Is the global drive for pay transparency the key to eliminating the gender pay gap?

Is the global drive for pay transparency the key to eliminating the gender pay gap?

In an age where advances towards equality are both a fervent cry and societal imperative, the persistent global gender pay gap remains a sobering reminder of the work yet to be done.  

It is widely known that men earn more than women around the world, with the global gender pay gap estimated to be around 20%, according to United Nations. In the EU, the gap sits at 12.7% and has not changed significantly in the last decade, as stated by the European Commission. 

In fact, significant gender pay gaps continue in some of the world’s most developed countries. For example, Japan, Korea and Estonia all have gender pay gaps above the global average, evidenced by the Organization for Economic Cooperation and Development (OECD). 

These statistics provide a stark insight into the systematic challenges rooted in workplaces around the world, urging governmental action that seeks to shatter the glass ceiling for good. 

As part of a global drive to increase pay transparency, the European Parliament and Council have recently published a new piece of legislation – the EU Pay Transparency Directive. Published to address the ongoing obstacle of wage disparity, the Directive seeks to foster a new culture of accountability, transparency and gender equality within the EU workforce.  

Fundamentally, the legislation challenges organisations to review their compensation structures and unveil the secrecy which has long surrounded salary disparities. By cultivating transparency, the EU aims to empower employees by ensuring that they can make educated decisions about their careers and be a part of a more equitable work environment. 

Research suggests a correlation between pay transparency and workers feeling happy with their pay and jobs overall. In a survey conducted by employee reviews site, Comparably, companies that pay fairly, and which are also transparent about wages, scored the highest for positive worker sentiment. Workday and Adobe are just two of the high-scoring companies which had voluntarily signed the White House Equal Pay Pledge in 2016, committing to fairer hiring, promotion and pay policies.vi Thus, data suggests that companies who are progressive and take the initiative towards pay parity are rewarded with happier employees. 

This whitepaper examines how the provisions set out within the Directive will affect EU Member States, as well as investigating how – and why – the legislation should be integrated into company pay structures in post-Brexit Britain, and global schemes to increase pay transparency.   

What is the EU Pay Transparency Directive? 

The EU Pay Transparency Directive is a new piece of legislation which has been approved and published by the European Parliament and Council. The legislation sets out to reinforce the principle of equal pay for equal work between men and women, and to increase gender equality in the workplace. It came into force on 6 June 2023. However, EU Member States will have three years to implement the provisions set out in the Directive, and will face penalties if adherence is not appropriately met. 

The Directive seeks to increase transparency around salaries and offer employees the right to request information around their organisation’s equal pay statistics.  

As each EU Member State has its own regulations around pay transparency, the objective of the Directive is to create a standardised approach across the European Union. However, there may still be some variation in the enforcement of the legislation.

As Caitlin Hartley, Senior Consultant at FAIRER Consulting, explains, “EU legislation doesn't apply across all countries in the EU until it has been enacted into national laws, so there is always a delay between a law coming into force and it being implemented in a given country. As a result, there can sometimes be slight differentials between how laws apply, but essentially, the EU Pay Transparency Directive introduces new obligations for organisations within the EU in terms of what they have to report and when they have to report it.”

New penalties for pay disparity

Where the reported pay gap unveils a gap of more than 5%, and the employer cannot prove that the gap is not gender-neutral, they will face penalties if the disparity is not rectified within six months. According to Lewis Silkin, if conditions are not met, the employer will have to undertake a compulsory equal pay audit, which requires additional data and analysis, such as a deep dive into the underlying drivers of pay disparities. This audit, which can be time-consuming and risky for organisations, must be published to employees and made available to external governing bodies. 

The four provisions of the EU Pay Transparency Directive

There are four provisions set out within the EU Pay Transparency Directive, which are designed to enhance transparency around salaries, and particularly any disparities between men and women performing the same – or similar – roles: 

1. The expansion of the gender pay reporting requirements

The Directive provides employees the right to know what criteria are used to determine pay and what comparable employees are paid, broken down by sex. Employers must segment pay gap reports by “category of workers”, considering basic salary as well as variable pay and bonuses. As explained by Lewis Silkin, “category of workers” refers to employees performing the same work or work of equal value. However, as it currently stands there is no formal guidance to assist employers with categorising workers in this way.  

Organisations with over 250 employees are required to report their gender pay gaps each year, and employers with between 150-249 workers must report every three years. As of 2031, the minimum threshold of employees will reduce, meaning organisations with 100 or more workers will be expected to report their gender pay gaps every three years.

2. All job vacancies must publish a salary range for the role

When advertising a job role, employers will be required to disclose the salary – or salary range – for the role. While some employers might feel reluctant to publish these figures, a Glassdoor study found that 62% of candidates reported salary transparency as being the most important factor they looked for in a job advertisement.

When it comes to salary negotiations, recent research has challenged the myth that women are less likely to negotiate. In fact, women are more likely to negotiate salary than men, but get turned down more often, so how might this new provision affect salary negotiations overall?  

“The Directive says that there may be a salary range published in every job advertisement, which suggests that there should still be an opportunity to negotiate on pay. However, in my opinion we should eliminate salary negotiations or make the range that people can negotiate within minimal. We should be paying for skills, competencies and the value of the role rather than a candidate's ability to negotiate”, says Caitlin.  

“We know that women are less likely to be successful when negotiating on pay, which suggests, unfortunately, that the gender double bind is alive and well. By eliminating negotiation we will also mitigate the impact of the systemic gender pay gap, because knowing a candidate’s current pay can perpetuate inequality, especially for women, who are already paid less on average”, she adds. 

To further support the move towards salary transparency, recent research has shown that in Canada, Denmark, Switzerland and the UK, there is a correlation between wage transparency and a decreasing gender pay gap. In addition, this research suggests that the reduction is due to a stagnation in men's wage increases, rather than an increase in women’s wages.

3. Employers must stop asking for current and historical salaries

As part of the new legislation, EU employers will be banned from asking candidates about their pay history, including their current salary. Companies in the United States are already facing bans on this practice, as, despite there being no federal laws against asking for salary history, the practice is banned in over half of US States, including Washington, New York and California.

A study by Harvard Business Review (HBR) compared the pay increases for female candidates in US states where asking about salary is prohibited, versus states which still allow the practice. HBR found that the salary ban generated an 8% increase in pay for female candidates who accepted a new job, suggesting the legislation is contributing positively to mitigating gender bias. 

4. Banning pay secrecy clauses: Employees have the right to disclose their pay to others

Employees will have the right to request information about their individual pay level, as well as organisational average pay levels, and for this information to be segmented by gender for employees performing the same or a similar role. This approach is already taken in Germany as part of the 2017 Pay Transparency Act (Entgelttransparenzgesetz – EntgTranspG), which seeks to promote pay parity between men and women.

In support of cultivating a transparent culture around pay, employees will no longer be prevented from disclosing their salaries to colleagues. In fact, as part of the new legislation, employers are prohibited from including a “secrecy clause” in an employment contract. This has already been enacted by Australia, who banned pay secrecy clauses in December 2022.

“In the UK, discussions about pay have never been banned but these conversations are often discouraged and there is a general reticence to discuss salary”, explains Caitlin. “We need to be more mature in the way that we have discussions around salary and help people to understand or publish how salaries are determined”, she continues.  

While conversations around salary are often considered taboo in UK workplaces, Nordic countries like Sweden, Norway and Finland are much more open to the topic, according to HR management and software provider, ADP.

“In other countries, where it is less common to speak openly about pay, it is going to be a difficult conversation for some people and will require a degree of self-awareness, from both the employer and the employees”, explains Caitlin. 

What does the EU Pay Transparency Directive mean for the UK? 

 “While the UK is no longer part of the EU, we are not operating in isolation. We are part of a global community”, says Caitlin. “Thus, while we are not under the explicit direction of the legislation, it is important to consider its interplay in regard to a wider business and DEI strategy”, she adds.  

In the UK we have had gender pay reporting since 2017. In fact, of the 38 OECD countries, more than half have some form of gender pay reporting. For example, Brazil introduced salary and compensation reporting requirements in July 2023, and Japan, which has the worst pay gap of the OECD countries at 22%, introduced pay ratio reporting from June 2023.

Despite the UK having the equality legislation and the Equal Pay Act since 1970, we still have an almost 13% gender pay gap. Furthermore, the 22nd November 2023 marks Equal Pay Day in the UK: the day in the year when, based on the UK mean gender pay gap for full-time workers, women stop being paid compared to men.

Whether it is a part of UK legislation or not, the EU Pay Transparency Directive is a step in the right direction towards gender pay parity and transparency. UK organisations should take initiative from other countries – and from the practices set out in the Directive – to move the needle on gender pay equity. 

Why do we need to address the pay gap? 

It will take 131 years to close the gender pay gap if we continue with the current rate of progress, according to the World Economic Forum.

But taking active steps towards a diverse workplace is not just beneficial to employees, but employers, too. Organisations perform better when they are more diverse. For example, advancing women’s employment could provide an incremental US$12 trillion, boosting some countries’ economic output by up to 35%.

Looking at diversity as a whole, companies with a diverse workforce are 35% more likely to experience greater financial returns, as reported by McKinsey. “The benefit of diversity is not just about women. There has got to be a balance; it’s about having different perspectives. But how long are we going to wait before we say enough is enough on gender equality?” questions Caitlin. 

How can organisations prepare for the new Directive?

“The first step is making sure that you are collecting and analysing your data”, says Caitlin. Organisations need to take measures to improve representation, not just for women, but across the board for under-represented groups, with the aim of achieving parity with societal populations. Organisations need to understand and review pay data across the board, look for outliers and investigate where those historic differences come from.  

Talent acquisition teams and hiring managers need to be trained about the impact of the pay gap, and about the impact their decisions have on the pay gap. Ensure that HR and management understand the requirements of the Directive and are equipped to implement necessary changes. 

Begin to increase transparency around pay structures within the organisation. This may involve communicating to employees how their pay is determined and providing information about pay ranges in various roles. Evaluate compensation policies and practices to ensure they are fair across different roles and that intersectional impact has been considered. Assess the criteria used for determining pay, promotions and bonuses to identify and mitigate any potential biases.