Under the EU directive, "pay" also includes benefits and must be included in pay equity analyses.
Since the European Parliament earlier this year approved the Pay Transparency Directive, employers have been learning the new rules and preparing to respond to its requirements. Few however have considered that the directive also relates to employee benefits. Benefits can impact the pay gap, and therefore employers should start assessing their benefits now.
Employers worldwide are increasingly focused on addressing diversity, equity and inclusion (DEI). Company values, employee expectations and investors' views are just some of the drivers. Legislation, and particularly legislation focused on transparency, is playing an important role in accelerating focus and progress on DEI.
Among the recently implemented legislation on pay differentials, the EU Pay Transparency Directive is one of the most significant due to its detailed employer reporting requirements and the number of countries it will affect.
Equal work deserves equal pay. And for equal pay, you need transparency. Women must know whether their employers treat them fairly," said Ursula von der Leyen in relation to the EU Pay Transparency Directive adopted by the European Union on April 24, 2023.
Who will be affected and when do the provisions come into effect?
All private- and public-sector employers in each Member State regardless of size will be subject to the Pay Transparency Directive provisions, although only employers with more than 100 employees will be subject to the provisions related to gender pay gap disclosure.
Under current terms, Member States will have until June 7, 2026, to transpose the requirements into local law, although some Member States may move sooner. Employers may then be given up to a year to start complying with key provisions.
At a high level, the measures introduced by the directive are focused on:
- Right to information for job applicants on pay rate or range
- Annual right to information for employees on average pay levels for those in same category of worker
- Reporting of average pay gaps by category of worker and action to close gaps of 5% or more, which cannot be justified on objective, gender-neutral grounds
What is the EU Pay Transparency Directive and why is it being introduced?
According to recent statistics from the EU Council, women earn on average approximately 13% less than their male counterparts. There are multiple factors contributing to this gap, such as over-representation of women in low-paid jobs, unequal share of unpaid work between men and women, and unequal opportunities preventing women from reaching higher paying roles. Pay discrimination (i.e., women earning less than men for doing equal work or work of equal value) also continues to be a contributor to the overall average pay gap.
Seventy years after the principle of equal pay was enshrined in the founding treaties of the European Union, the goal of the EU Pay Transparency Directive is to ensure employers are delivering equal pay. The key levers are requirements for employers to provide more information to employees about their pay and the pay of others and for employers to address unexplained differences in male and female pay.
The basic principle behind the directive is that where employees are doing the same work or a work of equal value any differences in their pay must be for objective reasons (e.g., the work location or an employee is a higher performer) and not related to gender. This principle extends to all elements of pay, including pension and benefits.
The EU directive therefore defines "pay" as "The ordinary basic or minimum wage or salary and any other consideration, whether in cash or in kind, which a worker receives directly or indirectly (complementary or variable components) in respect of his or her employment from his or her employer."
Employers will need to know which benefits are offered and their value for each employee in each EU Member State. These values will have to be included in the calculations of average pay levels and gaps by category of workers each year.
Where differences in pensions and benefits contribute to pay gaps of 5% or more, employers will need to understand why the value of pensions and benefits varies between employees in the same category of work and whether these can be explained by objective reasons – for example, some employees in the same category being eligible for a closed defined benefit plan and others who joined the company after the closure of the plan, being eligible for a defined contribution plan.
If an organization cannot identify an objective reason for pay disparity, it must develop a remedial action plan.
Although the value of some pension plans and benefits in isolation may be dwarfed by compensation elements, evaluation of pension and benefits plans should be conducted, because they may have a material impact on whether the overall pay gap exceeds the 5% threshold.
Common challenges in pension and benefits equity and the EU directive
Although employers typically provide pension and benefit plans on a non-discretionary basis and apply them uniformly without discrimination, there are many situations where the design, or eligibility conditions not related to gender, means that a higher proportion of women are either excluded from the plan or draw less value compared to their male counterparts, as illustrated below.
WTW has identified at least 15 possible areas of gender inequity across retirement, risk, healthcare and other benefits, which, depending how Member States transpose the directive into national legislation, may have to be considered and evaluated if pension and benefits are contributing to gaps of 5% or more. These include considerations on eligibility for different plans, utilization and design features.
One of the most glaring examples lies in retirement plans with different retirement ages for men and women. From a statutory perspective there are still 10 countries in the EU with different state pension ages for men and women. Where supplemental company plans have been designed to align with state retirement ages, the value of the benefit will differ between men and women.
Further, if we consider the value of pension benefits and the longer life expectancy of females, a defined benefit plan, which guarantees a lifetime pension, could be considered more equitable than a defined contribution plan where the same lump sum at retirement will have to be spread over a longer period for women compared to men. Understanding how this connects with the total pay gap assessment will be relevant during this exercise.
Parental leave and particularly eligibility and utilization of long periods of unpaid (or lowly paid) parental leave could also lead to differences in pay between men and women. Take the example of Italy where both parents are eligible for 10 months of parental leave but only paid at 30% of salary. Differences in utilization within the same category of employees could lead to differences in overall pay if a higher proportion of women take the leave, leading to an average lower pay in that year compared to men.
Defined contribution plans with matching contributions will favor those who can afford devoting salary toward retirement savings. The EU pension gap is estimated to be around 30%, and the two key contributors are unequal pay and differences in the contribution levels due, among other factors, to women not being able to afford higher level of contributions. Plan design, financial awareness and affordability could therefore lead to overall pay gaps within the same category of employees.
Other more indirect examples include differences in plan provisions based on level or role within the company, with typically more generous plans available to managers/executive roles. There may be situations where there has been a change in policy and more generous benefits may no longer be available to women who joined the company later or took longer to reach managerial/executive levels. While employers do not have to provide everyone the same benefits and it is legal to differentiate benefits based on level/grade, the value of these benefits may still have to be considered in pay analysis and any differences explained – even if there isn't an equal pay issue.
Aside from eligibility and design features of benefits, employer actions can also affect gender benefit equity. Company culture, failure to listen to employees and understand their needs, poor employee benefit communication can all result in women drawing less value on their benefits compared to men.
How can employers prepare?
Although Member States will have up to three years to adopt the legislation, employers must start preparing now. In WTW's experience it can take employers between three to five years to be confident on pay equity and ready for greater pay transparency. The earlier organizations understand equity in pension plans and benefits, the more prepared they will be for compliance with the EU directive.
To date, most employers have not included benefits in pay equity analyses so there is limited insight on the levels of gaps that may occur through this type of calculation. The complexity extends to understanding the utilization of benefits and their economic value.
Key preparatory steps:
- Create awareness: Create awareness across key stakeholders of the directive, the inclusion of benefits and implications, planning preparation stages and allocate responsibilities.
- Access data: Identify additional data that will be needed for calculating and reporting on pension and benefit gaps and determine how it will be collated.
- Analyze: Working with compensation colleagues, review initial analytics to discover gaps in pension plans and benefits, their impact on total pay gaps and where corrective actions may be required.
- Act: Ensure that pension and benefits structures and polices are robust and any differences in eligibility, opportunity and outcomes can be explained by objective, gender-neutral reasons (with compensation colleagues taking similar steps).
- Engage and educate: Increase education for managers and employees on pension plan and benefits, alongside pay, to provide a firm base for additional transparency.
- Track: Monitoring the impact of the changes implemented (pay and benefit, hiring practices, education, etc.) on pay gaps and monitor how Member States are transposing the directive in local legislation.
Pay transparency is changing quickly
While our focus here has been in response to a single piece of legislation in a single geography, transparency issues are changing quickly worldwide. New legislation is enacted each year in different markets, all with a common goal of driving employers to be more transparent with their employees around pay, benefits and careers. Now is the time to develop and implement a broader global strategy around total rewards transparency. That strategy should address key questions such as:
- What does transparency mean to you in the context of pay, benefits, careers and wellbeing?
- What is your point of view about the role this plays in the overall employee value proposition?
- How far are you willing to go in the absence of mandates or legislation?
Having a defined strategy and guiding principles around transparency enables you to make decisions more efficiently as new pressures emerge (whether through legislation or changing employee expectations) and sets you on the right path to be an employer of choice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.