DI&W Summary Notes: Navigating the World of Pay Transparency

On 7^th November CRF hosted an online event for its Diversity, Inclusivity & Wellbeing (DI&W) community on the topic of Navigating the World of Pay Transparency. During the session, Lucy Brown, DEI, Pay Equity and Pay Transparency Consulting Leader at Mercer UK, shared the implications of new pay transparency legislation as well as insights from Mercer’s Global Pay Transparency Survey. These notes summarise the presentation.

Pay Transparency Context
There is an increased focus on pay transparency, driven by the following reasons:

• Proliferation of data on social sites: organisations need to act to control the narrative to minimise the risk of inaccurate or misrepresented data and to mitigate reputational risks.
• Shifting societal and employee expectations: for example, nearly 90% of Gen Z employees are comfortable discussing pay openly at work.
• Sustainability: the focus on both workforce and environmental sustainability, such as paying a living wage, is intensifying. For instance, the 2024 EU Corporate Sustainability Reporting Directive (CSRD) mandates disclosure on various equity and sustainability metrics.
• Legislative action: e.g. the EU Pay Transparency Directive, set to take effect in 2027, will require UK businesses operating within the EU to comply with transparency standards, marking a significant shift.

Mercer’s 2024 Global Talent Trends research also highlighted fair pay as the second most critical factor in employee retention, up from fourth place in 2022. Rather than prioritising competitive pay, employees are increasingly focused on pay fairness.

Engagement and commitment are notably higher in employees who feel they are paid fairly—by 85% and 60%, respectively. Furthermore, nearly half of job seekers are less likely to apply for a position if pay details are absent from the listing, showing that organisations risk missing out on a substantial portion of the talent pool if they do not share this information.

Definitions
Pay transparency, pay equity and pay gap reporting are related but distinct concepts:

• Pay Gap Reporting: Typically refers to reporting requirements in line with local legislation, such as the EU Directive on pay gaps between men and women.
• Pay Transparency: Involves employers sharing information on what, why and how employees are compensated, aligning with business performance and market standards.
• Pay Equity: Ensures fair pay for similar work. Mercer refers to this as the “gold standard,” involving robust regression analysis to assess an individual’s actual pay.

Pay transparency is on the rise globally, with variations across regions. In the UK, gender pay gap reporting has been in place for seven years and may soon extend to cover other areas. In the US, pay range disclosure is becoming more common, and the EU will introduce mandatory pay range disclosures in 2027.

Pay Transparency Legislation
Pay transparency legislation varies by jurisdiction but centres upon three primary elements:

• What information is shared? (e.g. pay ranges or gaps)
• With whom is it shared? (e.g. the public, employees, legislative entities)
• When is it shared? (e.g. upon request, upon qualification etc.)

Businesses operating within the EU will be affected by the following legislation:
EU Corporate Sustainability Reporting Directive (CSRD): This directive mandates reporting from an ESG perspective, including disclosure of basic salary and remuneration ratios between men and women.
EU Directive on Equal Pay and Pay Transparency: Enacted in 2023, with reporting required by 2027, this directive impacts organisations with 100+ employees. Reporting on pay gaps will be necessary, and discrepancies above 5% will require remedial action.  

The Directive defines pay as including all types of benefits (e.g. company cars, flexible benefits, wellbeing benefits etc.). Therefore, organisations need to be able to identify the value of all employee benefits for each individual. This can be hard to achieve due to benefits information being held in multiple systems, varying employee choice and unknown value of certain benefits. Organisations need to start crafting a pragmatic approach as soon as possible, especially as reporting in 2027 will be based on data gathered in 2026. 

The UK Labour New Deal will also likely introduce further reporting requirements, including ethnicity pay gap reporting, living wage standards and mandated gender pay gap action plans.

Pay Transparency Implementation
Organisations face both benefits and challenges with pay transparency:

• Potential challenges include discomfort between colleagues, demands for immediate pay increases, negative customer or shareholder perceptions and government fines.
• Potential benefits include perceptions of increased fairness, higher trust among employees and improved talent attraction and retention.

Most organisations in Europe fall into one of three categories regarding pay transparency:

1. Resisters: Prioritise confidentiality and focus on minimum compliance.
2. Transformers: Recognise the benefits of transparency but proceed with caution, focusing on preparation and risk mitigation.
3. Leaders: A pioneer in the pay transparency space, embracing transparency as a core organisational value.

The implications of changing approaches to pay transparency include:

• Organisations will need robust job architecture and gender-neutral job evaluations to ensure fair pay.
• Overlapping analyses across different organisational areas may be required.
• Organisations will need to build trust and build their capacity to collect data.

Mercer 2024 Global Pay Transparency Report
Mercer’s 2024 Global Pay Transparency Report surveyed over 1000 companies from around the world. Insights included:  

• Organisations are aware that candidates and employees expect transparency. However, preparation levels are mixed, with 25% of companies saying that they are not prepared for the impact of global pay transparency requirements. Around 1 in 2 companies are currently developing a strategy or approach and a further 28% have not started yet but plan to start in the next 12 months.
• The most common approach regarding pay transparency is creating global principles or minimum standards – around half of respondents said they were doing this.
• Approaches vary by industry. For example, the Consumer Goods sector leads in the sharing of pay ranges internally and externally beyond legal requirements.
• In terms of information shared, companies are more likely to share their pay philosophies and policies than pay ranges or pay gaps.  
• Amongst companies who do share pay range information, the most common approach is to share base pay only.
• Compliance is the key driver for creating a pay transparency strategy. This is followed by aligning with company values and/or DEI commitments and increasing employee satisfaction with pay.
• The top challenges companies are facing regarding pay transparency tend to relate to people; a lack of employee understanding of compensation, lack of manager capability and difficulties getting leaders on board were three of the top four challenges.

Navigating the Journey to Pay Transparency
The below framework can help organisations navigate the path to pay transparency:

1. Assess your readiness – how set up is your organisation? Are your processes fit for purpose?
2. Set your destination with your stakeholders. Make sure they are engaged  – what will you share and who will you share it with?
3. Plan the journey – how will you address gaps and risks in your current environment? E.g. do you want to change job architecture, train managers or conduct an equity analysis?
4. Share your story – how can you support managers to have difficult conversations with employees? How will you communicate with employees about the journey you are on?
5. Measure the impact through data and insights. E.g. what KPIs will you use?

Assessing pay transparency readiness can be broken down into four focus areas:

• Policies & Practices (e.g. what is your DEI strategy regarding pay equity?)
• Job & Career Architecture (e.g. is your career progression clear and unbiased?)
• Data & Pay Equity (e.g. how relevant and solid is your data collection process?)
• People & Culture (e.g. are your leaders or managers comfortable and trained?)

Mercer’s Pay Transparency Readiness Checklist tool – an online questionnaire of 36 questions – can help organisations to assess their key areas of focus in preparation for the EU Directive (see attached slides for QR code).

Communication
Many organisations are nervous about telling their ‘story of pay’. Adopting a holistic and structured approach to communication is key, involving:

1. Clear objectives and understanding of the business context.
2. Understanding the audience.
3. Crafting the story to take the audience on a journey.
4. Creating targeted, multi-channel and digital-first communications to engage employees.

Organisations should also consider how they communicate to different audiences, such as HR, leaders and managers, employees or candidates.

5 Key Takeaways

1. This topic is not a passing phase and will be here for the long term.
2. Now is the time to be honest about the strength of your foundations.
3. Understand what your different audiences want.
4. Set a strategy and communicate clearly and consistently.
5. Acknowledge this is a long-term approach and will take time.

Further Resources
CRF. 2023. HRD Briefing 2024: Navigating Change in an Uncertain World
Mercer. 2024. Global Pay Transparency Report
Mercer. 2024. Global Talent Trends