23 January 2023
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
"New EU directive on Equal Pay and Pay Transparency"
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.
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”
EU countries reporting for Europe or home country only
Internal labor market map (n=57 organizations)
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
Isolate the part of the pay gap that is caused by legitimate business-related factors
Be grounded in your business practices to eliminate (or minimize) the introduction of potential biases
Evaluate the entire company while focusing on specific pockets of risk
Address individual discrepancies in a way that focuses on addressing aggregate goal
Test remediation scenarios for impact before rollout
Include transparent communication to employees about your organization’s pay inequities, their origins and the actions you’ll take to remedy them