Why Equal Pay Compliance Isn't Enough: Rethinking Compensation Systems

Most companies treat equal pay as a regulatory box-ticking exercise. Something to be checked off — like a privacy policy or a fire safety plan. That's a strategic mistake.

The EU Pay Transparency Directive (EU) 2023/970 doesn't just demand transparency. It forces a paradigm shift in how companies think about, structure, and communicate compensation. Those who view this change only as a burden will miss the opportunity. Those who actively shape it will win — in recruiting, in employee retention, and in court.

Because one thing the courts have already made clear: opaque compensation systems are legally vulnerable. And the consequences go far beyond fines.

Case study — The Daimler ruling: A wake-up call for every European employer

The most powerful example of what happens when compensation systems fail the transparency test comes from Germany — but the lessons apply across the EU.

What happens when a senior executive discovers after 15 years that she earns significantly less than her male colleagues? She sues. And Germany's highest labour court rules in her favour.

The case of a department head at Daimler Trucks sent shockwaves through European boardrooms. The woman had spent 15 years at the third management level of the company. After returning from parental leave, she discovered she was paid significantly less than male colleagues in comparable positions. She knew the specific salary of one colleague — and sued for the difference.

The state court: Only the median

The Stuttgart Higher Labour Court initially awarded her compensation of approximately €130,000 for four years — based on the median salary of male department heads. A claim for the salary of the highest-paid colleague? Denied. The reasoning: the principle of pay equity is not designed to raise below-average salaries to the level of above-average ones.

Germany's highest court: Pair comparison is permissible

The Federal Labour Court (BAG) saw it differently. On 23 October 2025 (case no. 8 AZR 300/24), the 8th Senate clarified: to establish a presumption of gender-based pay discrimination, a so-called pair comparison is sufficient. It is enough if a single colleague of the other gender in the same or equivalent position is paid more. The size of the comparison group and the level of median salaries are irrelevant for triggering the presumption.

GFF attorney Sarah Lincoln put it succinctly during the hearing: "Women don't have to settle for mediocrity." If a woman identifies a male colleague performing the same or equivalent work who is paid more, she can compare herself with him. The employer must then prove why the unequal treatment is objectively justified.

The scale: €420,000 — and it's not over

The claimant sought a total of €420,000. The court referred the case back to the state level — giving Daimler another chance to present objective reasons for the difference. But the direction is clear: if the employer cannot rebut the presumption, the woman is entitled to the same salary as the colleague she compared herself with.

Particularly concerning: according to the Society for Civil Liberties (GFF), 90% of women at Daimler earn below the male median. Six additional claimants have already joined the action. The Daimler case is not an isolated incident — it's the beginning of a wave that will reach every EU member state once the directive takes effect.

Why this matters for every European employer

The presiding judge criticised during the hearing that the salary determination process for Daimler Trucks executives was "not very transparent" and did not follow fixed criteria. The court described the defendant's pay system simply as "opaque".

That's the central message — and it applies to every employer in the EU, not just in Germany: an opaque compensation system is not just unfair — it is indefensible. In court and in the public eye. With the EU directive, employees across all 27 member states will have the tools to challenge exactly this kind of opacity.

What counts as justification — and what doesn't

Many employers assume they can explain pay differences with common arguments. Current case law and the EU directive set tight boundaries.

✅ Permissible justifications

Measurable performance and individual target achievement: Anyone seeking to justify a pay difference based on performance needs more than a manager's word. The courts require robust, quantifiable evidence — specific revenue figures, achieved project targets, defined KPIs with clear documentation. An annual review with subjective assessments is not enough. Crucially: the performance criteria must have been defined before the pay decision — and must apply equally to all employees.

Relevant professional experience and qualifications: Additional expertise or specialised experience can justify higher pay — but only if it is specifically relevant to the current role and genuinely impacts work outcomes. Someone who has been at the company for 20 years but performs the same tasks as a colleague with 5 years of experience cannot rely on seniority alone. The question is always: does the experience make a measurable difference in today's role?

Market and location factors: If a company pays all employees at its Luxembourg or London office a cost-of-living allowance, that's an objective criterion. But if a single candidate gets €15,000 more "because of the market" than a female colleague in the same role, that's thin. Location and market-based differentiations must follow company-wide rules that are transparent and documented for all — not applied on a case-by-case basis.

❌ Impermissible justifications

Negotiation skills: "He just negotiated better" — that may sound plausible, but under the directive and recent case law (including a landmark ruling by Germany's Federal Labour Court), it's off the table as justification. The reason: negotiation strength is not an objective qualification. It depends on socialisation, confidence, and power dynamics — all factors that systematically correlate with gender. The directive specifically aims to break this mechanism.

Personal circumstances: Whether someone has children, is married, or pays alimony has no place in salary decisions. Compensation must be based on the role, not the employee's personal situation. Exceptions apply only to objective, gender-neutral supplementary benefits available to all equally.

Historically grown differences: "That's how it's always been" is not an argument — it's the problem in one sentence. If an employee retains a higher legacy salary after a merger or restructuring while new female colleagues in the same role earn less, this creates a gap without objective basis. The directive requires that such legacy issues be resolved.

Each pay component individually

A point frequently overlooked in practice: the assessment of non-discrimination is carried out not at the level of the total package, but for each pay component individually. If a female employee receives €5,000 less in base salary than her male colleague, you cannot offset this by giving her a more expensive company car. Base salary, bonus, allowances, benefits in kind, occupational pension — each component must independently be based on objective criteria. The principle of "it all balances out in the end" doesn't hold up in court.

From "don't discriminate" to "actively design": The paradigm shift

Most companies still operate in the old world of compensation: individual negotiations determine starting salary. A candidate's "market value" justifies deviations. Salary bands exist but are broad and opaque. Pay rises follow no system — just the discretion of individual managers. And the result? Compensation structures that have grown historically — but cannot be explained.

The new world looks different:

• Objective criteria instead of individual negotiation: Compensation is determined by transparent evaluation criteria, not by the applicant's assertiveness.
• Documented decisions instead of gut feeling: Every pay decision — from hiring to promotion — is justified in writing and archived.
• Transparent salary bands instead of hidden ranges: Employees and applicants know the compensation framework for their position.
• Regular reviews instead of ad hoc corrections: The compensation structure is systematically analysed for gaps — not only when someone sues.

The directive's four evaluation criteria

Art. 4 of the directive defines four criteria for assessing the equivalence of roles:

1. Skills: Education, professional experience, technical and interpersonal abilities
2. Effort: Physical, psychological, and emotional demands of the role
3. Responsibility: Decision-making authority, leadership responsibility, financial responsibility
4. Working conditions: Work environment, working hours, special conditions

Crucially — and neglected by many companies: Art. 4 para. 4 explicitly requires that soft skills be appropriately taken into account. Communication ability, empathy, team leadership, conflict resolution — these competencies must not be systematically underweighted in role evaluations. In practice, this is exactly what happens: roles with physical demands are often valued higher than those with psychological or emotional strain. The result is a structural undervaluation of roles disproportionately held by women.

A compensation system that follows these criteria is not just compliant — it is fair, explainable, and defensible. Exactly what Daimler lacked — and what every European employer now needs.

The business case: Why modernisation pays off

Viewing equal pay as a strategic initiative is not idealism — it's sound business reasoning. Here are four reasons:

1. Employer branding: Transparency as a competitive advantage

The labour market has turned. Qualified professionals choose their employer — not the other way around. Studies consistently show: transparent salary information increases the quality and quantity of applications. A comprehensible compensation structure signals: this is a company that pays fairly. This is a company that makes decisions based on criteria, not personal connections.

The generation now moving into leadership positions expects transparency. Those who offer it attract talent. Those who withhold it lose talent — to companies that are bolder.

2. Risk mitigation: Prevention is cheaper than back-payments

The Daimler case shows the scale: a single lawsuit can trigger six-figure back-payments — plus interest and non-material damages. And the directive provides for no cap on compensation (Art. 16). Add legal costs, reputational damage, and the organisational effort of a forced pay assessment.

Proactive modernisation of the compensation system costs a fraction of what a lost lawsuit costs — not to mention the signal effect for additional claimants.

3. Public procurement: Compliance as a business prerequisite

Art. 24 of the directive enables exclusion from public procurement for violations of pay transparency obligations. For companies that regularly participate in tenders, equal pay compliance is no longer optional — it's a business prerequisite. Particularly critical: an unjustified gap above 5% can trigger procurement exclusion.

4. Reporting goes public: Every company becomes comparable

Metrics 1 to 5 of the reporting obligation must be made publicly accessible — on the company website or through equivalent means. This means: applicants see your gender pay gap before they apply. Employees compare your company with competitors. Journalists, trade unions, and NGOs create rankings. In Luxembourg's financial sector — where gender pay gaps are among the highest in any EU industry — this visibility will be particularly impactful.

Companies with a high, unexplained gap won't just have a compliance problem — they'll have a reputation problem. Those who proactively modernised and can show strong numbers will win in the comparison.

What you should do now

The Pay Transparency Directive takes effect on 7 June 2026. The data baseline for the first report is calendar year 2026. The courts are already anticipating the obligations. The time to act is now.

But compliance alone isn't enough. Those who do only the bare minimum — removing secrecy clauses, adding salary ranges to job ads, producing an annual report — will discover that the real problems run deeper. They lie in legacy structures, opaque decision-making processes, and compensation systems that wouldn't survive judicial scrutiny.

Compliance is the beginning. Transformation is the goal.

Based in Luxembourg and advising companies across Europe, we help organisations make their compensation systems not just directive-compliant but future-proof — as a strategic advantage, not as bureaucratic overhead. Pragmatic, structured, and confidential.

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