Pay Gap Assessment: How Companies Uncover Salary Disparities

The EU Pay Transparency Directive (EU) 2023/970 doesn't just demand reporting — it demands answers. Do you pay men and women equally for the same or equivalent work? Can you prove it? And if not: do you even know where the disparities lie?

This is exactly where a pay gap assessment comes in. It's the structured process through which companies analyse their compensation data, identify gender-related disparities, and — crucially — determine whether those disparities are objectively justified or not.

Sounds like a compliance exercise? It is. But one that can determine your company's future. Because if you can't explain a gap above 5%, you trigger a joint pay assessment with employee representatives — with far-reaching consequences. And if you haven't analysed anything at all, you'll face a lawsuit with no line of defence.

This article explains what a gap assessment involves, which metrics the directive requires, and which mistakes you absolutely must avoid in your analysis.

What is a pay gap assessment?

A pay gap assessment is a systematic analysis of compensation structures within a company. Its purpose is to identify, quantify, and evaluate gender-related pay disparities.

Unlike a simple salary overview, a gap assessment goes deep: it doesn't just compare averages but breaks down compensation by employee categories, pay components, and gender. It doesn't just ask "Is there a gap?" — it asks "Where exactly does it lie, how large is it — and can it be objectively justified?"

In the context of the EU Pay Transparency Directive, a gap assessment is not a voluntary best practice. It is the de facto prerequisite for meeting the reporting obligations under Art. 9 and the foundation for monitoring the 5% threshold under Art. 10.

The 5% threshold: When it gets critical

Art. 10 of the directive sets a clear boundary: if the gender pay gap in an employee category exceeds 5% and the employer cannot justify this difference through objective, gender-neutral criteria, things get serious.

Specifically: if the gap cannot be remedied or objectively justified within six months of reporting, the employer is required to conduct a joint pay assessment with employee representatives. This assessment is not an informal conversation — it has seven mandatory components and can entail significant organisational and financial consequences.

The 5% threshold is not a safe harbour. It does not mean that gaps below 5% are unproblematic. It is merely the trigger for the mandatory joint assessment. Even smaller gaps can be subject to individual information requests and lawsuits — especially since courts in some member states are already applying the directive's principles. In Germany, for instance, the Federal Labour Court (BAG) ruled in October 2025 that a pair comparison with a single higher-paid colleague of the other gender is sufficient to establish a presumption of discrimination (case no. 8 AZR 300/24).

The 7 reporting metrics under Art. 9

The directive defines seven metrics that companies subject to reporting obligations must regularly collect and — partially in public — communicate. A solid gap assessment aligns precisely with these metrics:

1. Gender pay gap — mean

The average pay difference between all female and male employees. The classic GPG figure that shows the overall picture at a glance — but on its own, it's not very telling.

2. Gender pay gap — median

The median gap is more robust against outliers than the mean. While a few top earners can skew the average, the median shows where the middle of the pay distribution actually sits.

3. Gender pay gap — variable pay

Bonuses, performance awards, commissions: variable pay is often the area where the largest gender disparities occur — and are hardest to explain. This metric isolates precisely that component.

4. Distribution by pay quartile

How are women and men distributed across the four pay quartiles? Are women disproportionately represented in the lowest quartile? This metric makes structural inequalities visible that the average figure conceals.

5–7. Gender pay gap by employee category

This is where it gets granular: the gap is reported for each employee category separately — once for base salary, once for variable pay, and once for total compensation. This is the core of the assessment, because it reveals exactly where in the company action is needed.

Important: metrics 1 to 5 must be made publicly accessible. This means your compensation data will be visible to applicants, employees, competitors, and the general public.

Forming employee categories: Equal and equivalent work

The quality of a gap assessment stands or falls with the formation of employee categories. Because the decisive comparison is not between all employees but between people who perform the same or equivalent work.

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

• Skills: Education, professional experience, technical and interpersonal abilities
• Effort: Physical, psychological, and emotional demands of the role
• Responsibility: Decision-making authority, leadership responsibility, financial responsibility
• Working conditions: Work environment, working hours, special conditions such as travel requirements or hazard exposure

These four criteria must be applied objectively and in a gender-neutral manner. That sounds self-evident but often isn't in practice.

Don't forget soft skills — Art. 4 para. 4

A common and costly mistake: many companies only consider "hard" factors like technical qualifications or physical strain when evaluating roles. Art. 4 para. 4 of the directive explicitly states that soft skills — such as communication ability, empathy, team leadership, or conflict resolution — must be appropriately taken into account in the evaluation.

This is not a nice-to-have. It is a legal requirement. Companies that systematically underweight soft skills risk having their employee categories overturned in court — and with them, their entire compensation analysis.

The broad definition of pay: More than just base salary

Another point that is consistently underestimated in practice: the directive defines "pay" far more broadly than the monthly base salary. Under Art. 3 para. 1 lit. a, the definition of pay includes:

• Base salary — fixed monthly compensation
• Variable pay components — bonuses, performance awards, commissions, performance-related allowances
• Benefits in kind — company car, mobile phone, meal subsidies, company housing
• Occupational pension — employer contributions and pension commitments
• Overtime pay and supplements — shift, night, and public holiday supplements
• Other benefits — stock options, travel expense reimbursements, training budgets, other monetary benefits

This means: a gap assessment that only compares base salaries is incomplete and non-compliant. You must capture total compensation — and that requires data that in many companies is spread across multiple systems.

Building the data foundation: HR and payroll systems must deliver

The biggest practical hurdle in a gap assessment is often not the analysis itself, but the data foundation. The seven reporting metrics require structured, gender-disaggregated compensation data — broken down by all relevant pay components and employee categories.

The reality in many companies looks like this:

• Compensation data is fragmented: Base salary in the HR system, bonuses in a separate tool, company cars in the fleet management system, stock options in the equity platform
• Gender is not consistently recorded: In some systems the attribute is missing entirely or incomplete
• Employee categories don't exist: There are departments and hierarchical levels, but no groupings by equal or equivalent work
• Historical data is missing: Variable pay from previous years cannot be retroactively analysed

The first step of a gap assessment is therefore often a data audit: What data do we have? Where does it reside? In what format? And what's missing? Without a reliable data foundation, there is no reliable assessment — and no reliable reporting.

Important: calendar year 2026 is the data baseline for the first report in 2027. Data collection must be prepared now — not when the report is due.

Common mistakes in gap analysis

Even when a company undertakes the analysis in principle, there are typical mistakes that distort the results or make them vulnerable in court:

1. Comparing only base salaries

As explained above: the directive's definition of pay is broad. Those who only compare base salaries overlook systematic differences in bonuses, benefits in kind, or occupational pensions. Particularly for executives, base salary often accounts for less than half of total compensation.

2. Employee categories that are too broad

If you lump all "administrators" into one category — from accounts receivable clerks to technical writers — you dilute the comparison. Categories that are too broad conceal gaps in specific functions. The categories must reflect the actual equivalence of work, not the organisational structure.

3. Systematically overweighting physical effort

A classic mistake: roles involving physical effort are valued higher than those involving psychological or emotional strain. The result is a systematic undervaluation of roles disproportionately held by women. Art. 4 para. 4 of the directive addresses exactly this problem — soft skills and non-physical demands must be given equal weight.

4. No root-cause analysis

Identifying a gap is the first step. The second — and more decisive — step is asking: Why does this gap exist? Is it due to differing professional experience? Historical pay structures? Discriminatory compensation decisions? Without root-cause analysis, you can neither justify the gap nor address it effectively.

5. Accepting negotiation skills as justification

"He simply negotiated better" — under the directive, this is not an objective justification for a pay difference. Nor is merely citing market rates or the applicant's salary history. Objective criteria are required: demonstrable qualifications, performance, scope of responsibility.

From analysis to action

A gap assessment is not an end in itself. It is the starting point for concrete action. When your analysis uncovers gaps, you face the question: can we justify them — or must we close them?

Objective justifications are possible but narrowly defined. They must be based on objective, gender-neutral criteria — such as demonstrably different professional experience, additional qualifications, or measurable performance. General references to "market rates" or individual negotiation outcomes are not sufficient.

Where no justification holds, corrections must follow — ideally before the reporting obligation kicks in. Because a publicly disclosed gap without explanation is not just a compliance risk. It's a reputational risk, a recruiting obstacle, and an invitation for lawsuits.

Analyse now — before others do it for you

The time for waiting is over. Calendar year 2026 is the data baseline for your first report. The courts have already established precedent with the pair comparison. And your employees will have the right to request individual information about the pay of comparable colleagues — broken down by gender — as soon as the directive takes effect.

A structured gap assessment gives you back control: you know where you stand. You can explain or remedy gaps. And you have the data foundation to meet your reporting obligations — without nasty surprises.

Even in countries like Luxembourg — where the overall gender pay gap is the EU's lowest at -0.8% (Eurostat, 2024) — individual companies can have significant internal disparities, particularly in the financial services sector where gaps reach up to 40% in some EU countries. A solid assessment reveals what the national averages don't.

Based in Luxembourg and advising companies across Europe, we support you with systematic analysis — from data preparation through category formation to root-cause analysis. Pragmatic, confidential, and fully compliant.

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