pay Transparency Scale ranges from Level 1 (minimal transparency, patriarchal decision-making) to Level 7 (open pay and compensation decisions, common in unionized and public sector environments).


The scale is built on three factors:

  1. who is involved in making pay decisions.

  2. what infrastructure (e.g. job evaluation and pay ranges) has been created to support pay decisions.

  3. what pay-related information is shared with line managers and employees.


Level 1 is where senior managers make pay decisions and the other people involved are responsible for transacting these (e.g. Payroll). These are sometimes referred to as patriarchal organisations. Commonly, they tend to be smaller organisations as managers need proximity to employees to make pay decisions. They have certain advantages, especially when employees need extra support. The discretion given to managers provides flexibility.


Level 7 is the most open of organisations when it comes to pay and compensation decisions. This ensures that fairness around pay is hard-coded and defendable. It is surprisingly common and found in unionised environments and some public sector organisations.




Between Levels 1 and 7 is a scale that moves towards greater transparency as the numbers increase. There is no “perfect” position, only that determined by the corporate culture and the level of decision-making applied by senior managers.



Moving up the Pay Transparency Scale


Under the EU Pay Transparency Directive, most companies will need to reach Level 6 – where employees know their position in the pay range, along with the average result for their colleagues (by sex) doing equal work or work of equal value.


For companies at Level 1, transitioning to Level 6 is possible in one move. However, it will require careful planning to ensure it is handled with care, only when the organisation and its people are ready. The biggest risk is from pay inequities which cannot be justified: either because they do not fit with the explanation of pay decisions or because line managers are unable to articulate these to their team.


This move will involve several steps:

  1. Pay structure: companies need to document the pay structures, job levels, pay progression, and other determinants.

  2. Pay audit: undertaking an analysis of where companies unadjusted (i.e. not related to gender neutral factors, such as location, and work-related skills) pay gaps are critical to ensuring a smooth implementation.

  3. Remedying any pay equity challenges – either increasing pay where there is a recognised shortfall, or, rarely, reducing pay where the salary is no longer justifiable.

This may not be as overwhelming or expensive as it sounds. For instance, the timing of the EU Directive permits organisations the chance to smooth out inequities across the next few years, including by accelerating some increases or not increasing others.

Additionally, it will be necessary to review and seek alignment across HR processes with the pay document, to ensure that there is no secondary impact on pay, from other areas of HR.


Where do most companies fall on the Transparency Scale?


Using the Pay Transparency scale, most companies are at Levels 2, 3, or 4, depending on how well they have developed pay ranges and job evaluation methodologies. These processes can be quite time-consuming, depending on the size of the organisation, and need careful monitoring to ensure they stay relevant as the organisation continues to change over time.


The most important aspect to consider is how to communicate pay transparency. The key to success is to allow time for implementation, having completed the earlier work, to ensure that line managers fully understand the concepts of pay transparency.

After all, they are employees themselves!


The Future of Pay Transparency


In the long term, companies will need to maintain pay equity through regular reviews, possibly at least twice a year. The transition towards greater pay transparency, driven by the need for open pay decision information, is a significant shift in organizational dynamics.



About Rachel Gibbs


Transitioning from her initial career as a Tax Advisor, Rachel has found her specialty in Compensation and Benefits, working across finance, life sciences, and telecom sectors in the UK and Switzerland. Her recent work centers around the vital aspects of pay transparency and equity – areas that are seeing rapid global changes. Besides her professional endeavours, Rachel finds tranquility and adventure in the Swiss mountains, embracing activities like snowshoeing, hiking, and swimming.

Rachel set up Merities Consulting in 2021 to support businesses with their rewards related challenges. You can get in touch at rachel.gibbs@merities.com




 

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