pay transparency

warning: disruption ahead

Since its founding, the European Union has prioritized the principle of “equal pay for equal work” for both men and women, established it in the 1957 Treaty of Rome. Over time, additional directives evolved the principle to “equal pay for equal work or work of equal value" and extended protections to hiring, promotions, and working conditions.

However, these directives relied on voluntary and non-binding measures that failed to achieve the intended impact. By 2020, the gender pay gap in the EU was still around 13%, and the review of past directives’ implementation results revealed that a lack of transparency in pay systems hinders the application of the principle of equal pay.

The most recent Pay Transparency Directive (2023/970 of May 10, 2023) is more ambitious, evolving from recommendations to enforceable obligations. Although its primary aim is to eliminate gender-based pay inequality, its impact will go beyond gender. By mandating increased transparency in pay structures, evaluation criteria, and career advancement, the directive lays the groundwork for tackling broader pay disparities. It fundamentally transforms how organizations perceive fairness in compensation, making all types of unjustified pay gaps more visible and accountable.

These obligations will take effect in June 2026 (with some provisions beginning only in June 2027), and member states are still working to implement the directive into national law. While it binds member states, requiring them to collect and interlink pay data to calculate the gender pay gap at the employer level and appoint a dedicated monitoring body, most provisions bind companies directly. This highlights the short-term challenges that organizations must address proactively.

challenge 1

clarify criteria that determine workers’ pay, pay levels, and pay progression

One of the immediate challenges organizations face under the Pay Transparency Directive is making pay criteria easily accessible to employees. Companies will no longer be able to keep these criteria vague or hidden, disrupting traditional pay practices and HR policies.

The directive requires objective job evaluation and classification systems based on skills, effort, responsibility, and working conditions. While the specifics of these criteria could be debated, many companies still lack clear systems or fail to apply them consistently - this will no longer be an option.

Organizations must reassess how they evaluate roles and ensure their career models transparently link to pay progression. This can be a significant challenge for companies that have relied on informal or subjective methods in the past or for those who adopt verified methodologies but fail to apply them consistently.

Another challenge is using individual assessments, such as evaluating an employee’s performance and potential for future roles. These assessments will be scrutinized more closely, requiring clear and well-documented assessment processes, and will need to be backed by upfront feedback conversations some leaders are not ready to hold.

Particularly, the individual potential assessment is not usually known to employees. Pay transparency may pose a risk to this practice, as employees may become more aware of the importance of this criterion. Companies may need to find ways to make these assessments more transparent or exclude them from pay-related decisions altogether.

Additionally, companies must balance the need for transparency with the reality of varying pay rates driven by market conditions. For example, pay levels for similar roles may vary based on the skills required, which may conflict with the directive’s push for uniformity in pay structures. Companies will need to navigate this complexity by defining clear guidelines for how market-driven variations can be accommodated within the overall pay framework.

From 2026 onwards, employees will also have the right to request written information on their pay level and the average pay level for comparable roles. Defining pay criteria is not the most arduous task. However, as employees gain greater visibility into pay practices and are empowered to demand fairness, inconsistent application of pay criteria will pose legal and reputational risks as the burden of proof for fairness shifts to employers.

Additionally, pay practices, such as misclassifying pay components, that are adopted to evade tax burdens will be exposed in the quest for fairness. The risk isn’t new, but it intensifies.

Ultimately, companies will need to take proactive steps to establish clear, fair, and consistent pay criteria. This means reviewing existing systems and making the necessary changes to ensure full transparency.

challenge 2

establish processes and procedures to comply with pay information requirements

The challenge goes beyond what is communicated to employees and extends to who and how.

As mentioned before, not only do employees have the right to request written information on their pay level and average pay levels for comparable roles, but information on pay-determining criteria must be easily accessible. Also, companies with at least 100 employees must regularly report gender pay gap levels and make them publicly available2.

For now, there are no specific guidelines, so companies will need to decide on the department/area responsible, define internal processes and procedures, and start drafting communication materials and templates, ensuring coordinated and uniform communication efforts.

This is not just an HR challenge; it will demand close collaboration with legal partners, either internal or external, especially when we add the data privacy factor into the mix.

challenge 3

review talent acquisition processes and procedures

Employers will need to ensure that job vacancy notices and job titles are gender-neutral and that recruitment processes are conducted non-discriminately. Additionally, applicants must receive information on the initial pay or its range before the job interview or employment contract negotiation to ensure informed and transparent salary discussions. Another significant change is that employers can no longer inquire about an applicant’s current or previous salary history. This prevents past pay disparities from perpetuating in new employment contracts.

In more prominent companies, past DEI efforts have prepared most talent acquisition teams for some of these changes. However, they may have a higher impact on smaller ones. As of 2022, 99.4% of the Portuguese business landscape was composed of micro and small-sized companies3. DEI initiatives are not at the top of their priorities, and they often do not have structured compensation policies, leading to more discretionary pay decisions and greater reliance on individual negotiations. Also, the sample in market salary surveys may not reflect their specific needs because they do not usually participate in them. The same may be true for niche-market companies.

Despite their size, companies will need to review their recruitment policies and find trustworthy salary data on which to base their entry-pay decisions.

challenge 4

understand and assess pay disparities

Since 2023, the Portuguese agency for working conditions (Autoridade para as Condi??es de Trabalho - ACT) has been notifying companies whenever gender-based pay inequalities are detected, requiring them to develop and implement action plans to correct disparities.

However, current reporting methods may obscure key insights - individual company reports can hide business groups’ internal gaps, outdated job classifications fail to reflect evolving roles, professions and qualifications are aggregated in broad categories, annual bonuses often go unaccounted, and in-kind benefits - explicitly considered as remuneration under the directive - are not yet reflected in current reporting.

Although member states are still preparing to transpose the directive into national law, companies who want to go beyond compliance and to be ahead on the subject cannot rely solely on current government assessments to determine their level of compliance. They should be ready to uncover eventual disparities in a way that complies with future regulations and reflects reality.

Moreover, they will need to master the concept of pay disparity and related variables (this may be a good start) so they can challenge official agencies' conclusions and design and implement mitigating action plans whenever needed.

While these challenges seem primarily relevant to compensation and benefits teams, they require a broader change management effort that involves management, HR teams, and legal departments. The directive disrupts traditional organizational cultures and will hold decision-makers accountable for explaining pay gaps caused by gender disparities and other forms of inequity that will emerge over time.

The time for action is now. Companies must assess their pay gaps, revise pay structures, adapt recruitment processes, and ensure transparency in salary discussions. By proactively addressing these challenges, organizations can align with the directive’s requirements while fostering a more equitable and transparent workplace.

Article written by Rita Carvalho , Advisor at pur'ple | purpose by people .

1 - The unadjusted gender pay gap, 2022 (difference between average gross hourly earnings of male and female employees as % of male gross earnings), Eurostat

2 - Employers with 150 workers or more should comply by June 2027; employers with 100 to 149 employees should comply only by June 2031

3 - Pequenas e médias empresas em % do total de empresas: total e por dimens?o, PORDATA