European Union (EU) directive on equal pay and pay transparency 

Around the world, organisations are under pressure to accelerate their progress toward an equitable
workplace. Activist shareholder groups are calling for greater commitments to social sustainability, which
centres on pay equity and equity in opportunity. The World Economic Forum is encouraging companies to report on pay equity standards, which many exceed in their voluntary disclosures. And legislation on pay
equity is increasing around the world, with eyes especially on the European Union (EU).

In the EU, the European Commission is calling for increased pay transparency through disclosure
mandates, consistently required across the member states. New legislation will provide a framework for
identifying unexplained pay inequalities. It will also give workers access to relevant pay information to
further drive their own pursuit of fairness. And it will require greater consistency in pay equity disclosures
across countries.

Striving toward pay equity is on its way to becoming a requirement in the EU — and it’s the right thing to do
everywhere. It’s also good for business in its support of strengthening access to diverse talent and
perspectives. Leading organisations around the world are already choosing to be publicly transparent about
their efforts toward pay equity and diverse representation. As part of this effort, they’re adopting formal pay
equity processes that rely on statistical analysis. This allows companies to compare “apples to apples,”
ensure effective measurement and support pay adjustments, where appropriate, to drive change.

Some countries with a strong tradition in collective bargaining agreements and workers’ rights have
expressed resistance to the EU directive.

But the directive brings significant benefits:

• Enhances or replaces local regulations that don’t always consider how pay is actually determined at
  specific companies

• Relieves challenges for multinational organisations, streamlining and standardising requirements
  from country to country — simplifying the implementation process to achieve pay equity across
  multiple countries

• Ensures the pay equity review covers the entire organisation beyond those covered by collective
  bargaining agreements; this extends equity enforcement to all employees, including those at
  management and executive levels, where there is typically limited representation of diverse talent
  and larger pay gaps

Mercer has been at the forefront of diversity, equity and inclusion work for more than 25 years, helping organisations address the effects and sources of gender disparities in the workplace. We are fully equipped to advise companies on how to act on the European Commission’s Directive on Pay Transparency and Equal Pay, published on March 4, 2021.

Under the revised EU directive:

What do we mean by pay equity? The primary objective of the pay equity analysis is to measure
an organisation’s unexplained pay gap and close it where appropriate.

In this example, women earn 20% less than men, but much of that is driven by differences in the
attributes of women and men. An effective solution requires understanding whether the issue is
about pay or something else.

The proposed EU directive is especially helpful in calling out the distinction between two types of pay gaps,
which should be identified and mediated in different ways.

Unexplained pay gaps are areas of potential bias in pay policies and practises, which should be identified
through a regression analysis and mediated, in the short term, through pay adjustments. In the longer term,
these should be addressed through a thorough review of policies and practises that affect pay decisions.

On the other hand, explained gaps include differences in experiences, skills, roles and access to career
opportunities. These can be identified through pay driver analysis and further explored through deeper
workforce analytics, including Mercer’s proprietary Internal Labour Market (ILM) maps.

In the EU, women’s representation declines in more senior levels despite favourable trends in recent years to hire, promote and retain women. Some focus on hiring professional women can help the average company
accelerate progress

The patterns through which people are selected into an organisation, learn, develop, perform, advance and
ultimately choose to stay or leave characterise an “internal labour market” or ILM.

An ILM map for the organisation visualises the talent flows of that workforce across career levels. This
forms a “system at a glance” view by showing the entry and exit of talent by career level and the various
rates of advancement. Breaking down this information further by race or gender can deliver valuable
insights, such as:

• Balance, or imbalance, of representation of various groups by career level

• The degree of organisational or career hierarchy and the overall velocity of talent movement in,
  through and out of the organisation over time

• The extent to which an organisation “buys” its talent via hiring or “builds” its talent through
  promotion — which can disproportionately affect different subgroups

• The presence of bottlenecks in rates of advancement overall and for any given group

• Unwanted differences in talent losses between different groups

At Mercer, we use ILM maps to offer essential insights to organisations. They serve as a starting point to
identify where and what interventions are needed.

To make a difference, pay equity analysis should:

To make a greater impact on gender disparity, the EU could call for not only increased transparency and
equal pay but also workplace equity. This would include public disclosure on representation rates
throughout the organisation — at the board, executive and managerial levels, at the very least.
Bias in the recruiting, talent review and promotion processes and limited access to strategic, high-growth
roles impedes women from progressing into higher-level, better-paid jobs. As organisations work to include
more women in management, they should also look further down the hierarchy. This will ensure that women
have equal access to roles that are more likely to lead to higher-paid senior roles.

In partnership with Fair Pay Innovation Lab, Mercer now offers clients the “Universal Fair Pay Check,”,
which recognises organisations dedicated to true pay equity. The three-step certification is a verified,
trusted, and internationally recognised process that sets a new standard for both employers and
employees. It has been recognised as an EU certification trademark, meeting the highest standards of
neutrality, verification, monitoring and transparency. It’ is valid for global, as well as local companies. For
more information on the certification, please contact us.