Background: Why EU Pay Transparency?

The EU Pay Transparency Regulation, adopted in June 2023, aims to foster Gender Equality and improve Economic outcomes and competitiveness of the EU markets.

As part of the EU’s broader social and economic agenda, this regulation will be progressively implemented by June 2026. With new reporting and transparency obligations, the regulation also aligns with ESG goals, making compliance not only a regulatory requirement but also a value-creation opportunity for Private Equity (PE) funds and their portfolio companies.

1. Mandatory Gender Pay Gap Reporting

• Who: Companies with 250+ employees must report annually starting June 2026. Companies with 150-249 employees follow every three years, while those with 100-149 employees begin in 2032.
• Implications: If a company’s pay gap exceeds 5%, it must conduct a joint equal pay audit with employee representatives and establish a public strategy to address the gap. Non-compliance could result in fines or other penalties.
• Action: Set up infrastructure to start collecting and reporting gender pay gap data to local governments.

2. Right to Equal Pay for Equal Work

• Who: Applies to companies with 50+ employees from June 2026.
• Implications: Employees can request comparisons of their pay to colleagues in similar roles, and the burden of proof lies with employers to justify any pay discrepancies with objective, gender-neutral criteria.
• Risk: Increased litigation risk due to enhanced employee rights, with the majority of cases historically settled out of court.
• Action: Employers should consider creating progression framework and pay bands with objective and gender-neutral criteria and prepare by conducting regular pay audits to ensure compliance to mitigate potential risks.

3. Transparency in Pay Information

• Who: Applies to companies with 50+ employees from June 2026.
• Implications: Employers must disclose pay bands in job postings or during recruitment processes and are prohibited from asking candidates about their salary history.
• Action: Establish transparent pay bands and update their hiring practices.

Anomymized insights from the discussion & polls

• Beyond Compliance: Majority of the funds plan to leverage these regulations across existing ESG and value creation efforts, some plan to implement them within the DD.
• Readiness for Pay Transparency: Vast majority of the fund are still in the early stage planning for these regulations. Some portfolio companies are proactively seeking guidance on compliance, asking for resources to better understand the regulations and associated legal obligations.
• Improving Gender Pay Gap: Europeans funds that are more familiar with Gender Pay Gap Reporting legislation were less concerned about the reporting, but rather discussed challenges around helping individual portfolio companies improve their Pay Gaps.
• Current Efforts in Gender Pay Gap Analysis: Big proportion of funds are asking their portco about Gender Pay Gap numbers, but this is rarely implemented across all portco.
• Challenges in Pay Equity: We’ve discussed challenges around objective justification for pay disparities and developing a consistent framework for performance metrics.
• Strategic Planning for Portfolio Companies: Some funds mentioned considering creating playbooks and identifying reliable third-party providers to assist portfolio companies with pay transparency and DEI requirements. Some have mentioned they have been implementing guidances as part of Due Diligence (DD) tools focused on gender pay metrics, but full-scale implementation across portfolios remains limited.

Key Takeaways and Next Steps

1. Engage Early: Begin conversations with portfolio companies, especially those with more than 50 employees, to ensure they understand the upcoming requirements and their role in compliance.
2. Set Up Gender Pay Gap Tracking: Start gathering data on gender pay gaps within portfolio companies. This data will be essential for complying with reporting obligations and will also support ESG and DEI initiatives.
3. Integrate Into ESG and Value Creation: Use these regulations as a value-add tool by incorporating gender pay metrics into ESG reporting, supporting a strong narrative for LPs and potential buyers. Companies with better social credentials are shown to outperform in profitability, turnover, and engagement.
4. Prepare for Compliance Risks: Ensure that portfolio companies understand the regulatory consequences of non-compliance, including financial penalties and reputational risks. Consider conducting internal audits in advance to pre-empt any compliance issues.

The Business Case for Portcos (beyond compliance)

1. Increased ROI and Exit Premium:

+10% ESG Premium at Exit (PWC):

Companies that incorporate ESG, including gender equality initiatives, can see up to a 10% premium on exit value. This is particularly relevant for tech & services PE-backed companies, where Carbon is often less material, and enhanced gender diversity can improve attractiveness to ESG-focused funds (Article 8 and 9 under SFDR) and other buyer.

2. Better Financial Performance:

+25% More Likely to Outperform Competitors (McKinsey):

Companies with strong gender diversity and inclusivity measures are 25% more likely to outperform their peers financially. This number jumps to 36% if strong ethnic diversity is present, too. This translates to greater profitability and competitive advantage, especially when diversity efforts enhance decision-making and innovation within the organization.

3. Reduced Turnover Costs:

+22% Lower Turnover Costs (Deloitte):

Improved gender equity and inclusive practices can reduce employee turnover by 22%. Lower turnover minimizes recruitment, onboarding, and training costs, providing substantial cost savings for PE-backed companies with often high staff mobility.

4. Enhanced Employee Productivity:

+41% Reduction in Absenteeism (Gallup):

Companies with inclusive policies experience up to a 41% reduction in absenteeism. Gender equality improves employee satisfaction and engagement, leading to fewer days missed and a more productive workforce, directly impacting bottom-line performance.

5. Access to Larger ESG-Invested Capital:

€6.2 Trillion in Article 8 & 9 AUM (Prequin, PWC):

There’s a growing pool of capital focused on ESG-aligned investments. By prioritizing gender equality and social KPIs, portfolio companies can attract investments from funds with €6.2 trillion in assets under management across Article 8 and 9 funds.

Example Action Plan

1. Short-Term (Next 6 months):
   1. Educate portfolio companies about the regulations.
   2. Start tracking gender pay gap data at all relevant portfolio companies.
   3. Conduct an initial audit to identify any immediate gaps or risks.
2. Medium-Term (6-18 months):
   1. Implement transparent pay practices and frameworks across portfolio companies.
   2. Establish protocols for regular pay audits and reporting.
   3. Integrate these metrics into annual ESG reporting and review value creation impacts.
3. Long-Term (18-36 months):
   1. Review and refine pay equity strategies as per audit outcomes.
   2. Maintain ongoing compliance with the EU regulations as they come into full effect.
   3. Report results and improvements to LPs as part of ESG and value creation narratives.

Additional Resources

• Fair HQ & ILPA: slide deck from the workshop
• ILPA’s resources for DEI in Private Equity: ILPA Diversity in Action Initiative
• EU Pay Transparency Directive Overview: European Commission
• Gender Pay Gap Data in Europe: Eurostat

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