Do market rates justify pay gaps? Anita Lettink answers EUPTD's hardest questions

Reward teams across Europe are deep in the work of understanding what EU Pay Transparency Directive compliance looks like.

The Directive comes with a lot of genuinely hard questions – including some that don't have obvious answers yet. 

Anita Lettink, a leading expert on pay transparency, is helping us make sense of it. 

Below, she answers the most pressing questions that Reward professionals are grappling with right now, from defining equal value to employee rights and equity pay gap reporting.

1. How do we actually approach grouping employees based on "work of equal value"?

Under the EUPTD, "work of equal value" must be determined using objective, gender-neutral criteria. The Directive does not dictate the exact criteria you must use – that is for you to decide based on what "value" means to your organisation. However, to be compliant, those criteria must be applied consistently across all functions, from Finance to HR to Engineering.

You’ll need to decide on your job evaluation criteria – with common examples including skills, effort, responsibility, working conditions – and then apply a consistent job evaluation method to evaluate each role against those same criteria. It is important to note that factors like job title, job function, and market rates are explicitly not accepted as criteria for evaluating value.

Naturally, different job levels within a group of workers (P3, P4, etc) are seen as justifiable reasons for pay gaps – because those objective criteria like responsibility and skills always increase with seniority level. 

I recommend using the point factor job evaluation method as your system. It breaks every job down into those defined criteria or “factors” and assigns a numerical point value to each.

By totalling the points, you can compare roles that look very different on the surface. If a Marketing Manager and a Software Engineer produce similar point scores, they must be considered to be in the same equal value worker category.

If your framework produces equivalences that don't feel right, that may mean it's not using the right factors to distinguish between job roles for your company’s context.

2. Can we justify paying an IC5 Marketer differently to an IC5 Software Engineer?

You are not required to compare Marketing and Engineering roles at the same grade if a job evaluation system treats them as different work. 

IC5 Marketing and IC5 Engineering can legitimately be put into separate categories of worker under the EU Pay Transparency Directive if you can demonstrate that the discipline distinction is objective – against the standardised job evaluation criteria you use to evaluate every role in your company – and not a proxy for gender segregation.

However, if both score equivalently on objective evaluation criteria, they become "work of equal value" regardless of discipline – the Directive does not allow you to use discipline alone to justify a pay gap.

3. How does "work of equal value" apply to senior leadership roles across different functions? For example, a CFO and a CHRO.

Executive compensation has the same requirements as all other roles.

So, if a CFO and CHRO are at the same job level with comparable scope and impact scores (according to the objective job evaluation system you choose to use) this is then "work of equal value," and pay differences must be justified on objective, gender-neutral grounds.

This could be a significant compliance risk for companies where, for instance, Finance leadership has been historically paid more than HR leadership.

4. Is our existing job architecture enough to be compliant?

If your job architecture is supported by objective, gender-neutral job evaluation (see question 1) then it’s a solid foundation for EUPTD compliance. Ensure you have clear documentation in place too, to support your decisions.  

On the other hand, if your job architecture is only based on job functions and locations, then this is not enough to assess and justify your pay gaps – these are exactly the type of criterion the Directive targets as potentially discriminatory.

One of my recommendations is to not make job architectures too granular. I've seen some companies with more job descriptions than workers. Keep them sufficiently general – not only considering the Directive, but also to remain flexible in hiring and promoting.

5. Should the job evaluation framework be developed with worker representatives, or can the company define it alone?

The Directive states that job evaluation and classification tools shall be developed in cooperation with worker representatives where they exist. 

If worker representatives lack the technical skills, you can bring in outside expertise – but the co-development obligation remains, meaning employees must be involved in that external project.

Defining the framework unilaterally without any worker representative involvement would be non-compliant where representatives exist. In some countries, worker involvement is mandatory under existing labour laws independently of the Directive.

6. Which elements of total compensation do we have to report on?

"Pay" under Article 3(1)(f) includes all elements of remuneration in cash or in kind that a worker receives directly or indirectly.

The EU Pay Transparency Directive states that companies must report on: the gender pay gap in average pay, the gender pay gap in median pay, the proportion of female and male workers in each quartile pay band, and gaps in complementary and variable pay.

In practice, this includes equity compensation, variable pay, and benefits with a monetary value – company cars, health insurance, housing allowances, meal vouchers. Recognition awards are included in "pay" if they have monetary value too – and if you have a peer nomination process this could be a particular risk, if men predominantly nominate men and women predominantly nominate women then structural bias can easily emerge.

Pure non-monetary perks with no cash equivalent are less clear, but check your local guidance. Some countries have announced they will provide lists of pay elements to be included.

Your national transposition will also explain how to report, what to include, and where to publish. First reports are due before 7 June 2027 (depending on company size).

7. Can you offset one area (such as bonuses) with higher compensation in another area (such as salary) so that total compensation is broadly equal across the group of workers? 

No. Each pay component must be justifiable independently on objective, gender-neutral grounds. The Directive requires that all components are free from discrimination, not just total compensation.

However, if a higher base and lower bonus structure is consistently applied using gender-neutral criteria (for example, based on role type) it may be defensible. Using it at the individual level to mask a gap would not be compliant.

8. Equity isn’t always easily quantifiable, how do we include it in pay gap reporting?

Equity compensation is in scope for pay gap reporting under the EUPTD, but valuation is genuinely harder than other pay components – particularly for private companies. 

The best advice at the moment is to check your local transposition once ready for more detailed guidance on how to handle different elements of reporting – the Directive offers guidance, but many of the details will come through the national legislation.

Here's a few common scenarios:

• Unvested shares or shares without a market price. For unvested shares (like shadow RSUs that only vest in vash on exit) or shares without a market price (like for early-stage startups), valuation is undeniably difficult. If they have no current monetary value and haven't vested, you could argue they are not 'pay received' in the reference period and need not be included. If there is a monetary value – even if nominal – they are considered compensation and prudence suggests disclosure. A common approach for valuation is to use fair market valuation, grant-date value, or face value
• Grant value vs vested value. The Directive refers to pay received in the reference period, which points toward vested or exercised value in the reporting year. However, grant-date value could also be defensible for reporting consistency.
• Voluntary participation. Employee choice is not a sufficient justification for a pay gap if participation rates differ significantly by gender. The Directive looks at actual pay received, so if men systematically participate more than women (for example due to pay levels making the plan more accessible) you must still report the gap. Report it and note the voluntary nature, but also investigate whether participation rates show a gender difference and, if so, what causes it.
• Performance-related stock grants, where all employees are eligible but only some receive. You can continue to award for performance, but eligibility must be universal across a category of workers, and the performance criteria must be objective and gender-neutral. You would need to demonstrate that women and men at that level receive grants at similar rates and amounts when controlling for performance criteria – unexplained differences in grants awarded by gender would trigger scrutiny.

9. Is the 5% gender pay gap reporting threshold applied within each employee category, or as a company-wide average?

The threshold under Article 26 applies within a worker category, not as a company-wide average. If any single worker category shows an unexplained gap of 5% or more, a joint pay assessment is triggered for that category.

That means a company could have an overall gap lower than 5% and still be triggered at category level.

10. If a 5% pay gap is identified, does it have to be fixed immediately?

The 5% threshold triggers a ‘joint pay assessment’ if the gap is unexplained. This involves additional analysis into the reason for the gap, as well as an action plan – but not immediate remediation. 

Member states will set the specific remediation timeline, but the Directive requires the assessment to begin promptly and action plans to follow within a ‘reasonable period’.

That said, this isn't only a legal question. It goes to company reputation and employee satisfaction too. In practice, many companies are already doing some remediation upfront, to avoid reporting larger than 5% gender pay gaps when reporting begins.

11. Should employees of record (EOR) be included in gender pay gap reporting under EUPTD?

The Directive applies to workers and employees. EOR workers who are genuinely integrated into your workforce and perform work under your direction likely fall within scope, even if formally employed by a third party. Some national transpositions will specifically include temporary workers – so check your national law too.

12. Can market rates or industry benchmarks be used as a justification for a pay gap of above 5%?

No. Market pay and industry benchmarks are explicitly not acceptable justifications for pay gaps under the EU Pay Transparency Directive. Using them could lead to statements like "the market pays men more" which perpetuates rather than eliminates discrimination.

Objective factors must relate to the work itself: skills, effort, responsibility, working conditions. 

Using industry sector as a factor – for example, finance roles paid more than marketing roles of equal value – would not be compliant.

13. Can historical pay structures be used as a justification for pay gaps – for example, after an M&A where the acquired company had a different pay philosophy?

No. "The acquired company historically paid differently" is not an objective, gender-neutral justification, and therefore is not acceptable under the Directive. 

However, the practical reality is that EU laws prohibiting pay reductions mean normalisation may take several years – so the best approach may be to document a remediation plan rather than use history as a standing justification.

Because of this, we might see national transpositions include specific treatment of transition periods for M&A scenarios.

14. Can you limit the window in which employees can make pay transparency information requests?

No. The Directive (Article 7) gives employees the right to request information at any time and requires employers to respond within a reasonable timeframe. It does not permit limiting requests to specific windows. Member states will add rules on response timelines but cannot restrict when a request can be made.

You will need an operational process to handle on-demand requests – there are software solutions that will make this easier too.

15. Can employees request a breakdown of average pay by component (base, bonus, benefits) separately?

Yes. Article 7 of the Directive confirms employees can request average “pay levels” by sex for their worker category, and "pay" covers all components of compensation.

The component-level breakdown is specified as follows: "The mean gender pay gap between workers by categories of workers broken down by ordinary basic wage or salary and complementary or variable components of pay." Expect more detailed guidance on this in national transpositions.

16. Should you use target earnings or actual earnings when responding to a right to information request?

Actual pay received, not target. Using target earnings would not be compliant and could mask real gaps. You must use actual earned compensation in the reference period.

17. How do you handle GDPR and data privacy with employee information requests when peer groups are very small? 

The GDPR's data minimisation and privacy principles apply. Where disclosure would effectively identify an individual's pay, you can invoke GDPR protection and decline to provide the breakdown. The Directive acknowledges that member states should ensure GDPR compliance.

In practice, most frameworks set a minimum group size (typically five to ten) below which individual-level data is not disclosed, to account for data privacy. 

The exact floor is left to member state transposition. The Netherlands, for instance, has stated in their draft proposal that pay transparency requirements will override GDPR requirements. There is genuine tension between transparency and privacy obligations that national transpositions will need to resolve

18. Is there any expectation that member states will align on the specifics of how they transpose the Directive over time?

Harmonisation is unlikely in the short term. The Directive sets minimum standards but allows member states to be more specific – and it explicitly states that member states with more stringent pay gap reporting requirements already in place cannot lower those standards.

Beyond that, each country has its own labour laws, and those would need to be unified to create a truly common approach. That's a much larger undertaking than the Directive itself.