European Union (EU) directive on equal pay and pay transparency 

23 January 2023

If there’s one thing companies should prioritize to drive balanced gender representation, our research shows that it’s ensuring pay equity.

Around the world, organizations are under pressure to accelerate their progress toward an equitable workplace. Activist shareholder groups are calling for greater commitments to social sustainability, which centers on pay equity and equity in opportunity. The World Economic Forum is encouraging companies to report on pay equity standards, which many exceed in their voluntary disclosures. And legislation on pay equity is increasing around the world, with eyes especially on the European Union (EU).

In the EU, the European Commission is calling for increased pay transparency through disclosure mandates, consistently required across the member states. New legislation will provide a framework for identifying unexplained pay inequalities. It will also give workers access to relevant pay information to
further drive their own pursuit of fairness. And it will require greater consistency in pay equity disclosures across countries.

Striving toward pay equity is on its way to becoming a requirement in the EU — and it’s the right thing to do everywhere. It’s also good for business in its support of strengthening access to diverse talent and perspectives. Leading organizations around the world are already choosing to be publicly transparent about their efforts toward pay equity and diverse representation. As part of this effort, they’re adopting formal pay equity processes that rely on statistical analysis. This allows companies to compare “apples to apples,” ensure effective measurement and support pay adjustments, where appropriate, to drive change.

Resistance and acceptance

Some countries with a strong tradition in collective bargaining agreements and workers’ rights have expressed resistance to the EU directive.

But the directive brings significant benefits:

  • Enhances or replaces local regulations that don’t always consider how pay is actually determined at specific companies
  • Relieves challenges for multinational organizations, streamlining and standardizing requirements from country to country — simplifying the implementation process to achieve pay equity across multiple countries
  • Ensures the pay equity review covers the entire organization beyond those covered by collective bargaining agreements; this extends equity enforcement to all employees, including those at management and executive levels, where there is typically limited representation of diverse talent and larger pay gaps
The strongest driver of balanced gender representation in top management levels is the existence of robust annual pay equity processes.

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Highlights of the EU directive on pay transparency

Mercer is fully equipped to advise companies on how to act on the European Commission’s Directive on Pay Transparency and Equal Pay, published on 4 March 2021. Accordingly, we are pleased to see the latest developments with the European Union Ambassadors endorsing the EU Directive on Equal Pay and Pay Transparency on 21 December 2022. We have been at the forefront of diversity, equity and inclusion work for more than 25 years, helping organisations address the effects and sources of gender disparities in the workplace.

Companies face multiple challenges with the EU directive. Our pay equity and internal labour market analysis approach provides support by helping employers assess the extent to which representation issues exist and identify the root causes.

Under the revised EU directive:

  • Employers with 100 or more employees must report on their gender pay gaps every year in every EU country. They must also make public certain information related to gender pay gaps and pay levels at job interviews.
  • Pay differences must be based on legitimate and objective criteria unrelated to gender, such as individual competence and performance.
  • For pay gaps exceeding 5% that cannot be explained by legitimate factors, employers must conduct a joint pay assessment with employees’ representatives and develop an action plan.
  • To evaluate and compare employees in similar roles, employers can consider criteria such as education, professional and training requirements, skills, effort, responsibilities, and the nature of work.
  • Employees may request, and employers will have to provide, the mean pay levels by gender for categories of workers performing similar work.
  • Employers will have to provide their employees with the business-related, legitimate criteria used to make decisions on pay and career progression.
  • Employers should provide increased transparency for employees in understanding existing pay levels and visibility of pay ranges for job seekers.

Example: Identifying the unexplained gap

What do we mean by pay equity? The primary objective of the pay equity analysis is to measure an organization’s unexplained pay gap and close it where appropriate.

In this example, women earn 20% less than men, but much of that is driven by differences in the attributes of women and men. An effective solution requires understanding whether the issue is about pay or something else.

This graphic illustrates the concept of the unexplained pay gap. If a man’s average pay is 100,000 per year and woman’s average pay is 80,000, there is a raw pay gap of 20,000 or 20%, or “gender pay gap” aka “women earn 80 cents for every dollar men earn. The raw pay gap (how average or median pay differs between women and men) is made up of the explained pay gap (how pay differs because men and women are in different roles or have differing amounts of labor market experience) plus the unexplained pay gap (residual pay gap that cannot be explained and may be due to pay inequalities). 

Explaining the unexplained

The proposed EU directive is especially helpful in calling out the distinction between two types of pay gaps, which should be identified and mediated in different ways.

Unexplained pay gaps are areas of potential bias in pay policies and practices, which should be identified through a regression analysis and mediated, in the short term, through pay adjustments. In the longer term, these should be addressed through a thorough review of policies and practices that affect pay decisions.

On the other hand, explained gaps include differences in experiences, skills, roles and access to career opportunities. These can be identified through pay driver analysis and further explored through deeper workforce analytics, including Mercer’s proprietary Internal Labor Market (ILM) maps.

EU’s pay equity statistics: Disparities in “say” and “do”


In the EU, 76% of organizations say women have equal access to roles that facilitate advancement into leadership positions.


But the average percentage of women in senior management is only 30%.


And in executive roles, the percentage of women drops to 22%.

Key observations

In the EU, women’s representation declines in more senior levels despite favorable trends in recent years to hire, promote and retain women. Some focus on hiring professional women can help the average company accelerate progress

EU countries reporting for Europe or home country only
Internal labor market map (n=57 organizations)

This graphic shows an example of an internal labor market map. An ILM map for the organization visualizes the talent flows of that workforce across career levels: executive, senior manager, professional and support staff. The map shows the total percent of hires at each of these levels, broken down by males and females. The data component shows average representation and total promotions by males and females. In this example, there is a steady decline of female representation as career level rises. Average representation at support staff is 46% for females and 54% for males; professional is 42% for females and 58% for males; manager is 35% for females and 65% for males; senior manager is 30% for females and 70% for males. At the executive level, female representation is 22% and male is 78%. The last data category shows total exits at each career level by females and males.  

What is an internal labor market map?

The patterns through which people are selected into an organization, learn, develop, perform, advance and ultimately choose to stay or leave characterize an “internal labor market” or ILM.

An ILM map for the organization visualizes the talent flows of that workforce across career levels. This forms a “system at a glance” view by showing the entry and exit of talent by career level and the various rates of advancement. Breaking down this information further by race or gender can deliver valuable insights, such as:

  • Balance, or imbalance, of representation of various groups by career level
  • The degree of organizational or career hierarchy and the overall velocity of talent movement in, through and out of the organization over time
  • The extent to which an organization “buys” its talent via hiring or “builds” its talent through promotion — which can disproportionately affect different subgroups
  • The presence of bottlenecks in rates of advancement overall and for any given group
  • Unwanted differences in talent losses between different groups

At Mercer, we use ILM maps to offer essential insights to organizations. They serve as a starting point to identify where and what interventions are needed.

Six elements of effective pay equity analysis

To make a difference, pay equity analysis should:
  1. Isolate the part of the pay gap that is caused by legitimate business-related factors
  2. Be grounded in your business practices to eliminate (or minimize) the introduction of potential biases
  3. Evaluate the entire company while focusing on specific pockets of risk
  4. Address individual discrepancies in a way that focuses on addressing aggregate goal
  5. Test remediation scenarios for impact before rollout
  6. Include transparent communication to employees about your organization’s pay inequities, their origins and the actions you’ll take to remedy them

Improving representation of women in higher levels

To make a greater impact on gender disparity, the EU could call for not only increased transparency and equal pay but also workplace equity. This would include public disclosure on representation rates throughout the organization — at the board, executive and managerial levels, at the very least. Bias in the recruiting, talent review and promotion processes and limited access to strategic, high-growth roles impedes women from progressing into higher-level, better-paid jobs. As organizations work to include more women in management, they should also look further down the hierarchy. This will ensure that women have equal access to roles that are more likely to lead to higher-paid senior roles.

Get certified with the Universal Fair Pay Check

In partnership with Fair Pay Innovation Lab, Mercer now offers clients the “Universal Fair Pay Check,”, which recognizes organizations dedicated to true pay equity. The three-step certification is a verified, trusted, and internationally recognized process that sets a new standard for both employers and employees. It has been recognized as an EU certification trademark, meeting the highest standards of neutrality, verification, monitoring and transparency. It’ is valid for global, as well as local companies.  For more information on the certification, please contact us, please view our video and don’t hesitate to contact us.
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