Pay transparency: an algorithm for fairness or a recipe for internal and external drama?

First, let’s recall:

What is the Pay Transparency Directive (briefly)

This is Directive (EU) 2023/970 of the European Union, whose main objective is to reduce the pay gap between women and men through greater transparency, accountability, and the right to information. Member States must implement it into their national legislation by June 2026.

In the previous article, we explored:

• Main objectives of the directive,
• What changes in practice for employers,
• Obligations based on company size and objective criteria for Determining Pay,
• Why the Directive concerns HR teams,
• What changes for employers and employees.

The promise of fairness of the directive

In theory, this sounds like an upgrade and evolution of HR regulations at EU level and appears to be yet another tool in the arsenal of modern HR management and social legislation.

And in reality?

We expect the directive to build and support trust and sustainable organizations. But if we take the concept out of presentations and place it in the real work environment, the questions become more uncomfortable:

• Can transparency solve such a complex dilemma as fairness in compensation policies – or will it simply create more noise and public scandals?
• If all data is visible, does that automatically lead to less tension between employees and employers, or will it simply expose existing problems in people management?
• Yes, large companies have implemented, tested, and developed good practices, but this is their own decision, concerning their own money, and the risk of the investment is borne by them, with expected efficiency and results. Is it appropriate for the legislator to impose “good practices” on companies that are not convinced and not ready for them?

Pay transparency: theory vs reality in HR

On paper, the directive looks like a well-structured algorithm:

• clear criteria for compensation,
• defined levels (floor and ceiling),
• objective assessment of roles, importance, and position within the organization;
• predictable logic that HR specialists can apply through internal policies or external HR consulting.

In the world of HR services, this sounds almost like an expensive dream achieved – a system that eliminates subjectivity and makes workforce management more transparent and measurable. But the reality in companies rarely works like an Excel sheet.

Why there is no “perfect algorithm” for compensation

In the practice of human resource management, this means that even the most well-designed and structured compensation systems and motivation tools still carry a human element – bias, compromises, risks, and responsibility from managerial decisions. Or put less diplomatically: there is no way to have a fully fair algorithm for something that by definition is not fully objective.

Let’s look at

4 real HR cases regarding pay transparency

Case 1: Pay differences in similar roles

“Why does he earn more than me?”

Imagine a standard situation from the daily work of any HR team.

• Two employees in similar positions, with similar responsibilities, in the same department.
• One was hired three years ago, in a different market environment. The other joined recently, with better negotiation skills and an offer aligned with the current talent shortage, urgency, and criticality of the need.

At first glance, we have “equal work, equal pay”. But not quite.

There is a difference in compensation that until yesterday was “invisible”.

The case continues: for one reason or another, the difference in performance deepens, one of the two increasingly refuses to follow the “spirit of the times” and current market realities, and gradually and clearly does not produce the expected results.

• Should the employer update and reward this behavior by equalizing their salary with that of the top-performing colleague?
• What if there is no budget or possibility to do so?
• Should one of them be dismissed?
• And if yes, which one – the top talent or the average performer?

The challenge

The problem is not only in the numbers, but in the perception of fairness. Not every employee sees the market context, the timing of hiring, or individual negotiations, responsibilities, and potential. And let’s be honest – not everyone has an objective view of their own performance. They see a colleague with a similar role and higher pay. And from that point on, people management becomes an exercise in “translation”: how do you explain a difference that makes sense for the business but does not sound convincing at an individual level?

The result:

In HR practice, this often leads to three possible scenarios:

• pressure to equalize compensation regardless of real differences and productivity. But is there budget for that right now?
• decline in motivation (“why should I give more if I receive less?”) and performance
• or the worst – silent withdrawal and search for opportunities outside the company

The irony? Transparency fulfills its promise – it reveals the differences. But instead of solving them, it turns them into a central issue. “Congratulations, you now have transparency. And a few new conflicts added to HR’s task list. Why not a regulator audit as well?”

Case 2: The manager as a buffer between HR and employees

If in the first case the conflict is between employees, now the focus shifts to the person in the middle – the manager. In a transparent environment, they are no longer just a team leader, but

• a spokesperson for compensation policies,
• a translator of HR decisions, and
• sometimes… a guard.

Do you trust them to understand and explain grades, percentiles, etc., better than HR? And will they defend them as well as you – the capable HR professionals?

The scenario is familiar: an employee (usually the most average, but confident and confrontational) comes with a specific question: “Why is my salary X, while others are between Y and Z?” The expectation is for a logical, clear, and convincing explanation. But reality rarely provides such answers.

The challenge

This is where the real challenge begins – managing imperfect people by other imperfect people. Managers, who traditionally rely on HR support or external authority, suddenly find themselves on the front line. They must defend decisions they did not fully make and explain logic that is not always measurable. And when the explanation does not convince the employee, authority begins to erode.

The result

In HR practice, this leads to several very concrete effects:

• managers avoid difficult conversations, postpone them, or hide behind “HR said so”
• HR teams become “judges” who must validate and defend every individual decision
• processes slow down, as every difference now needs to be justified even legally

Case 3: Candidates and the effect of salary ranges

Candidates lead the game

While internal transparency creates tension among employees, the external market reacts in its own predictable way. With salary ranges published in job ads, companies demonstrate openness – something long recommended in modern HR consulting. But this transparency quickly turns into a new “game” for candidates.

The scenario is simple: a job ad with a range “3000 – 5000”. What does the candidate see? Not a range, but a target. And that target is the upper limit.

The challenge

As a result, almost all candidates enter the process expecting the maximum, regardless of their actual experience or level. And often they are responsible for their own disappointment. Negotiations, which used to be a real step in the process, become a formality – HR specialists no longer negotiate but explain why someone does not fall into the highest bracket.

The result:

For compensation management and motivation, this creates several real problems affecting all market participants:

• salary compression – differences between levels begin to shrink
• loss of flexibility – it becomes difficult to offer a lower salary without appearing unfair, and difficult to offer a higher one without disrupting the structure
• expectations that outpace reality – especially among less experienced candidates

Case 4: Pay transparency and employer branding

Here, the effect of tension moves outward and becomes public. Salary data, ranges, and internal differences become part of the employer’s image. And in the era of forums, review platforms, and social media, this means one thing: control over the narrative is no longer in HR’s hands.

The scenario: employees share information, candidates compare offers, competitors analyze. What used to be an internal HR topic or part of professional consulting becomes publicly accessible “truth”, often taken out of context.

The challenge

The truth is that workforce management is rarely black or white, as it may seem from the outside. Differences in compensation often have logical explanations – experience, skills, business needs. But once the information becomes public, nuance disappears and only comparison remains.

How transparency affects the labor market

In HR practice, pay transparency often distorts the labor market. Instead of guiding candidates, salary ranges anchor expectations to the upper limit. Companies trying to remain competitive are pushed beyond their budgets, effectively carrying underperformers as well.

Employers face a new type of pressure: not only to create a functioning internal compensation system, but one that appears fair externally, even to those who do not understand the context.

Risks for employers when implementing pay transparency

• internal conflicts
• budget pressure
• erosion of managerial authority
• external reputational risk

Practical solutions for HR and business

• use of HR consultants for job grading systems
• development of clear compensation policies
• strategic use of external partners for sensitive roles

In conclusion

Let’s summarize the most important points briefly

The Pay Transparency Directive leads to:

• more transparency
• more comparisons
• more expectations
• more HR challenges

HR teams will once again be at the center – as translators between regulation and reality, between numbers and perception, between business logic and human expectations.

And if there is one thing this directive clearly shows, it is that compensation management has never been just mathematics. It is a combination of market, strategy, communication, and human factors.

 

Read the first part of the article, dedicated to the upcoming implementation of Directive (EU) 2023/970 of the European Union.