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Article | Executive Pay Memo – Western Europe

Europe’s increasing focus on fair pay

Total Rewards|Executive Compensation|Future of Work
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April 16, 2021

The European Union is working towards increased transparency and better enforcement mechanisms to gradually ensure equal pay for equal work.

In the EU, women are still being paid 14.1% less per hour, on average, than men. In recent years the gender pay gap (the difference between the average hourly earnings of working men and working women) has been continuously narrowing due to increasing pressure from different stakeholders. Following some changes to enforcement of the gender pay gap reporting regulations for the 2020/21 reporting year, Institutional Shareholder Services (ISS), a proxy advisory firm, now considers a company’s pay gap due to gender, race or ethnicity when issuing voting recommendations. While this only concerns large US companies at the moment, it suggests that similar guidelines will be prompted for European companies.

The European Commission (EC) has performed a retrospective evaluation of the relevant legal provisions concerning fair pay in European countries. The conclusion was that despite the current legal framework (Directive 2006/54/EC), the principle of the right to equal pay for work of equal value is seldom implemented or enforced in full. This appears to be due, in part, to a lack of transparency, which often leaves workers unaware of how much others in equivalent roles are earning.

However, in March 2021 the European Commission tabled a binding pay transparency proposal. This new legislative proposal seeks to remedy the discrepancies in pay through greater pay transparency provisions and improved enforcement mechanisms. The former means that any company with 250 employees or more will be required to publish externally and share internally information on the pay gap between genders within their organisation, with any unjustified pay gap greater than a threshold leading to a mandatory pay assessment. The latter attributes the burden of proof to employers, covers compensation for workers suffering gender pay discrimination, includes the possibility to levy fines on companies, and offers stronger roles for equality bodies and workers’ representatives.

The European Banking Authority (EBA) has also signalled its intention to become active in this area with respect to financial institutions: it revised its guidelines on remuneration policies, stressing the fact that gender neutrality needs to be warranted. In order to be able to demonstrate the gender neutrality which is now required, financial institutions will need to monitor their overall gender pay gap (both for staff and the management body) and track its development over time and by country.

Some European countries have been developing their own regulations (see table below). Clearly, disclosure requirements vary widely by country and by number of employees. Companies that are concerned should therefore be prepared to comply with the ensuing disclosure requirements and are encouraged to implement internal audits of their pay structures to ensure compliance with the applicable law. All these regulations share some obligations to monitor fair pay among workers and communicate the corresponding results to employees and workers’ councils.

Where should this lead us?

The European Union is working towards increased transparency and better enforcement mechanisms to gradually ensure equal pay for equal work. The EC, the EBA and a whole range of European countries are implementing regulations that will leave companies with no choice but to monitor gender gaps within their organisation, track their development over time and perform a comparison with their peers. It is expected that proxy advisors will follow suit and require this type of disclosure soon, possibly starting from the next proxy season. Willis Towers Watson is therefore recommending active engagement in monitoring the situation around fair pay and preparing for upcoming disclosure requirements.

Fair pay disclosure requirements
Region Requirements
Denmark
  • In order to strengthen the efforts for equal pay, companies are required by law to compile gender-disaggregated wage statistics for employees.
  • Companies with at least 35 employees and at least 10 women and 10 men with the same work function (same 6-digit DISCO code) must therefore present gender-disaggregated wage statistics to employees. The company must inform and consult the employees about the statistics, which will typically happen in the company's cooperation committee.
Switzerland
  • At its meeting on August 21, 2019, the Federal Council put the amendment to the Equal Opportunities Act into effect on July 1, 2020 to improve the implementation of equal pay. Companies with 100 or more employees must carry out the first in-house equal pay analysis by the end of June 2021 at the latest. The analysis must be checked by an independent body and the employees must be informed of the result.
  • The equal pay analysis must be repeated regularly every four years, unless an analysis shows that there is no inexplicable systematic pay gap between women and men. In this case, no further analysis needs to be carried out.
Austria
  • The Austrian Federal Equal Treatment Act was passed in 1979. It sets the legal framework against discrimination in the working environment on grounds of gender, age, sexual orientation, ethnicity, religion or beliefs.
  • In 2011 an amendment with regards to “Gender/Fair pay” was introduced:
    • Salary indication in job advertisements: hiring companies are obliged to state in their job ads the minimum wage according to the respective tariff agreement applicable to the advertised position. Also, the willingness for overpayment must be stated, if applicable.
    • “Income report”: companies with more than 150 employees are obliged to generate an anonymized income report biannually and provide it to the works council. The report has to show the income situation of women and men per employee group according to the respective tariff agreement.
Germany
  • The government has introduced ‘The Act on Transparency of Pay’ on July 06, 2017, that establishes new requirements for employers above a certain headcount to enhance pay transparency and equality with respect to pay for men and women in the same or similar roles.
  • From January 2018, the law provides a fundamental new right for employees to request information on their pay relative to their colleagues at all firms with 200+ employees.
  • The law also recommends that firms with 500+ employees periodically review and test their remuneration arrangements to ensure compliance with their obligation to provide equal pay for equal work. Companies with more than 500 employees that are required to publish a financial report are required to report periodically on their efforts to achieve pay equality between men and women.
Ireland
  • Equal pay for equal work is in every employment contract, governed by Employment Equality Act (1998-2015)
  • Gender Pay Gap Information Bill 2019 has been published, currently at Committee Stage
Italy
  • Circular 285/2013 (revised version on November 2020 of which consultation ended on January 18,2021), applied to all financial service companies in Italy. It requests to highlight in the Remuneration Policy the principles and measures that financial institutions adopt to ensure neutrality of policies by verifying the Gender Pay Gap and monitoring its evolution over time.
  • Regolamento emittenti (version in force since January 2021) applied to all listed companies in Italy. It provides only balance between genders in the composition of the administrative and control bodies, no disclosure requirements about gender/fair pay yet.
Spain
  • Requirement to prepare an annual Pay Registry
    • Identification of jobs of equal value
    • Obligation to justify gender gaps > 25%.
    • April 14, 2021 as the deadline to publish the report (transparency).
  • Requirement to prepare an Equality Plan
    • Establishment of a Negotiation Commission
    • Assessment on remuneration policies and practices (Remuneration Audit)
    • Assessment on HR policies and practices defining actions plans in detail

Actioning

We have found that acting on this matter has a positive effect in several ways:

  • It improves employee engagement, which positively correlates with better financial results in the longer term.
  • It enhances a company’s brand in the eyes of its customers, again correlating with better financial results in the longer term.
  • It enhances the quality of internal governance and better aligns with supervisors’ and regulators’ expectations, which leads to improvements in how investors (both current and prospective), stakeholders and proxies view the company – all of which allows you to capture more or better resources.

For more information on this and how we can help you further, please contact your Willis Towers Watson consultant or one of the below.

Contacts

Senior Director, GB Executive Compensation Practice Leader

Executive Compensation Leader, Northern Europe

Senior Director, Executive Compensation Practice Leader, Western Europe

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