EVA JESMIATKA: Hello, and welcome to our video series, "Providing Pay Clarity and Visibility." My name is Eva Jesmiatka, and I'm here today with my colleague, Tamsin Sridhara. In today's video, we're going to talk about the calculation and reporting and resolving of pay gaps under the EU pay transparency directive.
And in our previous videos, we've talked about the provisions of the EU pay transparency directive. And today specifically, we're going to focus on what type of gaps do companies need to calculate and report, but also what do companies need to do about those pay gaps. So, Tamsin, to start us off with, do you maybe want to give us an overview of the gaps that companies need to calculate under the EU pay transparency directive?
TAMSIN SRIDHARA: Yeah. Hey, Eva, there. Well, there are two levels of gaps. So the first level within a market would be the gaps on an employer basis. And those are the types of gaps people are familiar with calculating in the UK or Ireland, for example.
What is new is that employers within a market will also have to calculate gaps by what is defined in the regulations as categories of workers. Now we came across that expression in the second video. But just as a reminder is that categories of workers means workers grouped into those doing same work, similar work, or work of equal value as defined by gender-neutral criteria.
So, Eva, for you and me, that means if clients got a grading system, the default would be looking at your employees by global grade or career band. But also where employees have got enough employee numbers, it may also be looking at it both by grade and also by job family or function.
EVA JESMIATKA: Yeah. And you tucked in a really important point there-- employee numbers.
TAMSIN SRIDHARA: Yes.
EVA JESMIATKA: So the reporting requirements, who does it apply to?
TAMSIN SRIDHARA: Yeah. So this is the set of provisions within the directive that do have a threshold number of employees. So these provisions only apply to an employer within a member state that has 100 employees. So let's take-- if we've got an employer that's got 1,000 employees, they're scattered across Europe. These provisions would only apply, for example, in Spain if they've got 120 employees, France if they've got 500. But if in Belgium, they've only got 50 employees, it wouldn't apply to the employees in Belgium.
EVA JESMIATKA: Yeah. And that's a very important distinction to make, because the other provisions that we talked about in our first video, they in essence apply to all employers that operate in EU member states. But the reporting requirements or specific to those who have 100 workers or more in any given member state.
Taking a closer look at those pay gaps that need to be calculated and reported, what entails pay under that definition?
TAMSIN SRIDHARA: So the definition of pay is almost as wide as it can be because it's pay, it's variable pay, and any type of what it calls complementary pay. And that includes any benefits. So what employers will need to gather is data on base pay, any type of allowances. Then you're looking at variable pay elements, bonus, sales compensation, and LTI. And then moving across to your benefits, and that includes all the different types of benefits.
EVA JESMIATKA: Yeah. So that's a very broad concept, and broader to what we, for example, have seen under the UK or Ireland reporting requirements.
TAMSIN SRIDHARA: Yes. I think probably most similar to Spain. I think that the challenge is and clients have often said, well, what exactly do we mean by LTI? What's the valuation point? Or when we're looking at benefits, exactly what benefits? And at the moment, we have got no detailed guidance that's been provided on that.
EVA JESMIATKA: Yeah. And is the expectation that there will be further guidance issued on this?
TAMSIN SRIDHARA: So we've heard that the EU Commission don't intend to issue guidance on a European basis. They're looking to the member states to issue guidance because the regulations will be introduced member state by member state. Now that concerns us because we do want to ensure as much commonality across member states. And we-- I think as we've said in series in the first video, we will be lobbying hard for that.
EVA JESMIATKA: Yeah. Because it could make things really complicated, of course, if things are going to differ from member state to member state. Going back to the pay gaps, so it needs to be reported by entity and by categories of workers. Do we already know whether that's going to be on an annual, as in an annual pay, basis or similar to what we, for example, see in the UK and Ireland, on an hourly rate basis?
TAMSIN SRIDHARA: So the indication is it may be based on an annual and also on an hourly pay basis. And then with that information, you will be first of all submitting it to a designated authority in the relevant market. Secondly, you will be required to share that with your employees.
But what is different from a lot of current provisions is it doesn't mandate that you will have to disclose that data externally. That will be at your discretion. But I think pragmatically, if it's in the hands of your employees, you need to be ready for it to be in the public domain as well.
EVA JESMIATKA: Yeah. And when do companies need to be concerned about pay gaps? What are the ones that are an area of concern?
TAMSIN SRIDHARA: So the directive introduces a clear threshold, which is gaps of 5% or above. And what it provides that if by category of worker you have any gap across any of those categories of workers that is more than-- that's 5% or above that you cannot explain for objective reasons.
So, for example, the employees may be based in different locations. They may have different skills. They may have different performance-- those types of factors. And you haven't remediated, so you haven't reduced the gap. You will then be required to do a pay assessment in cooperation with the workers' representatives. And with them, identify and agree what remedial action would be required to reduce then the gap.
Now what we would recommend for any of our clients is to use this three-year period to assess where they are at the moment and then ensure that they don't have unexplained gaps above 5%, that they're addressing that ahead of the regulation rather than after the regulation is introduced.
EVA JESMIATKA: Yeah, you want to stay clear from having to go through that exercise. And exactly like you said, make use of the benefit that we have time to get ready for this. And don't wait until the last moment.
And I think one of the things that we're hearing a lot from companies as they're starting to look into this and as they're starting to get ready is that getting their data ready is going to be a big focus for many organizations. And they recognize that at the moment, a lot of companies don't have the right data capability to run these types of analytics, but also not being able to understand how much of any pay differences are being explained by objective reasons.
So also there, our recommendation is make sure that you focus on that. Get your data in order, but also start running those initial checks to understand what is the lay of the land look like. And in our organization, do we have any areas that we need to be concerned about and any gaps that we actually should start to focus on now to make sure that we can remedy ahead of the regulation actually becoming effective.
TAMSIN SRIDHARA: And you're right because, Eva, you and I know from all the analytics work we do is that often the biggest driver to unexplained differences is drivers in base pay, is base pay and variable pay, which is the data most clients will have access to. So I think that is-- therefore it's very valid to start with the data you've got and then add in the other data elements as you collate them.
EVA JESMIATKA: Yeah. Very helpful. Thank you, Tamsin. And we're actually going to talk a lot more about this in our next video when we focus on getting your pay ready ahead of the EU pay transparency directive. So we hope you found today's video useful, and hopefully we'll see you next time.
