Kenjo Research · Sentiment Report
Pay Transparency Act: What German SMEs Need to Know Now
2026 Sentiment Report
How German SMEs are preparing for the EU Pay Transparency Directive. Insights from interviews, surveys, and expert webinars with Karol Czuba of twin.win.
Kenjo · Spring 2026
Five Key Findings
are waiting for court rulings or implementation legislation before taking action
lack full support from management. In one in four companies, leadership hasn't even been informed of the financial risks.
do not manage salary data in a fully audit-compliant system
plan to inform employees of their new rights only when asked directly
have no plan in place if an audit uncovers an unjustified pay gap of more than 5%
Introduction: The Pay Transparency Act 2026
On June 7, 2026, the EU Pay Transparency Directive takes effect. For HR professionals in Germany, this is a concrete liability issue.
The problem for most companies lies not in intent. Most SMEs do not discriminate in compensation. They can barely prove it. Documentation simply never existed.
The Directive requires companies of all sizes to define and document their salary structures based on objective, neutral criteria, establish comparison groups across positions, and provide employees with clear explanations upon request for how and why they are compensated as they are. Crucially, the burden of proof is reversed: whoever cannot justify a difference loses. Regardless of whether discrimination actually occurred.
The difference from the existing German Pay Transparency Act is significant. The old law applied only to companies with at least 200 employees and had little enforcement power. The new Directive applies to every employer, regardless of company size, and brings retroactive liability of up to three calendar years.
For companies with works councils, the pressure is even more immediate: the works council has statutory rights to salary data and will often initiate the review process before any individual employee even makes a request.
To understand how HR professionals in German SMEs are actually responding, Kenjo conducted several in-depth qualitative interviews with HR managers and People Leads from German SMEs across various sectors and company sizes, analyzed responses from dozens of participants in our Pay Transparency webinar series, and synthesized insights from two expert webinars with Karol Czuba of twin.win – employment law expert specializing in pay transparency.
No claim to statistical representativeness: This is a sentiment report – a snapshot from the German mid-market, just weeks before the Directive takes effect.
The findings are clear: awareness exists. Preparation, to the extent that legally matters, is lacking.
Webinar Recording: EU Pay Transparency Directive 2026
Key Dates
June 2026
The Directive takes effect. Transparency and disclosure obligations apply.
From 2027
First reporting obligations for companies with 100 or more employees.
Retroactively
Employee disclosure rights extend to the previous three calendar years.
Ongoing
Every salary change must be documented with an objective justification.
June 2026
The Directive takes effect. Transparency and disclosure obligations apply.
From 2027
First reporting obligations for companies with 100 or more employees.
Retroactively
Employee disclosure rights extend to the previous three calendar years.
Ongoing
Every salary change must be documented with an objective justification.
How Prepared Are German SMEs for the Pay Transparency Act?
The picture from our survey is clear: the majority of SMEs are not where they need to be. Many know that.
When asked about their current approach to salary structure, half of respondents selected the same answer: wait and see. Specifically, they are waiting for the first court rulings or German implementation legislation that will clarify what is actually required.
This is an understandable reflex. German implementation legislation has been delayed multiple times, and genuine uncertainties remain about how individual provisions will be applied in practice. However, the employment law experts in our webinar series were clear: the Directive has legal binding force, even before national legislation arrives. Existing laws, including the Pay Transparency Act and the AGG, must now be interpreted in light of the Directive. Waiting for complete clarity is not a risk-free strategy.
Those who act do so differently. About one-third chooses a pragmatic 80/20 approach: close the biggest gaps first, without aspiring to complete compliance. About one in five reassesses all positions in the company from scratch.
Preparation Status
- 22 %Highest Priority
- 22 %Implementation in Progress
- 37 %Awareness Exists, No Action Taken
- 19 %Not Yet on the Agenda
Approach to Salary Structure
- 50 %Wait and See
- 31 %80/20 Approach
- 19 %Comprehensive Analysis
The Blind Spot: Management's Lack of Awareness of the Pay Transparency Directive
The most striking finding from the survey is how little the issue has reached executive leadership. Only 12.5% of respondents indicated that their management treats pay transparency as a central compliance and liability risk. In 62.5% of companies, the matter is treated as purely an HR function: leadership is informed but not actively engaged. In a further 25% of companies, management hasn't even been informed of the financial risks.
Management Engagement
- 12.5 %Fully Engaged
- 62.5 %Partially Engaged
- 25 %Not Informed
of companies have not informed management of the financial risks.
This matters because the financial risk of the Directive, especially retroactive liability, is a matter for management, not HR.
Three Types of SMEs
The qualitative interviews reveal three clearly distinct attitudes. These are not judgments. Each represents a reasoned response to genuine uncertainty. However, the risk consequences are quite different.
Type 1 — The Waiter
"We don't need this law, and we don't discriminate here either."
HR Professional, German SME
Type 2 — The Pragmatist
"We don't want to raise expectations that might ultimately disappoint."
HR Professional, German SME
Type 3 — The Proactive
"I think it's important to have this push to do it. We already had it on our agenda."
HR Professional, German SME
Type 1 — The Waiter: The Legal Problem
The legal problem with this approach lies not in intent but in documentation. When a request arrives, the employer has two months to respond. Without an existing structure (comparison groups, evaluation criteria, documented salary decisions), it's nearly impossible to build a credible response in two months. With three years of retroactive liability, a single well-founded request can become expensive.
Type 2 — The Pragmatist: Progress With Residual Risk
Job descriptions are reviewed, comparison groups are drafted, and the most obvious gaps are addressed first. This is a sound approach that gradually reduces risk. The remaining exposure lies in documentation: partial solutions and informal processes leave gaps that become problems when a request arrives before work is complete.
Type 3 — The Proactive: Transparency as an Advantage
The company forms cross-functional working groups, engages managers in the position evaluation process, and views the initiative as both a compliance task and a cultural initiative.
Pay Transparency Act: Five Major Challenges for SMEs
Regardless of company type, five challenges emerge repeatedly in interviews and surveys.
75% of respondents do not manage salary data in a fully audit-compliant system. 41% use a combination of HR software and Excel spreadsheets. 34% rely exclusively on Excel or physical personnel files.
This matters because the new burden of proof shift requires employers to demonstrate at any time that every salary decision was objectively justified. A hybrid system with parallel spreadsheets cannot reliably provide this.
"Adapting the salary structure that has grown over the years and bringing it to a fair level. Employees who were good at negotiating tend to earn more than those who never asked for a raise. Now we need to link that with the actual tasks and responsibilities, and then communicate it transparently – that will be challenging for us."
Survey Respondent
The documentation problem and the salary structure problem are usually the same problem.
The four EU criteria are broad enough that roles that appear completely different can fall into the same comparison group. This is the intent of the Directive, but it places HR professionals before a genuine challenge: developing a system that is both legally sound and economically rational.
"How can I make the comparison across positions with equal responsibility levels – that is, comparable work – without having to suddenly compare departments where the work is comparable in terms of internal value, but the labor market might dictate different pay levels."
Survey Respondent
The short answer from experts: complete avoidance isn't possible. However, you have considerable discretion in defining and weighting sub-criteria within the four main categories. This design work, done carefully, is your most important tool for creating comparison groups that reflect your organization's actual structure.
Many SMEs have salary structures built through individual negotiations, not systematic design. The result is predictable: employees performing similar work at similar levels earn different amounts, often because some negotiated raises and others didn't. When these differences become visible through formal comparison group analysis, discussions with employees and management become difficult.
"We're honestly a bit worried about the team. Because it's clear – there are outliers among those who've been here longer or who kept asking for raises versus those who didn't. We already have some differences there, and that's something that gives us pause."
HR Professional, German SME
Here the Directive has real teeth. Under the framework, "good negotiating skills" doesn't count as an objective criterion for pay differences, unless negotiation is a core competency of the position itself. A gap purely because someone negotiated harder in 2021 has no legal protection. It can only be justified if there's documented, objective evidence: a difference in competency, experience, or measurable performance that existed at that time and was documented. Many SMEs simply don't have this documentation.
The gap is real. The justification is missing. So is the legal protection.
Nearly two-thirds of respondents plan to inform employees of their new rights only reactively: if someone asks. This is a missed opportunity and, depending on circumstances, a legal risk.
The Directive creates active information obligations, not just passive ones. Employers must inform employees annually that the right to salary information exists. Beyond the legal minimum, proactive communication directly affects how this process unfolds in practice.
"If you can create the feeling in the company: 'We're all in this together. Hey, something big is coming. We're not hiding it under the table – we're communicating openly. If something seems odd to you, if you want to talk about it, come to us.' Then you already have one level before the final escalation."
Karol Czuba, Employment Law Expert, twin.win
Who communicates reactively responds to concerns already formed. Who communicates proactively shapes the conversation actively.
The report has treated pay transparency so far as something triggered by individual employee requests. In companies with works councils, this picture is incomplete.
The works council has statutory rights to salary data: rights that exist independent of individual requests and are significantly strengthened by the Directive. In practice, this means: the internal review that many companies still view as a possible future scenario is nearly certain for a large portion of German SMEs. The works council will not wait to be asked.
A works council with access to aggregated salary data across a comparison group can identify systemic gaps that no individual employee would have discovered. And in companies where the works council approaches the issue with a strong sense of justice – which is not uncommon – the process can quickly become protracted.
"Especially if you have people there with a strong sense of justice and a very ideological perspective, you're lost."
Karol Czuba, Employment Law Expert, twin.win
Companies without a works council (like several of those we interviewed) cited this as a reason their situation is more manageable.
"We don't have a works council."
HR Manager, German SME
For companies with a works council, the timeline is not "before someone asks." It is: now.
When an Audit Finds a Gap
Our survey asked respondents directly: What would you do if an audit today uncovered an unjustified pay gap of more than 5%?
No Plan
Retroactive Justification with Objective Criteria
Gradual Salary Adjustments
The 47% who would retroactively justify are not wrong in principle: retroactive justifications are legally permissible under the Directive. The problem: it only works if the justification is genuine and provable.
"Anything you can't prove, or everything you can prove – you can prove. And anything you can't – that's going to be a real problem with the burden of proof shift."
Karol Czuba, Employment Law Expert, twin.win
If the gap is due to someone negotiating harder in 2021, and there's no documentation of a performance difference, competency difference, or other objective criterion, the retroactive justification won't hold. The company then faces the full retroactive liability.
This is the scenario most SMEs are unprepared for.
A Note on Hiring Practices
The Directive also prohibits asking candidates for their current salary before or during the hiring process. Yet 31% of respondents report still asking this question. Another 28% are in the process of adjusting their internal policies. Only 41% have fully adapted their hiring processes.
This change is straightforward, the timing is now, and there's no legitimate reason for delay.
First Steps for the Pay Transparency Directive: What to Do Now
Achieving complete compliance over the next few months is not realistic for most SMEs. What matters is: reducing the biggest risks first.
Consolidate Salary Data
Bring all compensation components (base salary, bonuses, additional benefits) into a single, centralized system. If you don't know what you're paying company-wide, you can't establish comparison groups. Parallel spreadsheets won't give you the audit trail you'll need.
Capture What Roles Actually Require
Existing job descriptions are often out of date. Before you can evaluate positions, you need to understand what they actually entail. Work through each department with the respective managers and verify what the role truly demands: not what the original job posting said.
Sketch Initial Comparison Groups
Evaluate positions against the four EU criteria and see which cluster together. Don't expect a perfect result on the first pass. The goal at this stage: identify where your greatest exposure lies, which groups show wide salary ranges, and whether those ranges are currently justifiable.
Address the Biggest Gaps
Within your sketched comparison groups, look at the outliers. Who falls significantly below average? Is there a documented, objective reason? If the only reason is that this person never asked for a raise, that gap must be closed now, before it becomes the subject of a formal request.
Actively Manage the Conversation With Your Team
Don't wait for employees to discover the Directive on their own. Inform your team openly: explain what's changing, what you're doing about it, and how they can come to you with questions. If you have a works council, engage early. They'll get involved anyway, and you can prevent an adversarial dynamic if the conversation starts on solid ground.
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