Morten Broekner
14. sep. 2023
What’s all the fuzz about?
How to get ahead of the Fair Pay curve to ensure both legal compliances, but more importantly to gain a lead competitive advantage over your competitors?
In this article on Fair Pay, I am providing my perspectives on how to elevate the Equal Pay and Transparency debate to another level than just being compliant and competitive in your local labor markets. Not because you have to - but because it is what you wish to do. We have already seen on the US labor market*, that applicants are beginning to deselect employers that do not demonstrate a fair and transparent pay practice, and this trend is moving faster than any EU or country legislation. So, time might be limited to get things in order if you want to stay (or get) ahead of the curve.
But how do you become the preferred employer of choice when applicants are looking for their next career opportunity? Not just because of the attractiveness of the job alone or the size of the paycheck - but because your company show the integrity of being the fair and transparent employer you truly wish to be. Offering the right pay for the job, not because you must, but because you want to. Taking pay transparency to the highest denominator of fairness with the practice that draws headlines – what some would call ‘an employer with an attitude’.
Read more below on how to take the double leap on both the legal compliance of the EU Pay Transparency Directive AND harvest the advantages of being the preferred fair employer of choice.
The below article series is in three parts, first part will be looking at what the fuzz on pay transparency is all about, the new EU legislation coming and how to evaluate your current situation on pay fairness and transparency.
In the following 2 parts of this article I will be looking more in depth into:
- How to get there? (Part II)
- AND, how do you get ahead of your competitors? (Part III)
Part I: What’s all the fuzz about?
On April 24th 2023, the new EU Directive on Pay Transparency or “to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms” – was adopted by the EU Council. The member states in EU now have 3 years to implement the directive into their own country’s legislation. This means that by June 2026 the new EU Directive on Pay Transparency should have taken effect in all 25 member states in various forms.
Eurostat report of up to 13% unadjusted gender pay gap across the Eurozone with significant differences across the member states (Luxembourg 0,7% and Latvia 22,3%). But for most companies the internal adjusted pay differences are less than 5%** if the job worth hierarchy (your Job Architecture) is well mapped and aligned to jobs of equal value in the company. Companies with mature HR and Reward practices might very well already be within the legal requirement of the new EU Pay Transparency Directive. The question is if this adherence is by coincidence or deliberate – i.e., is it the right people getting the right pay or just statistically correct? You need to be in a position to demonstrate that you are allocating pay in accordance with the value of people’s jobs and what they bring to the table in terms of skills, experience, efforts, and contributions to the business - in a proper way, of course! This means you will need to be ready for the ‘Printer Test’ as we call it in Reward Communities – i.e., going public with not only your company salary ranges, but all individual salaries and pay details. Because if you don’t, your employees will soon be debating and comparing their own pay details on the company’s Viva Engage site.
Needless to say, that it is preferable to be clear about what’s included in the pay definition of how you pay your people – all pay components as such – base salary, allowances, benefits, as well as short- and long-term incentives – the full reward package. It’s better that you help your people to understand how they should compare their reward packages to each other and to external offers as well – so they at least evaluate external pay offers on their full total reward and value proposition from your company. Many companies have now started to provide a full total reward statement to all their employees with the purpose of increasing transparency and knowledge for their people on how they are currently paid.
But let’s get back to the new Pay Transparency Directive that is up for implementation in each EU member state by June 2026. The most important features of the directive to take note of now are:
The 6 key aspects of the new EU pay directive:
Pay transparency for jobseekers: The employer must inform the applicant of the initial pay level or its range as part of the hiring process.
Right to information for employees: Workers shall have the right to request and receive information about their own pay level and the average pay level of colleagues performing work of equal value.
Gender-neutral salary structures: Employers must have pay structures that allow workers to compare work of equal value – based on “Skills, efforts, responsibilities and working conditions (content and impact of the job)”.
Reporting on gender pay: Employers with at least 100 employees must publish the pay gap between men and women doing jobs of equal value to the company.
Joint pay assessment: Employers must, in collaboration with employee representatives, carry out a joint pay assessment if three conditions are met.***
Strengthen enforcement mechanisms: Workers who have been subjected to discrimination due to gender must be compensated.
So, all in all a strict and harsh regulation with some pretty severe impact to current HR and Reward practice for most companies. But what is the real challenge being compliant to the new regulations, OR using these requirements as a steppingstone to get ahead in the ‘War for Talent’ curve to become the most attractive employer of choice?
What are your pain points today?
First you need to ask yourself a couple of questions.
1. Are you able to attract the people you need today?
Well, it’s basically a very simple question. Are you able to fill all your open positions within an acceptable timeframe and promotion effort? And if not, have you identified the root cause of this to be caused by the pay levels you are offering to targeted candidates? Mature organizations already have well established pay ranges guiding the selection of candidates to ensure that salaries are offered in fair alignment to already employed people and within their pay philosophy. So, if you are losing out on talent attraction due to lack of competitive pay offering, it’s time to look at your hiring process and salary ranges.
Set your pay ranges as close to the desired market position of your pay philosophy without violating the fair alignment to your current people, and then slowly over time, move your people up to the market position along with your pay ranges by the yearly salary review processes. At the same time make sure that your pay ranges are used in the front end of your hiring process, guiding your leaders to find the optimal candidate for the job where you can offer competitive pay within your pay range. You might have to set pay at the higher end of the current pay ranges until these have caught up with the market.
2. Are your people engaged by their current pay? What does your yearly engagement survey tell you?
Employee engagement is a key factor for both ensuring company performance and in retaining your employees – both in general but in particular the employees who are your highest contributors. Many companies today ask about pay satisfaction as part of their annual employee engagement surveys - so here is your main source of information. Another good place to measure the engagement temperature is in your exit surveys. Are people leaving due to low pay or are the root cause for looking externally for a new job something else? Maybe experienced dissatisfaction when finding out that a colleague was making significantly higher pay for doing virtually the same job. Look closely at how your people experience internal pay fairness and not least how they discuss this. Pay secrecy is a thing of the past. Actually, have Australia recently banned pay secrecy clauses in employment contracts. Employees find it rightful and entitled to debate all aspects of their company, work conditions and not least their pay level internally on the intranet. And as many companies have made the Viva Engage app (the Facebook for company debates) available to their people making it quite easy to start a debate forum or discussion thread around pay comparison or last year’s allocation of bonus payments. So, the real question is if your people leaders are ready to handle public pay discussions on “Viva Engage” once these becomes talk of the town? AND are you ready to prove equality and fairness by internal reporting to your people to make the debate based on true facts?
The solution is not to prevent internal debate on pay levels and perceived inequities. The solution is to provide structure and facts to your people so they can compare and discuss on the right basis when comparing themselves to colleagues doing the same job while being aware of the factors rightfully differentiating pay – i.e., country, location, performance, contribution, tenure, and special skills etc.
So, make sure to have a job architecture or title structure to set the baseline for discussions and make sure it is well maintained and aligned for your people to recognize and trust its value.
3. Are you targeting an equal pay around your desired position in the labor market, or are you paying too low or too high – i.e., losing your people or losing your competitive advantage in the market by excess labor cost?
How great is it to have full equal pay (i.e., no significant pay gap) if the median salary for your jobs is off the market level? Chances are more likely that you are paying to the highest denominator and overpaying than offering a competitive and sustainable pay level to your people. You will risk going out of the business or more likely will have to adjust your salary down by layoffs losing your best people first.
4. And finally, do you have a clear and engaging pay philosophy in place?
A strong and comprehensive company Pay Philosophy is setting the committed baseline for how you intend to pay your people. Not only being competitive as well as being a transparent and fair paying employer, but also why you want to be the preferred employer of choice, your bigger purpose – the pledge you can’t hide or run from. A good and comprehensive Pay Philosophy should define and explain the WHY, the WHAT and the HOW you promise to pay your people. In more details your Pay Philosophy should do the following:
The WHY – delivering an engaging, competitive, AND sustainable reward model to the Owners, the People Leaders, and the Employees of your company.
The WHAT – defining clearly what you are paying for – the fairness and equal opportunity equation – what makes jobs equally worth to the company, what differentiates peoples value doing the same job, AND what does NOT constitute a fair pay difference (i.e., gender, diversity etc.).
The HOW – how and when you will truly become a fair and transparent paying employer. Commit yourself to when you will open the books to your current and new employees – preferably before you have too – as the public demand are likely to arise sooner than the legislative requirements.
Following your new (or refined) Pay Philosophy then look at your strategy to get it implemented in your reward Practice and Processes and not least communicated and accepted among your HR colleagues, People Leaders, and not least your employees.
References:
* Monster Poll: Workers Want Pay Transparency. Nearly all (US) workers (98%) believe companies should put salary ranges in job postings, and more than half (53%) would decide not to apply for a job that doesn’t.
** Based on own experience across a number of global Danish organizations. A 2023 study by PayScale also shows that when comparing equal pay for equal jobs in North America, they found a gender difference of 1% (0,99$/1,00$ from males to females), when looking at the Controlled Gender Pay Gap adjusting for all measured compensable factors on salaries for 758,000 people in the U.S
*** Joint pay assessment: Employers must, in collaboration with employee representatives, carry out a joint pay assessment if these three conditions are met:
The reported pay gap between men and women is greater than 5%
The pay gap cannot be justified by objective, gender-neutral factors.
The employer has not corrected such an unjustified difference within six months of the date of submission of the reporting.
Background Readings:
DIRECTIVE (EU) 2023/970 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 10 May 2023 “to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms”
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023L0970
Eurostat: Gender pay gap in the EU
WHAT IS THE GENDER PAY GAP?:
https://commission.europa.eu/system/files/2022-11/equal_pay_day_factsheet_2022_en_1_0.pdf
Boomers hate to talk about pay, but 81% of Gen Z welcomes full Candor:
Here’s how pay transparency is going in 2024: