The global rise of pay transparency

Transparent compensation practices are increasingly being recognised as essential tools for promoting fairness and accountability. This article explores the intersection of international pay transparency movements and US Meritocracy policy.

The European focus on pay transparency

Europe has been at the forefront of promoting pay transparency, driven by a decades-old aim of gender equality and fair compensation. The European Union's Pay Transparency Directive specifically addresses the gender pay gap by mandating that companies disclose pay levels and address disparities.

The Directive, due to be transposed into National Law across Europe by June 2026, will see strict transparency obligations coming into force then, with mandatory equal value pay reporting required from June 2027.  Employers with European Operations are already taking steps to prepare for compliance and to address pay disparities this year in advance of having to report their pay gaps and disclose data to employees.

Meritocracy and pay transparency in the United States

In the United States, a shift away from DEI strategies has had a mixed reaction. President Trump's Executive Order on DEI aimed to reshape policies related to diversity, equity, and inclusion across federal agencies and organisations working closely with the US Government. The Order required a merits-based approach in employment and sought to limit the use of DEI initiatives:

"Federal hiring, promotions, and performance reviews will reward individual initiative, skills, performance, and hard work and not, under any circumstances, DEI-related factors, goals, policies, mandates, or requirements".

It is essentially a federal policy of abolishing affirmative action (insofar as is possible). The White House maintains that a merits-based approach is inclusive and seeks to enforce anti-discrimination laws.  However, concerns have been raised about the erosion of practices designed to foster equitable treatment – a meritocracy works where everyone starts from an equal position.

Whilst the Executive Order applies to federal agencies and contractors rather than all businesses, it may be seen as encouraging employers to reign back their DEI initiatives, including in relation to pay transparency.  However, it is worth noting that Federal executive orders do not override Federal or State legislation, so existing State laws governing pay transparency and DEI initiatives will remain in force. We are already seeing contractors to Federal Agencies changing the names of DEI initiatives as they try to straddle State and Federal requirements. 

That said, arguably the concept of pay transparency is intertwined both with DEI initiatives and with the notion of "meritocracy". Transparent pay practices can demonstrate whether there is (or is not) a clear, accountable framework for compensation and whether all employees are compensated fairly based on their job role. The challenge for international employers is understanding and complying with various legislative requirements, cultural norms, and social objectives, and presenting their strategies and reports in a manner that aligns with these diverse factors. 

Expanding UK pay reporting to foster equitable workplaces

The UK Government is looking at expanding pay gap reporting requirements to include data on disability pay gaps and ethnicity pay gaps. 

The UK's proposal for ethnicity and disability pay gap reporting has elicited mixed reactions. Equality advocates support it as a step towards addressing workplace disparities, aiming for transparency to highlight economic disadvantages faced by minority groups and individuals with disabilities. Meanwhile, some business leaders worry about the administrative burden and potential reputational risks. Businesses that have reported voluntarily have indicated that it has been challenging to capture the data, to report without identifying individuals and therefore to produce an accurate picture.

Whilst reporting is a useful tool, not least because highlighting discrepancies is the first step towards eliminating them, transparency goes further than pay gap reporting. The prevailing view is that transparency is vital in combating discrimination and promoting accountability and equity. Taking into account the UK Government's stated desire to be in step with Europe, it may be, therefore, that the UK Government will circle back to the gender pay gap in the future, and seek to introduce some of the more stringent requirements to be applied in Europe under the Pay Transparency Directive.

Conclusion

The international focus on pay equity remains influential in a global employee marketplace.

Transparent pay structures and clear reward criteria can help identify and address disparities, whilst still rewarding performance, and in so doing ensure that pay differences are not based on discriminatory factors.    

If you would like to discuss any aspect of pay transparency, please contact Ranjit Dhindsa, Nick Thorpe or transparencypays@fieldfisher.com.