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May 7, 2024
You have probably already heard about ESG legislation—short for Environmental, Social, and Governance. Europe is requiring companies to report on sustainability and social responsibility. This legislation is part of the Green Deal, which aims to make Europe climate-neutral by 2050. Specifically, there are two important legislative directives within ESG: the CSRD (Corporate Sustainability Reporting Directive) on sustainability and the CS3D (Corporate Sustainability Due Diligence Directive) on the careful application of sustainability and human rights.
Europe loves acronyms, but in practice, there are very concrete questions at the basis of the legislation. What does a company do for the environment? How does a company improve people’s lives in our society? How does it translate good policy into practice? Based on measurable answers, a company is given an ESG score. Compare it to a credit rating, which estimates the value of a company and facilitates comparisons between companies.
Much has been written in the media about the sustainability aspect. But specifically for HR, the second directive is very important. How does a company treat its employees? How diverse is a company? What is the male-female ratio or the age distribution? In concrete terms, Europe is asking companies to be more transparent about their pay policies.
This does not mean that companies are obliged to disclose how much individual employees earn. However, they must provide clarity on the ratio of average compensation in the company, for example according to gender and job title. They are also obliged to inform employees about the average salary level for their position, broken down by gender. A recruiter may no longer ask how much a candidate previously earned, but candidates do have the right to know the salary scale for their position.
Policymakers aim to eliminate the wage gap between men and women with these regulations. Women earn, on average, 13% less than men in the European labor market. Since the Rome Treaty of 1957, Europe has advocated for the principle of equal pay for equal work. However, the situation has seen little improvement in recent years.
In 2023, the European Council introduced new rules on pay transparency, compelling European companies to disclose wage information and take action when the gender wage gap exceeds 5%. By requiring companies to report this information, Europe aims to make disparities transparent, so companies address inequality.
The overall ESG obligations are reminiscent of the GDPR regulations from 2018. That privacy legislation laid the foundation for a fundamental shift in how companies handle personal data. Europe seeks to achieve a similar transformation in sustainability and social responsibility, with closing the gender wage gap as one aspect.
Make smart use of technology. Software like Youbo offers reporting functionality that provides the information you need to meet the European legislation. With the click of a button, you can access numerous reports on your pay policies. Some examples include: an overview of the pay ratio between men and women, a report on pay distribution, pay disparity, or the compa-ratio between genders. These reports are not only for the entire workforce but can also be broken down into deciles, precisely the information Europe requires.
Youbo offers much more than just insight into the wage gap. It is a bonus and merit tool that allows managers and HR to collaboratively grant periodic pay raises and bonuses to employees in a user-friendly, secure, and efficient manner. The extensive reporting capabilities are an important and distinctive advantage of the software tool.
HR professionals can immediately identify who deviates from the pay policy and whether that deviation is justified. Youbo enables management to identify outliers and make adjustments if necessary. Reports on budget allocation across different departments, compa-ratio reports by role, or reports on fringe benefits by gender are also easily accessible in the tool.
Time is running out. Large companies will be required to report on their ESG sustainability efforts starting in 2025, while public interest entities must do so in 2024. A large company has more than 250 employees or has a net turnover of 50 million euros or 25 million on the balance sheet total. In 2026, it will be the turn of listed SMEs.
Other companies that voluntarily apply the standards of responsible business have a competitive advantage. If they choose to report, they provide an objective insight into their sustainability efforts—an argument that the market and candidates are increasingly attaching importance to. It also facilitates collaboration with larger companies.
Regarding due diligence, according to CS3D rules, companies must report from 2027. This obligation is also being phased in: first, large companies with more than 5,000 employees and a turnover of 1,500 million euros will be required to report. In 2028, companies with more than 3,000 employees and a net turnover of 900 million will follow. A year later, companies with more than 1,000 employees and a turnover of 450 million will need to report.
As for pay transparency, there are also rules for smaller companies. Companies with more than 250 employees must report annually on the pay gap. Companies with more than 100 employees have to report every three years. If it appears that the pay gap between men and women exceeds 5 percent, Europe expects action. Countries still have three years to transpose the European transparency directive into national legislation. This gives companies the opportunity today to phase out the differences.
Organizations with fewer than 100 employees have no reporting obligation. But for them too, the following applies: if an employee wants to know his or her salary scale, he or she has the right to do so. It is therefore soon important for every company to have a clear wage policy and reports that provide insight.
Wage Dispersion is the difference between the salary of the highest and lowest-paid employees in a company. A greater wage dispersion indicates a larger gap between the highest and lowest salaries. It is often used as a measure of the fairness of a wage policy.
Wage Distribution indicates the extent to which wages deviate on average from the mean wage of the population. It can be interesting, for example, to compare the wage distribution of different departments or divisions.
Compa-Ratio is the comparison of an individual’s salary to the reference salary for the same position in the market. It is a metric used to assess the competitiveness of an employee’s salary.