Why The EU Pay Transparency Directive Is More Than A Compliance Exercise

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0:27The European Union Transparency Directive isn't a reporting exercise. It's an operating model overhaul. But most organizations are only looking at the visible part of the iceberg, so to speak. On today's show, I'm talking with Tom Hayes. He's a pay reporting expert at Lewis Silken, about why he describes the PTD as the UK gender pay gap regime on steroids. Because unlike previous reporting requirements, this one combines company-wide gap reporting with individual employee rights, new restrictions on what you can ask during recruitment, and the requirement to categorize jobs of equal value and defend those decisions to employee representatives.

1:06The last part is where a lot of organizations are going to struggle. Accuracy and explainability are not the same thing. An answer can be statistically correct and still be impossible to defend. And this legislation doesn't just ask for answers. It asks for you to show your work. If an employee representative turns around and says, show us your model and your black box generated the number, you're exposed. Tom's broader warning is one that extends well beyond compensation. We're entering an era where leaders are making decisions partially influenced by systems they didn't build and don't fully understand.

1:40That shifts explainability from a technical issue to a leadership capability. So today, we're going to cover what makes the PTD fundamentally different from prior pay reporting requirements, why job architecture is the foundation everything else sits on, the gap between documented work and what people actually do, why AI can accelerate this process but can't own the decisions, and why explainability is becoming as important as efficiency. I'm David Rice. This is People Managing People, and if your organization is treating pay transparency as a compliance checkbox, this conversation shows you how much work is actually underneath that.

2:16So let's get into it.

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2:59What makes this different from previous pay reporting requirements? And why do you think so many organizations are underestimating the amount of work that's involved with it? I came at the PTD from a background of having done a lot of work over the past few years for UK companies on UK gender pay gap reporting. That is at a high level. It's not comparing like with like. It's really more of a representation gap that you're looking at there. The PTD starts from a similar place in that you also have to report those organization wide gaps. But then it's really much more focused on a bigger issue, equal pay.

3:40And it does that through reporting obligations, but also additional reporting obligations compared to what you see in, say, the UK. So really looking at jobs that are comparable, comparing like with like, or at least like-ish with like. And then on top of that, it combines it with new individual rights, as well as new bans on things what you can and can't ask about during recruitment. So the approach that seems to have been taken is equal pay is a fundamental EU right. It's part of the treaties. And how can we hit it from every single direction to try and ensure equal pay as much as possible? And that seems to be the sort of guiding philosophy behind how the PTD has ended up the way that it has.

4:31So it's a really big new piece of legislation. And I think it will be very disruptive over the next one, two, three years. Kick up a lot of dust and it will take time for that dust to settle. It seems like it's not really as much a reporting exercise as maybe it is an operating model exercise. I think that's right. I think it's bringing in a new way of doing things, a new normal. And so it really forces a lot more discipline around things like pay setting and how you do and how you don't do it, what you can take into account, what you shouldn't take into account. You know, ways of doing it to ensure that bias doesn't creep in.

5:13So, for example, I mentioned some of the new obligations around recruitment. So you won't be able to ask people their pay history. So you can't say to people, what are you on now? You can't ask that as part of recruitment. And I think for so many companies, I mean, that's just the standard way in which things have been done for a very long time. So even on just that one very particular thing, it's a big change. Yeah, it is. The reporting part feels like the visible part of the iceberg, so to speak. You know, it's underneath there, you've got like job architecture, leveling, compensation, philosophy, governance, all these different things.

5:51In some ways, it feels similar to what's happened with AI readiness, you know, where everybody wanted outputs, but they had to fix the foundations first. And I think it sounds to me like this might be something similar to that. I think you're spot on. The iceberg example wasn't something that I'd thought of before, but I think it's really appropriate. And you mentioned the job architecture. I mean, that underpins the two biggest things that companies seem to be most concerned about. So in the PTD, it talks about categorization. So grouping people into jobs that are of equal value. So in terms of skill, effort, decision-making, responsibility rather, and working conditions, grouping those jobs together.

6:33And then firstly, all employees have a right to the average pay of men and women within their category. So straight away, that new right, which is underpinned by all of the really important job architecture stuff, that gives people the information that they need to be able to identify potential equal pay issues because they can see, hang on, I'm only getting paid this much. All the people doing similar enough jobs to me are getting paid that much. So I want to know what's going on there. And then secondly, the reporting bit that you mentioned. So there will also, as well as the broad company-wide gaps, the representation type of gaps, there will be a requirement to report internally the gaps within each category.

7:18And so you've got that combination of obligations on employers and also rights on individuals. And it's really putting all of the information out there for what people need to be able to bring equal pay claims. And as you say, job architecture, the categorization bit sits right underneath both of those two really big things. One of the themes that kept coming up when we spoke before this was explainability. And this is even something I just wrote about when it comes to hiring screens. How well can you explain what AI does, for example? And the AI can produce answers very quickly, but this legislation doesn't just require answers.

7:56It requires organizations to be able to defend them. And I'm curious, why would you say that distinction is so important? I think it's important because of the role that the legislation envisages employee representatives have. It's a really powerful role. They have rights and obligations and they can, in some circumstances, effectively the arbiter of whether gaps are justified or not. They get access to methodologies and how things are done. And they're a human being. and they get to ask questions. And some of those questions might be, you know, perfectly logical and sensible and some of them might come from positions of not so informed because this is a new thing for lots of people.

8:38It will take time for people to upskill themselves on this. Because you've got to explain to a human, you've got to really know why you've done things in the way in which you have. What is the process that you've taken? Because someone will ask you about it. They can ask you about it. And it's all by certain that at some point they will ask you about it. And unless you know why you've done all the things that you've done, it's not going to stand up to scrutiny. The end result may be perfectly good and sensible, but unless you know how it's been done, then it leaves some underlying potential risk, a hostage to fortune for the future.

9:16One of the things I was thinking about as I was writing that article is like accuracy and explainability are not the same thing, not even necessarily the same category and it's one of the two things can be true thing right like an answer can be statistically correct but impossible to defend and so like a lot of the ai conversations i have right now it's like people talking about moving from output focus to outcome focus and the idea i agree with it but have like worn against becoming outcome obsessed and because you still have to pay attention to reasoning right like how did you get there you're in we're in this time where trust is very low And I'm like, trust isn't going to be built because you have an answer.

9:55It's going to be built because people understand how you do what you do or think or reason to make a decision. And so this is very much in that same lane. I think there's definitely a role for AI within all of this to help employers get ready. Because things like job architecture, it's a massive job. Anything that can accelerate that process, particularly for lots of employees coming at this from a no architecture point. point. This is a whole new world that a lot of companies are entering into. So anything that can accelerate that process, then great. But I think there is a key difference between using AI to accelerate your decision making or to improve your processes.

10:36But I think there's an important line between then deferring to it to make the decisions. The decisions have to be yours. I think there's an obvious temptation here too. I think if you're in this position, You want to upload the job descriptions, maybe run them through an AI model and sort of celebrate job evaluation. But the thing about that is job descriptions often reflect what a role was supposed to be and not what it became or not what people actually do. I'm curious in your opinion, like how big is the gap between documented work and real work? I think it can really vary and it can vary by different types of organizations.

11:10I think particularly in smaller organizations where things are less rigid in terms of the job that you're doing, and also in things like startups, scale-ups, where roles can change very quickly and the paperwork might not match up with what someone is actually doing. the classic example of garbage in garbage out is very relevant here because the ai is only as good as what information is going into it and if you're feeding it out of date stuff i mean it can accelerate your processes and come up with some output but that output is not going to be i mean it's obviously it's not well informed because it's using out of date stuff and so potential issues caused there i hear this quite a bit you know the scope creep problem around a lot of people's roles it's like well we hired janet to do this but in actuality as we got her in the company and of course she's been here three years her role has now expanded out into all these other areas and our documentation doesn't necessarily reflect that and then that context then is missing about actually the impact of janet's role and all the different things that she does and all the things that have fallen into her purview we talk all the time about like hr's role for example is ever expanding.

12:26It just keeps getting bigger and bigger. It's been that way for years, but it doesn't necessarily get reflected back in the same way. So I think there's going to be some issues there. Yeah, I wonder whether you might see perhaps employees being a bit more proactive as to ensuring their job descriptions are matching up with what they're actually doing. I can foresee people emailing HR and saying, well, this is what my job description said I should be doing, but I'm actually now doing X, Y, and Z. So that needs to be reflected. I would agree. And I think a lot of people are becoming more and more aware of how this stuff works.

13:01If they're aware that the technology will be used in that sense, then I do think they'll want that. That's certainly going to increase as well. I mean, certainly across the EU, you've got 250 ,000 companies that the directive is applying to. It's tens of millions of people. And now suddenly they're hearing things about categorization and job levels and what all of that means. And I think there will become much more awareness of it. And as I said, it brings in new rights for employees as well. So it's sort of pushing people into a stronger bargaining position. Maybe that's not quite the right word, but certainly pushing them into being at least greater advocates for themselves by giving them the rights that they need to be able to do that.

13:49Quick pause. How's your cash flow looking right now? If you're a freelancer or small business owner, having a clear view of your finances can make all the difference. QuickBooks Online gives you real-time financial insights, helps you create and send professional invoices, and makes it easier to get paid faster. Plus, it keeps your income and expenses organized in one place, so you're always on top of where your business stands. Learn more about how QuickBooks Online can help you manage your business with confidence. Yeah, we've had guests on this show that talk about the importance of documentation.

14:22I think we're going to continue to talk about documentation practices for a while longer because context with AI, in some ways, it's everything. A lot of vendors are positioning AI as sort of this quick path to compliance. But if employee rep or even employee asks why a pay gap exists and the answer is essentially, you know, the system said so, the system flagged it, that's probably not going to be enough. That's not going to fly. I'm curious, do you think organizations are at risk of creating new compliance problems while trying to solve old ones? I think there is the potential for that. And I think the problems will come to light because, as I said, the role of the employee representatives is envisaged as being a powerful one.

15:04And there'll be a lot of publicity around the new rights as they come in. It's supposed to all come in on the 7th of June, but there's a lot of fragmentation around implementation. So there's a large number of countries that will be implementing late and perhaps most around January 2027. But that aside, there's lots of publicity around the paid transparency directive. The more people know, the more they will be asking of their employee representatives to hold their employer to account. And so if companies don't have decent explanations for how they're doing things, then absolutely it's going to come out.

15:48Especially because we've seen this pattern everywhere. Organizations want speed, and then that speed can sometimes create a new category of risk. And the temptation is, well, we should automate complexity away. But this to me sounds like a situation where the explanation is actually more important than what the answer is. I think so, because the directive is, it's all about transparency, obviously. But transparency about the way in which things are being done, it's not dictating a way of doing things. It's not saying pay everyone exactly the same thing. differences are fine differences are expected there will obviously always be differences in pay but what it's trying to get to is a point at which those differences are objective they're explainable they're not for biased subjective unfair illegal reasons but reasons that make sense that are proportionate so the fact that someone has more experience than another yeah okay, yeah, that's a good reason why someone might be getting more pay than another.

16:58If that experience is, you know, someone has 30 years experience in a particular role and someone has five and you get as good as you're ever going to get in this particular type of job when you've been doing it for three years, you're still paying the 30 years experience guy a lot more, then you start getting into issues. Because whilst you start with a potentially objective reason, You're not applying in a proportionate way. And, you know, these nuances, they will come out over time. And, you know, as I say, it's shining a light. It's exposing the way in which things are being done. Yeah, it's interesting because historically, I mean, well, at least in the U.S., so correct me if I'm wrong about in Europe, but, you know, compensation, it's been one of the least transparent parts of organizational life for a long time.

17:46And what do you think happens when people suddenly have the right to ask all these questions that a lot of organizations have never really had to answer before? Well, I think that the tendency to not talk about money is something we see this side of the pond as well, for sure. And certainly across a lot of, not exclusively, there are some countries where people are not afraid to say, I get this much, how much do you get? But in a lot of places, there is certainly a tendency to shy away from talking about the money. But in terms of what happens, so what will the outcome be once people get all of these rights and once companies have all of these obligations and the sun is shining down on all these ways of doing things?

18:30Well, I think the UK offers a very cautionary tale because about 10, 15 years ago, we had a lot of claims against local authorities, councils across different boroughs and cities across the country. And these were claims being brought not by people doing the same job, but by people, say, mostly female-dominated jobs like cleaners and carers, comparing themselves against mostly male jobs. So street sweepers, grave diggers, these are all the classic examples, mostly male jobs. The mostly male jobs that had large bonuses, which became de facto part of their pay. They weren't motivating extra productivity or performance or rewarding anything.

19:15It was a de facto part of their extra pay. And the amount of these bonuses was very big. And in some places, it was multiples of the pay of women. That was the extent of the difference. This all came out, though, because of the nature of the sector. So public sector, freedom of information applies. People could ask, what's the average pay for these types of jobs and those types of jobs? And also, it all being negotiated through trade unions. The information was out there. People knew that there were these pay differences and there were these different bonuses. And then what happened? Well, obviously, the underpaid people wanted their pay to be corrected.

19:55And so claims were brought, big multi-party claims, hundreds, thousands of people in some cases. And the impact of that was massive. So Birmingham City Council, one of the largest employers in the UK, possibly the largest local authority in Europe as well, something like a million people, very big. their equal pay liability was huge. And we're talking, I think it was over a billion. And so I think that just shows the consequence of what happens. The pay differences in these cases were quite often big, but it doesn't even have to be a very big pay difference, particularly when you're talking about a sort of workforce where there are lots of people.

20:40And what we've seen in a sort of similar situation is retailers in the UK have faced large multi-party claims. The differences there have been smaller, but because you're talking about tens of thousands of employees, 40 hours a week, you can get six years back pay. The amount of the difference doesn't have to be very much, you know, two, three pounds here or there. But when you're multiplying it by so much, the extent of the liability becomes massive. And what those sorts of cases are looking at is, say, shop floor people comparing themselves against warehouse people. Different jobs, jobs which, when looked at through the equal value lens, so the amount of skill, effort, responsibility, working conditions, in exactly the same way the pay transparency directive tells employers to look at their jobs.

21:35What happens is that the differences become exposed, people bring the claims, and I think there will be a lot of those types of claims spreading across Europe. In the UK, you can claim six years back pay. I know that in other parts of Europe, in parts of the EU, it's longer. In some places, it's unlimited. So someone who's been there 30 years underpaid could get their 30 years back pay. So I think that there will be a lot of those sorts of claims being brought over the next few years. It's interesting because there's been, it's sort of the bills come due for sort of a trust us culture around compensation is what it feels like, right?

22:16So now we're moving into this like show us environment and I imagine that's going to be pretty uncomfortable for a lot of organizations that never really had to articulate to compensation philosophy in any sort of plain language externally. I think that's going to be fascinating to see. Yeah. I mean, I think of it in like, you know, maths exams when you're at school, you get marks for getting the right answer, but you get more marks for showing you're working. And showing you're working is where the real substance is here. That's a great way to put it, actually. It sounds like a lot of organizations are sort of discovering they can't comply with pay transparency unless they first clean up the job architecture, the grading, the leveling systems.

22:57Would you say this legislation is really sort of a compliance challenge, or is it really getting at exposing some deeper organizational issues that have been ignored for a long time? I think it's both. I think the deeper issues cause the equal pay risk, and the PTD is surfacing that risk. So it's putting everything out in the open, And so as a result of that, the compliance problems become apparent. I don't think that the PTD should be thought of in terms of a compliance tick the box exercise. We've done it now. We don't need to worry about that anymore. I think it's really about throwing away the old way of doing things and replacing it with a new normal.

23:39I think it's going to be incredibly disruptive. A lot of organizations, it will, as I mentioned, kick up a lot of dust. When the dust settles, there'll be a new normal, normal 2.0, which will be a more objective, clearer way of pay setting, more honest, potentially. Like you said, it's not just trust us. We're doing it right, but show us. And, you know, it's not just trust us. It is showing as well. So I think that's the way in which it should be thought of. It's ushering in a new era. It's not a tick-the-box job. Yeah, it feels almost like an organizational MRI, so to speak, sort of revealing structures and inconsistencies that may have been around for a long time.

24:25And, you know, it kind of looks like compensation problems on the surface, us, but I really think it's more of a governance problem than anything. No, I think that's a sensible way of putting it because, I mean, ultimately it is all about how much people are paying, but where the problems creep in is where you get things like too much manager discretion, I suppose, and not enough guide rails on how things are done. So if you have managers without a clear way in which they should be awarding bonuses, say, or making use of whatever budget they have to reward their team, then, you know, you've got unexplained things going on, which has a pay impact, which then has an equal pay potential risk.

25:07You've mentioned the reporting obligations under the PT. I'm curious, what are the issues in, you know, using AI to solve X, like whatever it is? Yeah, so I think this is relevant in terms of the, as I mentioned before, reporting of gaps by category. So employers have to explain any gaps which within a category are greater than 5%. And we're going to need to get into the maths a bit for me to answer this question. So you can explain your gaps by reference to objective reasons, so potentially experience, like I mentioned before, but maybe also things like performance, potentially, you know, market factors, lots of different potential reasons.

25:49So the objective really is to say, okay, we know that we have an 8 % gap, say, within level 10. But we know, thanks to our analysis, we can see that actually 5 % of that can be explained, which only leaves 3 % left unexplained. There's a threshold of 5 % for gaps within a category. The PTD sets this out. And where the unexplained gaps are greater than 5%, it causes a requirement to undergo a joint pay assessment, essentially an equal pay audit, opening up all of your books to employee representatives. They get to see how you do everything. Big distraction away from actually being productive and trying to explain how you're doing things.

26:34So if you can avoid that, then great. So the standard way of being able to derive the amount of x-plane unexplained gap would be through regression analysis. So at its simplest, it's drawing a line through a set of points, the line that fits the best. But the thing is that this sort of analysis, regression is subjective. It's not objective. We're not talking really about 2 plus 2 equals 4. My analogy is that it's a lot more like mixing paint. Think red plus green equals brown. So, you know, how much of each color are we talking forest green and crimson or lime and scarlet? How thick are we putting the paint on?

27:15Are we using oils or watercolors? In the same way, you can think of regression analysis. How much of each variable? What's the model specification? Which variables are we considering here? Lots of different decision points. And it's not the case that there is a right way of doing it for any particular category that you're looking at, there are degrees of right, I suppose, degrees of defensibility, because as we've talked about, you've got to explain it all to an employee representative. And there might be different models that work, then there might be other ones that also reasonably work. And so your choice is, which ones are you going to use?

27:55Which ones are you going to not use? The risk is that when you defer this sort of analysis to AI, and we're talking really hear about analytical or predictive AI rather than the sort of generative AI. But when you say to a black box, I want to know how big my adjusted gap is, and it spits out an answer, and you then tell your employee representatives, well, it's 3%, so it's fine. And they turn around and say, well, you know, show us your model, show us you're working. And that's the point at which if your black box has done it in a not very defendable way, So maybe it's an over-specified model.

28:34Maybe it has too many variables that doesn't match the, you know, I think it's inevitable that all employers will have at least one small group that they have to look at. And when you start getting into small groups, regression stops working well because you don't have enough data to rely on. There's not enough points to be able to draw the line through in any clear or reliable way. And unless you know that, unless you can see that, then you can't rely on any output as being something that would stand up to scrutiny. So I'd exercise some caution around the use of automating the analytical process, not just looking at the answer at the end of the maths paper, but also making sure you understand the working as well.

29:21the old garbage in garbage out problem right if your data that you've got that you're you're doing this analysis based on is obviously a risk and then there's a risk that like you know a lot of times we put things in and we feel more certain than we should based on the output you get a polished answer whether it's a chart or a recommendation or whatever it is it sort of feels authoritative but if the underlying assumptions and judgments and decisions that somebody has to own are based on something that isn't real like i always talk about this i'm Like, you can't hold a machine accountable, right?

29:53So it can accelerate your analysis, but it's not going to absorb your accountability at the end of the day. The machines are doing what you ask them to do. But we need to make sure you're asking them to do the right things. That's exactly it. And we've got to give it the right context, not just, oh, I fed it a bunch of data. Cool. Was that even that meaningful? What data have you fed it? And what's it done with it? It's like you throw a ball for the dog and it brings it back. The machine brings the data back. But, you know, you don't know whether it's brought the ball back by going out of the park and down the street and round back the other way or whether it's brought it straight to you.

30:28Exactly. Well, there's a broader lesson here, I think. It extends beyond compensation. That's like as AI becomes more involved in our decisions. Do you think we're entering an era where explainability is just as important as efficiency? I think so. I think efficiency will become using AI to become efficient. Then great. We've all seen it's super impressive and does lots of things that can really speed up decision making. But I think that's the key. Use it to accelerate your decision making. Don't outsource your thinking to it. Use it to enhance your thinking. Yeah, I think this is one of the biggest sort of challenges or leadership challenges of the AI era, right?

31:09It's like for years, we've just been like rewarding faster decision, faster process, faster execution. Go quick, go. Move fast and break things, right? But we're entering this world now where leaders may have to explain decisions that were partially influenced by systems that they didn't build and in a lot of cases don't personally understand that well. And so that shifts explainability quite a bit from being sort of a technical issue to being a leadership capability. As you say, I mean, the importance of governance around all of this stuff, I think definitely will be increasing focus on it. Well, Tom, this has been a fascinating conversation.

31:46I feel like I learned a lot from you because I didn't know that much about this regulation. So this is good for our audience to kind of get a good grip on this. Thanks for coming on the show today. No problem. Thanks for having me. All right, well, listeners, be sure to look out more for this type of content and for more on developing regulations around AI, pay transparency, and everything that's going on in the workplace right now by following People Managing People on all of your social platforms, as well as heading on over to peoplemanagingpeople.com forward slash subscribe. Get signed up for the newsletter.

32:17You'll get all of this content straight to your inbox. And until next time, think about how you're going to explain things.

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