Pay Transparency: Opportunity or Threat?

Author: Katherine Murray

We live in an era of mass communication with information available, literally, at our fingertips, however there is one area of our working lives where secrecy largely prevails, i.e. what we get paid.

Over the years, legislation has had some impact on how we think about pay and pay equity, starting with the Equal Pay Act in 1970¹and more recently the Gender Pay Gap Regulations 2017²and the Pay Ratio Regulations 2019³ requiring organisations to report chief executive officer pay as a ratio of full-time equivalent UK employees.

The journey to greater openness on pay, now takes a giant step forward with the introduction of the EU Pay Transparency Directive⁴ that member states must enact by June 2026.

The stated aim of the directive is to help tackle pay discrimination at work and contribute to closing the gender pay gap by supporting workers to enforce their right to equal pay for equal work or work of equal value.

The UK is no longer in the EU, so why does this matter?

The new Labour government has already signalled greater support for employee rights with a focus on equality and fair pay, stringent pay gap reporting and greater transparency. And, while the changes do not directly impact UK-based organisations, many UK businesses are considering how to react, and many with employees across the EU are choosing to treat their UK employees no differently than those in Europe.

So, what does the directive mean?

The directive covers four key areas regarding access to information by employers:

• To provide easily accessible information regarding the criteria used to determine pay levels. It gives employees the right to request information on average pay levels, broken down by sex, for categories of employees doing the same work or work of equal value.
• To provide information on the criteria used to determine pay and career progression, which must be objective and gender neutral.
• To inform job seekers about the starting salary or pay range of advertised positions, whether in the vacancy notice, or ahead of the interview, and prevents them from asking candidates about their pay history.
• To report, explain and act on any pay gap of more than 5% that cannot be justified by objective, gender-neutral criteria.

Full details of what organisations must do to comply with the directive have not yet been published, but what is known is that unlike the current pay gap reporting based on a whole legal entity, the reporting will be split into more granular categories.

Why is pay transparency important?

Some organisations will see being more open about pay as a threat, as it will give employees more power in pay negotiations. However, there's potentially much to gain by aligning decisions on pay and benefits with a more open company culture.

Contrary to popular belief, pay transparency is not about disclosing the salaries of specific employees, but about creating visibility of employers' salary and compensation practices and being clear and open about how pay decisions are made. How and why pay decisions are made is a lot more meaningful for employees as people want to know they're being treated fairly and consistently at work.

It is also hoped that the new transparency will help close the wage gap by allowing all employees to negotiate terms on a more equal footing.

Going forward, organisations may face reputational damage if they are not open with employees about their approach to all remuneration or 'perceived' unfair employment practices. This, in turn, could mean they then struggle to attract and retain the talent they need or miss out on new business opportunities.

So, what should you be doing?

• Ensure you have a robust reward strategy, supported by overarching reward principles that are applied consistently across the organisation including your stated preferred market position.
• Pay and incentive principles should be clearly documented and reviewed and updated on a regular basis.
• Have in place a robust job levelling approach that is free of bias and is used to create an appropriate organisational hierarchy.
• Define pay ranges linked to your job hierarchy using appropriate sector specific data, and use of meaningful comparator companies.
• Effectively communicate pay and progression principles and processes to all employees and prospective employees.
• Define and document a process for employees to request pay information and how you will respond.
• Make sure your employee data is robust and easy to report on.

Communication is key

In this age of information overload, a lack of information leaves a void waiting to be filled with potential misinformation and conspiracy theories. In UK organisations there is still a general tendency to be secretive about all matters relating to job grading and pay setting and pay progression, leading employees to think of it as a 'dark arts'. Although many organisations have salary ranges in place, they are often not widely communicated.

So, while, for many, the new era of greater transparency may seem an uncomfortable place to be, there are several advantages and opportunities for innovative organisations including:

• Creating an environment of greater trust between employer and employee and encouraging conversations about organisational values and rewards
• Allowing individuals to plan their career path through the organisation by letting people know how they can increase their rewards and advance their careers, therefore aiding retention
• Reducing unfair pay decisions and potential bias in decision making
• Reducing speculation and misinformation obtained from unauthorised sources
• Enhancing staff pay satisfaction and increasing perceptions of pay fairness

How we can help

Our consultants have expertise in key areas that will support you in a drive to greater openness and transparency on pay, such as:

• Working with you to define your Reward Strategy and developing a set of robust Reward Principles.
• Using our in-house job levelling methodology to develop a transparent job hierarchy that can be linked to pay levels. This gives clarity around how people can move through pay structures, including explaining the difference between a progression (within a job level) and promotion (into a new job level).
• Pay benchmarking using robust, defendable market data sources to give clarity on rates of pay for individual roles that are free of bias
• Assess your frontline manager ability — do you need to deliver management training to ensure the right messages are being delivered by your frontline managers?

Get your journey started with us today!