20 July 2023
The directive — which aims to strengthen equal pay for equal work (or work of equal value) through pay transparency, gender pay reporting, and other enforcement measures — has immediate implications for organizations operating in Europe that ripple across the globe.
A key requirement of the directive is that companies with more than 100 employees must start to identify and explain pay gaps above 5%. While the directive won’t go into effect until 2025, leading organizations are already preparing for these requirements — not only to get a head start on complying with the directive, but also because it’s good for business.
Pay equity can drive employee engagement; support broader ESG and DEI strategies; as well as support other EU directives such as the Corporate Sustainability Reporting Directive.
Determining the actual gender pay gap
The gender pay gap, which looks at the average pay difference between men and women, in the EU is 12.7%, according to Eurostat 2021 data.
Looking at Mercer data1 we found that the gender pay gap for organisations participating in our 2022 Total Remuneration Survey was 8.7% — likely lower, due to the fact that they have embedded stronger job architecture and market benchmarking practices.
After calculating for objective factors — such as general experience (proxy by age), tenure within organization, whether the employee is recently hired, and the job family and level in the organization — the actual gap became just 2.8%.
We acknowledge, the list above of potential objective factors is not complete – simply a starting point to motivate companies to investigate further.
What objective factors can be considered?
The power of a pay equity regression analysis
Using a regression-based pay equity approach, companies can assess, for each individual in the organization, what constitutes equal pay for equal work under the same conditions. This provides a robust internal benchmark — simultaneously assessing the impact of pay for position, performance and personal characteristics like education, skills, effort and responsibility.
Where unexplained or unjustified pay gaps are identified, companies can work to close these gaps by implementing targeted pay interventions and addressing structural change.
“A pay equity regression analysis allows organizations to be certified with the Universal Fair Pay Check." As Henrike von Platen, the founder of this certification states. “We want to guarantee to stakeholders, investors and employees that the companies that we certify actually do provide fair pay.”
Four steps toward pay equity in your organization
Establish Equal Work.
- Ensure equal work by performing consistent and objective job evaluations to compare equal work of equal value.
- Create an overarching work architecture that defines roles and career progression
- Improve HR access and ability to report on accurate employee data
Assess your pay policies.
- Apply a consistent set of rules regulating pay, which can provide clarity and reduce the risk of employee backlash, in addition to complying with the directive.
- Codify requirements for pay and career progression.
Conduct an equal pay analysis.
- Calculate gender pay gaps for equal categories of work.
- Determine if pay gaps are higher than 5%, triggering a joint pay assessment according to the EU Directive.
Strive for — and certify — pay equity.
- Use pay equity regression analysis to determine objective reasons for pay gaps greater than 5%
- Remediate pay gaps through a robust analysis focusing on risk areas.
- Perform a root-cause analysis to identify pay gaps, both legitimate and illegitimate, perform a root-cause analysis, to identify structural policy and process intervention
- Consider obtaining an external certification to officially confirm and communicate your commitment to fair pay.
, Global Pay Equity Solutions Manager