How Financial Institutions can Prepare for Pay Transparency Legislation

How Financial Institutions can Prepare for Pay Transparency Legislation
Pay Transparency and Equity

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This insight is part 01 of 12 in this Collection.

October 10, 2024 10 mins

How Financial Institutions can Prepare for Pay Transparency Legislation

How Financial Institutions Can Prepare for Pay Transparency Legislation

As the deadline for implementing the EU Pay Transparency Directive fast approaches, some financial institutions feel unprepared to comply. These five steps can help guide the way through the upcoming regulatory landscape.

Key Takeaways
  1. Companies have essentially three years to get any pay gaps below 5 percent.
  2. The first step in the journey to pay parity is to evaluate global job architecture.
  3. Implementing a gender-neutral job evaluation methodology will help determine equal pay for equal work or work of equal value.

The European Union Pay Transparency Directive is upon us, and many financial institutions (FIs) are not yet prepared. An Aon survey of more than 200 organizations across the globe conducted in July 2024 found 57 percent of FIs have implemented new processes or programs to address pay equity and pay transparency compared to 62 percent of all industries.

The EU directive came into effect on June 7, 2023, and each of the 24 Member States have until June 7, 2026, to implement it into their own law. The directive requires companies with at least 100 employees in an EU country to provide gender-neutral job evaluation criteria and information on the standards used for determining pay and pay progression for all workers. This means a lot of multinational companies not based in the EU need to comply. Employers must also report and share information on the gender pay gap in the overall organization and in distinct job categories. In addition, they must work with employee representatives to assess the causes of pay gaps and remedy them if the reported gap is above 5 percent. 

Quote icon

For financial institutions that do not have robust processes for job evaluation or salary ranges and incentive targets, compliance with the EU directive seems a bit daunting. This is why it is important to start preparing and planning soon.

Anthony Poole
Partner, Talent Solutions, United Kingdom

Despite the time and resources required to comply with the directive, there are areas of flexibility — such as using scorecards to document pay decisions — that FIs can consider. Here are five steps to ensure your organization is prepared for the new legislation.

Step 1: Assess and Close Unexplained Pay Gaps 

Beginning a pay equity analysis should be done as soon as possible and repeated at several points along the company’s journey toward compliance. Employers subject to the EU directive are required to bring their pay gap below 5 percent, and it will be critical to know how achievable that requirement is at every stop along the way. 

“Employers need to assess their pay gap now to estimate the materiality of any potential pay adjustments. Most firms are working with limited annual compensation budgets that may not allow them to make the required changes within the annual cycle,” says Chris Byne, an associate partner in Aon’s talent practice in North America. 

The average gender pay gap in the EU is 13 percent, based on publicly available records.1 The directive requires employers to conduct a joint pay assessment if their pay gap is greater than 5 percent and disclose any pay gaps, even if it is less than 5 percent. However, organizations will be in a better position if their pay gap is below 5 percent to avoid a joint pay assessment — which can potentially involve Works Councils or an employee-nominated group to assess penalties and remediation.

Step 2: Initiate Global Job Architecture 

Reviewing your existing job architecture allows companies to establish a foundation for job evaluation and total rewards design. This creates a baseline for ensuring that any biased or inconsistent talent management decisions are identified and corrected ahead of the EU directive. 

“Job architecture is very difficult to maintain on a local basis, so even if a multinational organization doesn’t have its entire workforce subject to the directive, it’s important to do this work on a global scale,” says Christopher Tanana, a partner in Aon’s talent practice in North America. 

Once that work is completed, companies can determine where it makes sense to take further action to remedy pay gaps at a more regional level.

57%

of FIs have implemented new processes or programs to address pay equity and pay transparency vs. 62 percent of all industries.

Source: Aon July 2024 Pay Transparency Survey

Job architecture is a way to organize job functions, families, jobs and levels to ensure internal comparability and mobility. It is the foundation for all reward and talent programs.

Step 3: Conduct an Analytical Job Evaluation

To comply with the directive, organizations must conduct a gender-neutral job evaluation process. Some companies believe they are already conducting an analytical job evaluation when it is actually a job leveling approach they are taking, notes Kelly Voss, a partner in the Talent practice in North America. “Job evaluation is a rigorous, statistically validated process that measures each job on a standard set of factors,” says Voss. “You go through a set of decisions on these factors which determines the relative value within the organization, and that is an analytical job evaluation.”

Many companies, particularly FIs, have not conducted job evaluations in the past given the prevalence of job leveling approaches. However, in addition to the compliance benefits of doing so, there are others: A transparent grading system ensures companies can justify their pay structures based on objective criteria and provides a structured framework for benchmarking compensation more consistently as the company grows or enters new countries. 

Step 4: Address Discretionary Compensation

The directive requires companies to disclose their total rewards processes that underpin their compensation decisions. This includes incentive compensation, which is used heavily in the FI industry.

FIs commonly disclose that they have a discretionary bonus program or incentive program. And while compensation is often considered less structured in this industry compared to some others, it is not truly discretionary. 

“Incentive pay is something that my clients put a lot of thought into. They spend time assessing different metrics and looking at different factors,” explains Daniel Furey, a partner in Aon’s talent practice in North America whose clients are in the FI industry. 

What is critical under the EU directive is that differences in pay are documented and explainable. Market reference points and performance scorecards can help provide such documentation. 

28%

of FIs say they have a robust job evaluation process in place and use it consistently.

Source: Aon July 2024 Pay Transparency Survey

Most companies use tools like scorecards to document the factors behind C-suite incentive pay. They should implement this process for all eligible employees as they prepare for the directive.

“The bottom line is firms must show any discretionary pay is not discriminatory, particularly to women, as that’s at the heart of the EU directive,” Furey says. 

Step 5: Document the Performance Management Process

Documenting and disclosing the rationale behind talent management decisions is important for all pay transparency regulations. Performance is an objective criterion for making compensation decisions, but if companies don’t have a robust, transparent and fair process for evaluating performance throughout their organization, they are exposing themselves to potential litigation. 

“Under the directive, criteria related to pay progression can include individual performance, so ensuring that your organization has a best-in-class process is critical and a key differentiator,” says Voss.

All companies should look at what their performance management process is and ensure it is thorough and properly documented internally so all employees know and understand it. The directive is not prescriptive in what a performance management process should look like, so companies should ensure they have a well-reasoned approach they can defend. 

40%

of FIs say they don’t have salary ranges in place.

Source: Aon’s July 2024 Pay Transparency study

Global Pay Transparency Road Map

  • 01
    Late 2024

    Conduct a baseline pay equity analysis

    Conduct pay transparency compliance readiness assessment

  • 02
    Early 2025

    Conduct thorough job architecture review (e.g. analytical job evaluation, salary ranges, reporting)

  • 03
    2025

    Develop job architecture, salary structures and incentive targets (approx. 12-18 months)

  • 04
    Late 2025

    Develop pay transparency communication strategy

    Assess impact on benefits and retirement plans

  • 05
    Early 2026

    Implement updated global job architecture, salary structures and incentive targets

    Conduct updated pay equity study

    Conduct cost analysis and address gaps

  • 06
    2026

    Continue global implementation

    Consider additional enhancements (benefits & retirement plans, skills taxonomy, etc)

    Communicate to key stakeholders (leadership, HR, managers, employees)

  • 07
    Late 2026

    Validate effectiveness across total rewards to ensure compliance, competitiveness, global inclusion and understanding (june '26)

    Ensure governance of job architecture and global pay transparency including reporting

  • 08
    2027

    Continue to monitor plans, conduct ongoing pay equity analysis and begin formal reporting (june '27)

    Achieve full pay transparency compliance

The Risks and Opportunities of Pay Transparency 

There are three key risks if companies fail to fully comply with the EU directive. These include penalties, reputational damage and the potential to alienate current and future employees. 

  • Penalties

    The penalties for noncompliance have not yet been defined as each EU country interprets the specifics into law. The directive requires “effective, proportionate and dissuasive penalties.” Employees who have suffered from inequitable pay practices are allowed to recover damages or reparations — and the burden of proof would fall to the employer once a claim of discrimination has been made. This means companies must have documented evidence to show they are not engaging in discrimination. As currently written, the penalties are uncapped.

  • Reputational risk

    The directive requires disclosure of any amount of gender pay gap. This is not a figure that companies want to have advertised, as it can damage their employee value proposition to current and prospective employees, result in poor publicity and cause stakeholders to question the firm’s commitment to diversity, equity and inclusion.

  • Ability to attract and retain talent

    Companies that do not comply with the EU directive or are simply not embracing the spirit of pay transparency, can hurt their efforts to attract and retain talent. Pay transparency is more than just compliance; it involves proactive communication and providing managers with the tools to have more open discussions with employees around pay, performance and career progression. In fact, surveyed employees have voiced that they value this type of transparency in performance and pay.2

Pay transparency is generally viewed positively by employees and can improve employee confidence in the fairness of their employer’s talent management programs. There are numerous benefits behind related legislation, so it’s important for companies to embrace these opportunities even as they prepare for compliance and assess risks. 

Financial institutions have indicated they are more likely to see pay transparency as a challenge — however, a majority still do see opportunity in the movement. 

69%

of FIs view pay transparency as an opportunity.

Source: Aon’s 2024 Business Decision Makers Survey

Quote icon

Pay transparency cannot be about only compliance. When we all come to realize that pay equity and pay parity are table stakes in ensuring we are doing the right thing by employees, then we will have achieved what the pay directive set out to do.

Kelly Voss
Head of Rewards Advisory, North America

1 European Commission facts and figures
2 SHRM Equal Pay Day 2023: Pay Transparency

Aon’s Thought Leaders
  • Chris Byne
    Associate Partner, Talent Solutions, North America
  • Daniel Furey
    Partner, Talent Solutions, North America
  • Anthony Poole
    Partner, Talent Solutions, United Kingdom
  • Christopher Tanana
    Partner, Talent Solutions, North America
  • Kelly Voss
    Head of Rewards Advisory, North America

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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