Granular annual gender pay gap reporting
The EC’s draft directive would legally compel employers with at least 250 employees to publish an annual gender pay gap report containing the following information:
- The proportion of female and male workers receiving complementary or variable components.
- The proportion of female and male workers in each quartile pay band. This would involve ranking all employees based on their gross pay, from highest to lowest, dividing the workforce into four groups of equal size and calculating the proportion of men and women in each group.
- The average and the median pay gap between all female and male workers – broken down by basic salary and complementary or variable components, such as cars, bonuses, overtime allowance, benefits in kind and pension contributions.
- The pay gap between female and male workers by categories of workers with similar value of work. Gender-neutral job evaluation and classification criteria include educational, professional and training requirements; skills; effort and responsibility; work undertaken; and the nature of the tasks involved.
The reporting and compliance liability will be even greater for organizations where there is a gender pay gap of 5% or higher, which cannot be justified using objective and gender-neutral criteria. In these instances, the organization will have to embark upon a full pay assessment exercise in partnership with their employees’ representatives.
Taking pre-emptive action on pay inequality
Martha Cook is EY EMEIA Total Reward Center of Excellence Leader, People Advisory Services. She says that, due to the tight timeframe, companies based in the EU should presume the EC’s proposed directive will pass into law, and should therefore start taking action as soon as possible.
“Organizations are well advised to focus primarily on two key workstreams,” Cook says. “First, extracting the data necessary to comply with gender pay gap reporting requirements, and secondly, using that data to address their internal gender pay gaps and mitigate potential financial and reputational risks.”
Data extraction poses a real challenge for organizations, especially for complex multinational organizations spread across multiple jurisdictions running multiple payrolls. Martin Reynolds, Senior Manager, UK and Ireland Total Reward Advisory at Ernst & Young LLP, explains that collating fringe benefit information also poses a challenge given that these programs typically have separate administrators and reporting mechanisms.
“From our experience in assisting companies with gender pay reporting regulations in the UK, preparing the data for analysis is half the battle,” Reynolds says. “We would advise companies to run a simulation of the regulations as soon as possible.”
Using data to tackle the pay gap
Companies will most likely be aware if a gender pay gap exists within their organization, especially if they are based in jurisdictions such as the US and UK, where top-level reporting is already required. Few organizations, however, currently invest the time and effort needed to fully understand what is driving such inequality. The proposed EC directive, however, will shift the center of gravity. Companies will be obliged to collate pay gap data so that, by default, they will have the insights to start addressing the problem.
The reasons behind pay inequality can be complex and often objective and gender-neutral factors can justify these disparities. However, Cook suggests that companies not only use the data required by the new directive to tackle pay gaps, but also to conduct a root-cause analysis of the underlying triggers. They should also use it to better understand their employees in an effort to improve wellbeing, engagement and organizational health.
“I think that if or when the directive becomes law, most companies will initially view it as a compliance exercise,” Cook says. “This is understandable, but there is also a golden opportunity here to undertake a deeper, more holistic analytics dive.”
According to the EY 2022 Work Reimagined Survey, 20% of employees said that addressing pay equity is the single most important action a company can take to improve diversity, equity and inclusion (DE&I). Employers surveyed agreed on the need for action to improve DE&I, but the largest number of employers (17%) instead cited reviewing hiring criteria.
In any case, gathering and using data to drive DE&I solutions could ultimately lead to increased employee retention, higher productivity and reduced expenditures.
The draft EC directive has elevated the gender pay gap from an important HR issue to one that now deserves full C-suite attention. With an estimated two years until the directive could pass into law, companies may consider fast tracking the process of assessing and addressing any pay inequality issues that may exist, making incremental adjustments as required, and introducing guardrails to prevent future issues.
“Companies can start baking these adjustments into their compensation planning cycles,” Cook says. “This will enable them to slow, accelerate or defer pay increases where necessary to rectify areas of inequality.”
“Going forward, gender pay and reward calibration is going to become a key part of corporates’ annual hygiene routine. We know this EU legislation is going to come, with or without any revisions. Organizations that act as though it has already passed into law and start to lean into the compliance aspect will save time, energy and money in the long run.”
Rather than viewing the directive as an onerous compliance liability, leading companies are treating it as an opportunity to be proactive about pay equality in a way that places fairness and inclusion at the center of their employee value propositions. After all, if organizations don’t proactively take ownership of their pay story, there is a real risk someone else will.