How to build a fair compensation policy (and why the EU directive demands one) 

Most organisations have a compensation policy. The question the EU Pay Transparency Directive forces is whether it’s good enough. 

Until recently, “good enough” meant broadly competitive salaries, some kind of annual review process, and a general commitment to fairness. The directive changes that standard entirely. It requires pay structures built on documented, gender-neutral criteria — ones that can be explained to any worker, defended in any tribunal, and reported in granular detail by 2027. A policy designed around manager discretion and market benchmarking won’t survive that scrutiny. 

This post covers what a directive-ready compensation policy requires, and how to build or rebuild one that will hold up. 

What a fair compensation policy actually is 

A fair compensation policy is a documented framework that defines how pay is set, structured, and reviewed across the organisation. It covers base salary, variable pay, benefits, and progression. It is built on objective criteria that can be explained to any worker, any auditor, or any employment tribunal. 

It is not the same as a salary grid. The grid is an output — the structured pay ranges that apply to roles within a band. The policy is the governance framework that defines how the grid is built, how decisions are made within it, and how the whole system is maintained and reviewed over time. 

Why ad-hoc compensation no longer works

Three specific changes make informal compensation practices legally untenable under the directive. 

Pay information rights. Every worker can now request to know what colleagues doing equivalent work are paid. An organisation with no documented rationale for pay differences has no defensible answer to give. 

Reversal of burden of proof. In any pay discrimination claim where the employer has failed to meet transparency obligations, the burden shifts to the employer to prove no discrimination occurred. Defending undocumented, informal pay decisions against that standard is harder than defending a policy that was built, applied, and reviewed consistently. 

The 5% threshold for joint pay assessment. Organisations that have never analysed their pay data by worker category often discover gaps they didn’t know existed. Discovering them in a compliance context rather than in advance means remediation under pressure, with worker representatives at the table from the start. 

For a full overview of the directive’s obligations, see our complete guide to the EU Pay Transparency Directive →  
For a step-by-step readiness audit, see the 12-point compliance checklist → 

The five pillars of a fair compensation policy 

1. A documented job evaluation methodology

Job evaluation is the process of assessing roles against objective criteria — skill, effort, responsibility, and working conditions — to determine their relative value within the organisation. Without it, pay structures are arbitrary. With it, the organisation can demonstrate that pay reflects the value of work, not the identity of the person doing it. 

The directive’s “work of equal value” obligation cannot be met without a formal job evaluation methodology. Two different roles that require equivalent skill, effort, and responsibility must be paid equivalently — and demonstrating that equivalence requires a documented, consistently applied evaluation process. 

2. Salary bands grounded in market data

Once roles have been evaluated and grouped, pay ranges need to be set for each band. Those ranges should reflect both the internal value of the role and its external market rate. A band that ignores the market will either overpay — creating budget pressure — or underpay, creating retention problems. 

The directive requires that pay ranges in job advertisements are genuine, not artificially wide. That requires actual salary bands built on real data, not ad hoc estimates produced at the point of hire. As Thibault Vilon, CPTO at Assessio, puts it: “Sharing the salary grid early — starting at the job offer stage — creates clarity for candidates and reduces friction when offers are made.” 

3. Transparent rules for progression

Salary bands define where pay can go. Progression rules define how it gets there. Without documented criteria for increases — what triggers a band review, what justifies movement within a band, how performance links to pay — managers make individual decisions that accumulate into systemic inequity over time. 

Progression criteria must be objective, gender-neutral, and accessible to workers on request. That is what the directive requires, and it applies to every pay increase decision, not just the formal review cycle. Pay secrecy clauses are unenforceable. Workers have the right to understand what they need to do to earn more. 

4. A clear approach to variable and complementary pay

The directive’s definition of remuneration is broader than most organisations realise. Variable pay covers bonuses, commissions, and profit share. Complementary pay covers benefits, pension contributions, and allowances. Both fall within the directive’s definition of remuneration, which means the gender pay gap reporting requirements apply to all of it, not just base salary. 

Organisations that have transparent base pay structures but opaque bonus practices will find the gap in their reporting data. The directive requires disclosure of mean and median bonus gaps, and the proportion of women and men receiving bonuses. Variable pay criteria must be as objective and documented as base salary criteria. 

5. Governance that defends the policy 

A policy document without an owner and without a review process is not real governance. Governance means naming who is accountable for the policy, defining how pay decisions are reviewed against it, documenting exceptions and their justifications, and establishing a process for keeping the policy current as roles, markets, and law evolve. 

The directive requires the ability to demonstrate, at any point, that pay decisions are made in accordance with documented, objective criteria. That demonstration requires records, a named owner, and a process. The same principle applies here as it does to AI governance: a policy without an owner is just a document.  
 
Read more on building governance structures that stick → 

Building your compensation policy from scratch or rebuilding one that no longer holds up? Join our webinar where compensation specialists walk through each of these pillars in practice. Get practical guidance from compensation experts → 

Common mistakes to avoid

Building the policy after the gap analysis. The policy should drive the analysis, not the other way around. Organisations that run their first pay gap analysis and then try to build a policy around the findings are doing reactive compliance, not governance. Start with the framework, then run the numbers. 

Treating job evaluation as a one-time exercise. Roles change, markets shift, new functions emerge. A job evaluation methodology needs to be applied consistently to new roles and reviewed periodically for existing ones. A grid built on a single point-in-time evaluation becomes outdated and unreliable. 

Separating compensation policy from performance management. Pay progression divorced from a structured performance framework creates exactly the subjective decisions the directive is designed to prevent. If managers can award increases without reference to documented criteria, the policy is only as strong as their individual judgement. 

Confusing the policy with the grid. The policy governs how pay is determined. The grid is one output of that policy. Organisations that have a grid but no policy have the structure without the rationale, and no defensible answer when someone asks why. 

Where compensation policy meets performance management 

Performance ratings that are subjective, inconsistently applied, or disproportionately distributed by gender feed directly into pay decisions. A fair compensation policy cannot be defended without a fair performance management process underneath it. 

Organisations that link documented performance criteria to transparent pay progression are not just meeting the directive’s requirements. They are building a compensation system that employees trust, that supports retention, and that reflects what the organisation truly values. 

For a broader view of how compensation strategy is evolving across Europe, see our Compensation Strategy Report 2026 → 

See how Elevo connects performance and compensation in one platform