Dr Vassilia Orfanou, PhD, Post Doc, COIO, LUDCI.eu
Writes for the Headline Diplomat eMagazine, LUDCI.eu
Transparency Is Not Economically Neutral
The case for pay transparency is intuitive: better information should improve fairness and market efficiency. The difficult question is what happens after the information is disclosed. Workers renegotiate. Employers redesign ranges. Competitors benchmark each other. Managers become more cautious about exceptions. A reform intended to expose unjustified differences can therefore change the level, dispersion and structure of pay itself.
The academic evidence is deliberately mixed. In her Journal of Economic Perspectives review, Zoë Cullen distinguishes different forms of transparency. Information about external opportunities can strengthen workers by improving search and comparison. Internal visibility can create negotiation spillovers that make employers less willing to grant individual increases. “Pay transparency” is therefore not one intervention with one predictable effect.
| Transparency does not end bargaining. It changes who possesses the reference points, how credible those reference points are and what one pay decision implies for everyone else. |
Wage Compression and the Cost of Exceptions
Once employees can compare pay, the cost of an individual exception rises. A premium offered to one recruit may trigger demands from incumbents. Managers may respond by narrowing differences, placing more employees near the middle of a band or becoming less willing to reward an exceptional negotiation. Standardisation can reduce arbitrary inequality, but it can also weaken flexibility where genuine scarcity or performance differences exist.
The possibility is supported by Cullen and Pakzad-Hurson’s model of the equilibrium effects of pay transparency. When one worker’s raise becomes visible, the firm anticipates that others may renegotiate, reducing its willingness to pay the first worker more. Transparency can therefore shift bargaining power in ways that are less straightforward than the simple claim that more information always raises wages.
Evidence from public-sector disclosure also shows adjustment at the top. Alexandre Mas’s study of California municipal salaries found that disclosure was associated with an average compensation decline of about 7% among top managers and a large increase in their quit rate. That setting differs from the EU framework, but it highlights a real trade-off: greater accountability may compress pay while encouraging highly mobile employees to leave.
External Transparency Can Push the Other Way
Internal disclosure is only one channel. Public salary ranges also allow candidates to compare employers, and that can increase competition. If workers previously underestimated what other firms would pay, visible ranges can redirect applications and force low-paying employers to improve offers.
This is the mechanism emphasised by Arnold, Quach and Taska, whose study of US posting laws found higher posted and realised salaries without a measurable decline in employment. Their findings sit alongside research showing wage compression in other settings. The apparent contradiction is the point: internal and external transparency can create opposing forces.
For European employers, the practical implication is that salary strategy can no longer be designed solely inside the firm. Published ranges become market intelligence. Competitors can compare them, recruiters can challenge them and employees can use them as evidence when seeking adjustments. A remuneration framework that looked adequate in a closed system may become uncompetitive once the market can see it.
Internal Equity Becomes a Governance Test
The greatest disruption may come from existing employees rather than new applicants. A company can publish a credible range for a vacancy and immediately expose that experienced incumbents are paid below it. Historic acquisitions, retention payments, local discretion and unequal bargaining may have created differences that were manageable only because they were difficult to observe.
The Directive requires employees to receive information, on request, about their pay and average pay levels for comparable categories. The European Commission’s practical summary also highlights reporting for employers with at least 100 workers and joint assessments where an unexplained gender pay gap of at least 5% persists. These requirements make job evaluation and documentation central to governance.
Employers will need to distinguish between differences that are legitimate and differences that are merely historical. “That is what we negotiated at the time” becomes a weak defence when the organisation cannot show why comparable work is valued differently. Pay governance will require clear role families, objective evaluation criteria, consistent treatment of variable compensation and an auditable record of exceptions.
Litigation, Reputation and Trust
Transparency makes inconsistency easier to detect and challenge. The Directive strengthens access to compensation and can shift the burden of proof where employers fail to comply with transparency obligations. This increases legal exposure, but the more immediate risk may be organisational trust. Employees who discover unexplained differences may reinterpret past promotion decisions, performance reviews and retention promises through the lens of pay inequality.
The response cannot be communications alone. Publishing a philosophy without correcting unjustified gaps may deepen scepticism. Conversely, a company that identifies inconsistencies early, explains its methodology and provides a credible remediation plan can turn regulatory preparation into evidence of responsible leadership.
Strategic Recommendations
Employers should treat transparency as a redesign of pay architecture, not an advertising requirement. Before publishing ranges, they should map roles, test whether job families are coherent, review incumbent positioning and define the evidence required for exceptions. Meaningful ranges must be narrow enough to inform while flexible enough to recognise legitimate differences.
HR and reward leaders should replace informal discretion with governed discretion. Managers still need room to compete for scarce skills, but every departure from the framework should have a documented rationale, an approval path and a review date. Training should focus not only on what managers may disclose, but on how they explain placement, progression and work of equal value.
Employees should use transparency as evidence, not entitlement. A published range does not automatically place every incumbent at its maximum. Strong negotiations connect contribution to the criteria that move pay: expanded responsibility, scarce capability, measurable performance and market movement. Employees should ask how their position was determined and what specific evidence is required to progress.
Boards and investors should treat pay governance as an indicator of organisational maturity. Persistent unexplained gaps can signal weak controls, fragmented acquisitions, poor workforce planning or cultural risk. Boards should ask whether ranges are credible, whether exceptions are monitored and whether remediation costs have been assessed.
Policymakers should monitor the quality of implementation rather than the volume of disclosure. Extremely broad ranges, inconsistent definitions and excessive administrative burden can weaken the reform. Guidance should encourage meaningful comparability while preserving proportionate flexibility for smaller employers and specialised labour markets.
Overall Conclusion: The Economics of Openness
Europe’s Pay Transparency Directive is commonly described as an equal-pay measure. It is certainly that, but its significance is broader. It changes how information moves through one of the continent’s largest markets. Salary becomes visible earlier, comparable more widely and defensible only through clearer evidence.
The first article in this series examined the labour market as Europe’s last opaque market. The second showed how transparency changes the psychology and structure of negotiation. This final article has shown why openness can also create wage compression, internal pressure, legal exposure and stronger competition for talent.
The outcome will not be identical across organisations. Mature employers may use transparency to strengthen trust, recruitment and governance. Others will discover that their compensation structures depend on inconsistency remaining invisible. Employees will gain better reference points, but they will still need to demonstrate value. Regulators will obtain more information, but they will need to distinguish meaningful disclosure from formal compliance.
The Directive does not abolish negotiation, performance differences or market pricing. It changes the burden of explanation. Employers will increasingly need to show not only what they pay, but why. Employees will negotiate with something many have historically lacked: a credible view of the role’s value before the conversation begins.
The end of salary secrecy will not make the labour market perfectly fair. It will make unfairness harder to hide—and it will make the quality of pay governance far easier to judge.
References
Arnold, D., Quach, S. and Taska, B. (2025). The Impact of Pay Transparency in Job Postings on the Labor Market. NBER Working Paper No. 34480.
Cullen, Z.B. (2024). Is Pay Transparency Good?. Journal of Economic Perspectives, 38(1), pp. 153–180.
Cullen, Z.B. and Pakzad-Hurson, B. (2021). Equilibrium Effects of Pay Transparency. NBER Working Paper No. 28903.
European Commission (2026). New EU rules on pay transparency explained. 5 June. (Accessed 21 July 2026).
European Union (2023). Directive (EU) 2023/970 on pay transparency and enforcement mechanisms. Official Journal of the European Union, L 132, pp. 21–44.
Mas, A. (2014). Does Transparency Lead to Pay Compression?. NBER Working Paper No. 20558.
