Pay Transparency as an ESG Opportunity: How Companies Can Use the Guidelines for Sustainability Reporting and Communication

From the Newsletter
“ESG News” Subscribe to Newsletter

Overarching Goal of the Pay Transparency Directive

The goal of the Pay Transparency Directive is to reduce the gender pay gap and to strengthen and enforce the principle of equal pay for equal work or work of equal value. This goal is operationalized through greater pay transparency and binding rules. This includes, among other things, a 5 percent threshold for employers with 100 or more employees: As soon as the pay gap within an employee group is at least 5 percent, cannot be justified by objective, gender-neutral criteria, and is not eliminated within six months, employers must conduct an in-depth pay assessment together with the employee representation. Therefore, merely exceeding the threshold at the company level does not necessarily lead to a joint pay assessment.

Another new feature is that the directive defines, for the first time, what constitutes a permissible, objective justification for pay differences. The guiding principle of the directive is “equal pay for equal or equivalent work.” The benchmark for comparison thus extends beyond identical (i.e., “equal”) jobs, since even different jobs can be comparable if they are classified as equivalent based on objective criteria—namely, skills, workload, responsibility, and working conditions. To this end, companies must conduct a job evaluation that applies these criteria consistently, transparently, and in a gender-neutral manner to different job profiles and incorporates them into the compensation structure. Vague justifications for pay differences, such as references to “negotiation skills” or purely individual agreements, are therefore no longer sufficient.

For companies, this means: Those who must adjust their remuneration structure to objective criteria anyway simultaneously create the data basis needed, among other things, for transparent, measurable, and robust ESRS reporting on remuneration.

Key Points Still Open in the Design

Firstly, disclosure: Who, where, and how reporting must be done has not yet been clarified in detail. Reports are to be submitted to a national supervisory authority yet to be determined; larger companies are also to publish them; whether as an annex to the management report, a standalone document, or on the company website, remains open. Furthermore, the right to information: Employees will in the future receive information about their own remuneration as well as about the average values of equal and comparable groups broken down by gender. Here too, the specific procedure is still pending. The outstanding German implementation law is intended to provide clarity on the exact design. The directive should have been transposed into German law by June 7, 2026, but a national implementation law is not yet available. Until implementation, the Pay Transparency Directive (in its abstractness) applies directly to public employers and indirectly to private employers. The latter means: National courts must interpret existing law as far as possible in light of the directive. Consequently, despite the lack of national implementation, it cannot be concluded that private employers are protected from disputes.

The Link to ESG

The Pay Transparency Directive encounters a reporting landscape in which gender-specific pay differences are already embedded. In the European Sustainability Reporting Standards, the topical standard “ESRS S1 – Own Workforce” addresses gender-specific pay differences under the sub-topic “Equal Treatment and Equal Opportunities for All” and specifically names “Gender Equality” and “Equal Pay for Equal Work”.

If a company has identified a material positive or negative impact, a financial risk, or a financial opportunity (IRO) related to gender-specific remuneration, the disclosure obligation arises.

For material IROs, companies subsequently transparently disclose their management. This initially includes the underlying remuneration policies or code of conduct. In addition, specific actions taken or planned, such as introduced salary bands, company initiatives for equal opportunities and diversity promotion, and internal or external communication actions, are included. A remediation process for identified differences is also part of this. Furthermore, targets are disclosed, for example, for the gender pay gap or promotion rates by gender. The development of the unadjusted gender pay gap over a certain period can serve as proof of the effectiveness of the actions.

The development of the unadjusted gender pay gap over a certain period can serve as proof of the effectiveness of actions.

For a quantitative analysis, company-specific KPIs, such as diversity in the applicant pool vs. hiring rate, fluctuation rate by gender or diversity characteristic, participation rate in mentoring/sponsoring programs, with which progress is managed and tracked, can be disclosed. Additionally, reporting on the aggregated unadjusted gender pay gap is mandatory in CSRD reporting.

The actions taken within the framework of the Pay Transparency Directive and the established compliance process can provide substantive content for the policy-action-target and KPI description. For the disclosure of the metric of the aggregated unadjusted gender pay gap, all data necessary for ESRS reporting is available for EU companies thanks to the Pay Transparency Directive. The pay law-related occupational group categorization provides background information and audit evidence for classifying the metric, taking into account company- and business model-specific characteristics. For example, manufacturing industries often show a negative unadjusted gender pay gap, as predominantly male employees are represented in blue-collar activities with high allowances due to the business model. Nevertheless, within the respective occupational groups, pay differences between genders may still exist for equal work or work of equal value.

Furthermore, the gender pay gap is increasingly establishing itself as a KPI in Sustainability Linked Finance and is actively requested by rating agencies and investors. The Sustainable Finance Disclosure Regulation also requires financial market participants with more than 500 employees to disclose the gender pay gap as a PAI indicator, so the existing robust data basis can also be used here.

Structured Grading Systems: Remuneration Transparency as a Competitive Advantage in the Talent Market

Those who must objectify their job evaluation system and remuneration structure for compliance reasons anyway and can convincingly explain their remuneration criteria build trust with applicants and stand out in the competition for skilled workers. Fair, explainable remuneration thus becomes a visible component of the employer brand that pays off in recruiting and employee retention.

What Does This Mean for Companies?

Build a Data Model: Create a uniform data model for remuneration metrics that can be used simultaneously for the Pay Transparency Directive, ESRS, and SFDR. Those who build a common data basis here instead of parallel data collections not only save effort but also reduce inconsistency risks between the legal department and sustainability reporting, thus mitigating an audit risk that auditors are increasingly addressing in CSRD assurance.

Set Up Processes and Connect Software: Define how relevant HR data can be technically linked to reporting software and how audit-proof processes can be established.

International Dimension: For groups with subsidiaries in several EU member states, different national implementation statuses arise (timing, thresholds, sanction mechanisms). This creates a need for a group-wide minimum standard framework instead of maintaining 27 individual solutions. In addition, the scope for CSRD reporting must be extended to fully consolidated non-EU companies.

Strategy Integration: The remuneration data collected for regulatory requirements can serve as a common data basis for strategic HR management and HR and ESG strategy. Thus, the obligation to collect data becomes an instrument to specifically manage pay equity, diversity, and employer branding.

Examine Additional Applications: Whether the compiled data can also be used for Sustainability Linked Finance or investor and rating communication.

The aspects mentioned require the early establishment of cross-functional governance between HR, Legal, and the sustainability department. Regular exchange, steering committees, and cross-functional projects are essential to ensure a reliable decision-making basis and consistently leverage efficiency potentials.

With our experienced employment lawyers, auditors, and sustainability consultants, RÖDL supports you in interlinking the requirements of the Pay Transparency Directive with CSRD reporting and HR strategy.