New Regulations Will Force Companies To Address Pay Equity

by joshbersin · Published April 18, 2023 · Updated April 24, 2023

On March 30, 2023, the European Parliament approved a groundbreaking law, the Pay Transparency Directive, that will change the way businesses operate by mandating pay equity compliance.

That same day Australia made broad changes to the Fair Work Act, restricting fixed-term contracts and pay secrecy clauses; strengthen provisions on gender pay equity, anti-discrimination and sexual harassment protections; and improve access to flexible work arrangements. Canada has a similar law in place for Federally regulated workplace.

Right now, in Europe, women make 13% less than men for the same work, and in Australia it’s 13.3%. In the US, it’s worse, with a gap of 18%. Many people are aware of this issue and our research shows that 90% believe it’s unacceptable. Nobody sets out to discriminate against women (or any other group), but change is hard to come by. In fact, the US gender pay gap hasn’t budged in the last 20 years.

What can be done? Well, just as GDPR forced global improvements in privacy and security, the EU law will force every major company to get serious about pay equity.

The Pay Transparency Directive

The regulation aims to strengthen the application of the principle of equal pay for equal work between men and women through pay transparency and enforcement mechanisms. Employers must provide transparency regarding pay levels, criteria used for career progression, and workers’ right to pay information. Companies with more than 100 workers must report pay gap information, and if a gap of more than 5% is identified, a pay gap analysis is required to remediate issues. Employers also are prohibited from asking employees about their salary history.

The EU is Setting The Pace

This law might sound similar to laws and regulations in various US states. After all, questions about salary history have been banned in 23 states for years, and new salary transparency laws require companies in California and New York to post salary ranges on job postings. But these two measures alone are merely stepping stones to support pay equity, and in themselves they don’t create pay equity – in fact, a pay gap can still exist even when both are in place.

The big difference in this Directive: a requirement for employers to regularly report the pay gap (including disclosing to employees), and if the gap exceeds 5%, it needs to be addressed with actionable steps.

We’ve been talking with clients and this is a big deal. While the law is good news for employees (and yes, the directive also covers transgender and non-binary people), employers are worried about how they will comply. And this is for good reason: our recent study showed that 95% of organizations struggle with pay equity practices.

How To Solve The Pay Equity Puzzle

We just released a massive study on this topic, The Definitive Guide to Pay Equity. This study analyzed the business and management practices of close to 500 organizations to decode the secret of Pay Equity and teach organizations and business leaders the what, why, and how of creating fair and equitable rewards.

While 70% of business leaders see pay equity as critical to business success, only 14% set aside appropriate budget to mitigate pay inequities, and only 5% are truly excellent at pay equity. The rest merely see it as a legal requirement, a sporadic compensation project, or a way to enforce skills-related pay approaches.

The most successful organizations deploy balanced pay strategies, making equity considerations a part of every business decision. After all, pay is a lagging indicator of inequities happening earlier in the value chain. Did people negotiate a higher salary (men are known to negotiate more)? Who got the best projects and development opportunities? Was performance feedback biased? How did promotion criteria get applied? What bonus did somebody get and why? What learning opportunities did people receive? Any decision that is based on “discretion” is an opportunity to introduce pay inequities.

The Need for Governance, Structure, and Strategy

The new directive will require companies to disclose many things – salary ranges, career progression criteria, and pay gaps. This pushes decisions upstream: what are our salary ranges, job families, job levels, career progression criteria, skill requirements, and overall pay philosophies? How do we handle pay for performance? Do we need location-based salary ranges? How do we handle scarce or hard to find skills? How do we structure our jobs? What skills are truly important for us?

Beyond compensation philosophies, companies will also need to examine and address every place where bias and discrimination creeps in. How do we mitigate biases at hiring? How well are different diverse groups presented in the workforce? How can we foster more diversity? Can we bring in “bias disrupters” or technology solutions to curb politics and favoritism?

Change Management and Communication are Critical

Successful companies go well beyond behind-the-scenes pay equity audits and salary “corrections” to address them. Microsoft, Accenture, and Unilever for example, now publicly share their pay equity progress in their DEI report. Schneider Electric includes pay equity as a critical component of their management development program, and with good reason: our study shows that effective change management and communication has an outsized impact on the results of pay equity overall, and leadership and management communication and awareness is most critical of all.

“We didn’t tell anybody we were doing a pay equity audit because we didn’t want people to assume they were paid inequitably,” the CHRO of a mid-size manufacturing company said. “When it came time to make pay adjustments, we just included them in the merit increases so people wouldn’t be suspicious.” But if people don’t know why they are paid what they are paid, they will always wonder about fairness, and it will erode trust – and as we know from our employee experience research, it’s the most important element.

Above all: A Mindset Shift

“The more we reviewed pay equity, the more we started thinking about pay equity differently”, the head of total rewards for a large transportation company told us. Yes, technology and process consulting are important to conduct pay equity audits, but the biggest change will come from a laser focus on why pay equity matters, and how to make progress sustainable.

The “New GDPR”

The Pay Transparency Directive will force European companies to start thinking about pay equity, getting comfortable reviewing their pay practices and all other talent practices, and getting familiar with it. It will help them understand their business operations and their talent models. As we saw, 95% of companies are not ready for this.

Remember when the Global Data Protection Regulation (GDPR) was introduced in 2016? The entire world was worried about coming up to speed, nobody knew how to apply it, and it became the standard for data privacy and protection not just in Europe but across the world. It was great news for consumers (and employees) globally.

The Pay Transparency Directive will do the same for pay equity – putting equity front and center to realize the dream of fair and equitable pay based on merit and contribution, not favoritism or politics. Every business around the world that has operations in Europe will have to comply with this regulation, and the collective mindset shift will have a positive impact on employees in other parts of the world.

A Step towards People Sustainability

Pay equity is not just the right thing to do, it’s also good for businesses. Organizations that institutionalize this practice enjoy higher financial return, customer satisfaction, and innovation. Employees feel fairly treated, they trust leadership, and the recommend your company to others.

Leading companies like Heineken, SAP, Nestle, and Unilever make pay equity a part of its People Sustainability agenda and dedicate resources to fair and equitable pay.

The Definitive Guide to Pay Equity

How do you do all of this? We’ve literally written the “book” about it. Available only to Corporate Members, The Definitive Guide to Pay Equity equips you with a deep understanding of pay equity, helps you create a roadmap for achieving pay equity, assesses where your company is in the journey of pay equity, and provides actionable steps on the road to pay equity excellence, all supported by many real-life examples and stories.