Pay Transparency and Variable Pay
When clients ask me about pay transparency, the focus is typically on base pay. We discuss job architecture, salary ranges, and pay progression. And that makes sense because base pay is the most visible, familiar, and relatively easy to explain. But it’s only part of the picture.
Short-term incentives (STIs) and long-term incentives (LTIs) are also pay. And under the EU Pay Transparency Directive, they fall just as firmly within scope. As you prepare for implementation, it’s important to look beyond fixed salary and consider how incentive design, eligibility, and award decisions stand up to transparency, fairness, and justification.
Q: What are short- and long-term incentives?
Short-term incentives are designed to reward performance over a short period, usually a single year, sometimes even a quarter, and they’re meant to keep people focused on delivering against current priorities. Most short-term incentives are paid in cash and move up or down each year depending on results. In simple terms, they answer the question: did we do what we said we would do this year, and how well did we do it?
Long-term incentives take a much longer view. They’re designed to reward sustained performance over several years (often three to five) and to align people with the organization’s long-term strategy and success. These incentives are usually deferred, often delivered through equity or long-term cash plans, and they only pay out or vest over time. They’re less about this year’s results. They focus on building long-term value, and keeping key people invested in where the business is going.
Q: Do short- and long-term incentives fall under the EU Pay Transparency Directive?
Yes, they absolutely do.
The Directive specially mentions all elements of remuneration, not just base pay. That includes bonuses, commissions, cash incentives, equity awards, deferred compensation, and any other variable or long-term reward linked to employment. If someone receives it in exchange for their work, it’s in scope.
That means that you need to be able to explain how incentives are designed, who is eligible, and how outcomes are determined — in a way that is objective, gender-neutral, and defensible.
Always keep my EUPTD mantra in mind: “Can you explain why you pay what you pay, and can you do that in objective terms?” And also, is that explanation the same for every employee who asks the question?
Q: Why are incentives particularly challenging from a transparency perspective?
Incentives often come with greater discretion than base pay.
Short-term incentives may be influenced by individual performance ratings, manager judgement, or shifting business priorities. Long-term incentives may be awarded selectively, tied to “potential,” retention concerns, or leadership pipelines. While these practices are common, they can create risk if the rationale isn’t clear or consistently applied.
The challenge isn’t that discretion exists — it’s that unstructured or poorly documented discretion is difficult to explain, justify, and defend when transparency requirements increase.
Q: What about incentives that are awarded on an individual basis?
This is exactly where I find that organizations are most exposed.
Individual incentive awards can unintentionally introduce bias when criteria are unclear, inconsistently applied, or overly subjective. Over time, patterns emerge that are difficult to justify, particularly across gender or other protected characteristics. In my experience running initial pay reports, this is often where unequal incentives surface: awards that can’t be objectively explained and therefore must be corrected. When it comes to LTIs, these are also some of the most costly issues to address, which makes it especially important to check whether you are exposed.
Under the Directive, employees have the right to information and explanations. If an employee asks why they did or did not receive an incentive or why their award differs from others, you must be able to explain the difference with objective, role-related, and consistently applied reasons.
Q: Does transparency mean publishing everyone’s bonus or LTI award?
No. As with base pay, transparency does not mean full public disclosure of individual awards.
Employees should understand how incentives work, what influences outcomes, and what they can reasonably expect — even if individual results differ.
Q: What are best practices for incentives in a pay transparency environment?
Some practical best practices include:
- Define clear eligibility rules
Be explicit about who participates in STI and LTI plans and why. Avoid informal or “by exception” inclusion wherever possible. - Standardise opportunity levels
Use role-based or level-based incentive targets rather than ad-hoc percentages or amounts. - Limit and structure discretion
Where discretion is necessary, anchor it to defined criteria and document decisions consistently. - Strengthen governance
Use calibration, review committees, and data checks to spot inconsistencies or emerging gaps. - Document the ‘why’
If two people in similar roles receive different outcomes, there should be a clear, evidence-based explanation. - Align incentives with your job architecture and pay framework
Incentives should reinforce — not undermine — your overall reward structure.
Q: What’s the key takeaway for organizations?
If you’re preparing for pay transparency and only looking at base pay, you’re not finished. Short- and long-term incentives are part of the pay equation, and they often carry the highest risk when it comes to justification and fairness. Reserve time to review incentive design, award practices, and governance, not just to comply with the Directive, but to build trust and credibility in your total reward approach.