How does the EU Pay Transparency Directive affect performance management and performance reviews?

TL;DR:

• The EU Pay Transparency Directive regulates pay transparency, not performance management, but performance becomes legally relevant if it influences pay, bonuses, equity, or promotions.
• Obligations phase in over time: core transparency rights apply from 2026, while gender pay gap reporting, and stricter scrutiny, begins from 2027 (with later thresholds for smaller employers).
• To be defensible, pay decisions must rely on objective, gender-neutral criteria such as job levels, skills, responsibility, or clearly defined performance expectations.
• When performance affects pay, feedback behavior changes; clear expectations, growth-oriented feedback, and smart reward design (e.g., broad equity participation) help preserve trust and signal quality.
• Companies that invest early in clear expectations, job and level frameworks, and consistent documentation are best positioned to meet the Directive’s requirements without turning performance into a compliance exercise.

What does the EU Pay Transparency Directive actually require from employers?

The EU Pay Transparency Directive (EU) 2023/970 does not require employers to run performance reviews or adopt performance management systems. What it requires is that pay-setting decisions are based on objective, gender-neutral criteria and can be transparently explained and documented.

Performance reviews only become legally relevant if an employer chooses to use performance as one of the factors influencing pay, bonuses, or progression. Employers can fully comply by using other objective criteria, such as job levels, market benchmarks, seniority, or skills frameworks.

This distinction matters. The Directive regulates pay transparency, not performance management.

Why does performance management still matter under the Directive?

Performance management is not required by the EU Pay Transparency Directive. However, when performance is used as part of pay, bonus, equity, or progression decisions, as many AI-native startups do, it must be explainable, consistent, and defensible.

In that sense, performance management remains optional, but once it influences pay, it becomes part of the employer’s pay justification logic.

When do the EU Pay Transparency Directive obligations actually take effect?

The Directive’s obligations roll out in stages, and not all requirements apply at the same time.

By June 7, 2026, Member States must transpose the Directive into national law. From that point, core transparency rights apply, including pay-range disclosure in job postings and employees’ rights to information about pay levels and pay-setting criteria.

From June 7, 2027, gender pay gap reporting begins for employers with 250+ employees and 150–249 employees. Reporting obligations extend to employers with 100–149 employees from June 7, 2031. This is typically when scrutiny of pay criteria and supporting documentation increases.

It’s also important to note that some Member States already have national equal pay or equal treatment legislation in place. Finland, for example, operates under the Equality Act, which already requires employers to prevent pay discrimination and assess pay equality. For companies in these jurisdictions, the Directive often extends and formalizes existing obligations rather than introducing entirely new ones.

Why do expectations, performance criteria, and job frameworks matter under the Directive?

The Directive requires pay decisions to be based on objective, gender-neutral criteria. It does not mandate performance reviews, but when performance is used as a pay input, the employer must be able to explain what “good performance” means and how it was assessed.

This is where expectations, job architectures, and level frameworks become critical. Clear expectations make performance measurable; vague ones make pay decisions fragile.

Taito’s product philosophy has always emphasized that performance starts with expectation-setting, not evaluation. As outlined in our previous writing, "What are performance expectations, and how can they enable employee growth?", shared role and level expectations create the foundation for fair feedback, consistent reviews, and explainable pay logic.

As our previous writing highlights. Harvard Business Review has shown that ambiguous goals make it difficult to track progress or define success, and that vague evaluation criteria in performance reviews invite bias and inconsistency.

All this often results in vague, difficult-to-follow goals, or none at all. Harvard Business Review (2023) highlights that goals frequently fail when they are ambiguous, making it difficult to track progress or define success."

Defining performance expectations clearly supports successful performance reviews. Harvard Business Review (2022) notes that vague evaluation criteria in performance reviews often invite bias and inconsistency, undermining fairness.

In practice, companies that invest in clear expectations and job frameworks are better positioned to comply with the Directive if performance influences pay, without turning performance management into a compliance exercise.

What counts as “objective, gender-neutral criteria” under the Directive?

The Directive explicitly allows a wide range of criteria, provided they are applied consistently and without gender bias. Common examples include:

• Job classification or job level frameworks
• Skills and qualifications required for the role
• Years of relevant experience or seniority
• Market benchmarking data
• Responsibility scope and working conditions
• Explicitly defined role competencies

Performance can be one of these criteria, but only if it is clearly defined, consistently applied, and documented at the time pay decisions are made.

Does the burden of proof always sit with the employer?

No. The burden of proof shifts only after an employee establishes a prima facie case of unequal pay for equal work or work of equal value.

Once that threshold is met, the employer must demonstrate that the pay difference is based on objective, gender-neutral criteria. This is where documentation — whether performance-related or not — becomes decisive.

How do performance reviews become legally relevant?

Performance reviews are not required, but when performance influences pay, they often become the primary evidence employers rely on.

This creates two legal risks:

1. Retroactive documentation risk
   In several Member States, including Germany, courts have held that performance assessments must exist contemporaneously with pay decisions. Documentation created after the fact carries little weight.
2. Inconsistency risk
   Subjective or unevenly applied reviews are difficult to defend as gender-neutral, even if well-intentioned.

This is why companies that use performance in pay decisions benefit from clear, structured, and timely performance documentation, even though the law does not mandate reviews themselves.

How does tying performance to pay change feedback behavior?

When performance affects pay, feedback behavior changes: predictably.

People become more selective about:

• Who do they ask for feedback from
• How openly they give constructive input

This is not a culture problem. It is a system effect.

If feedback is perceived as a direct input into compensation, individuals optimize for safety, leading to softer, delayed, or avoided constructive feedback. Over time, performance signal quality drops.

One mitigating factor is how performance is rewarded: Index Ventures highlights in its Rewarding Talent handbook that broad, favorable equity plans can reduce defensive feedback behavior, because when everyone benefits from the company performing better as a whole, feedback feels less like a zero-sum game and more like a shared investment in outcomes.

Why is pay transparency also a retention issue?

People disengage from performance and feedback systems when they believe pay outcomes are unfair or poorly explained. Even legally compliant systems fail if employees do not trust them.

Transparency, especially clarity about how pay is determined, increases engagement and retention. Employees may disagree with outcomes, but they are more likely to stay when the system feels understandable and consistent.

This makes pay transparency not just a legal obligation, but a people strategy.

Why must feedback be framed as enablement, not evaluation?

Even in transparent systems, fear can persist. If feedback is seen as something that can harm pay, honesty erodes.

High-performing organizations separate three concepts clearly:

• Feedback supports growth and learning
• Evaluation supports decision-making
• Compensation rewards outcomes

Feedback must be framed explicitly as developmental input. When people trust that feedback helps them grow, rather than immediately penalizing them, performance systems remain healthy, even when performance influences pay indirectly.

How can AI support compliance without increasing legal or people risk?

AI does not decide pay and should not evaluate performance autonomously. Its value is structural.

Used correctly, AI can:

• Reduce recency bias by surfacing performance patterns over time
• Normalize language so feedback maps to agreed criteria
• Improve documentation quality without adding administrative burden

This is most effective in systems built around continuous feedback rather than episodic reviews.

How does Taito support pay transparency without turning performance into a compliance tool?

Taito is designed to support companies that choose to use performance as part of their pay logic, without forcing them to do so.

Here’s how the Directive’s requirements translate into practice:

The aim is not automation or enforcement. It is design clarity, so employers can explain their pay logic calmly, consistently, and credibly.

What should companies focus on next?

Companies preparing for EU pay transparency should focus first on how pay is defined, not on tooling.

Key priorities:

• Clarify objective pay criteria
• Decide whether and how performance influences pay
• Ensure documentation exists at decision time
• Design feedback as growth-oriented, not punitive

Strong systems make transparency manageable. Weak ones make it risky.

What should you read next?

• How should performance management evolve as a startup grows
• What should I have in place for a leveling framework to be effective
• What are performance expectations, and how can they enable employee growth?

FAQ

Q1: Does the Directive require performance reviews?
No. Performance reviews are optional. They only matter legally if performance affects pay.

Q2: Can companies comply without linking pay to performance?
Yes. Pay can be defined entirely through role level, market data, or seniority.

Q3: When does legal scrutiny meaningfully increase?
Typically, when gender pay gap reporting begins (July 2026–2031, depending on company size).

Q4: What happens if documentation is created after pay decisions?
In several Member States, retroactive documentation carries limited or no legal weight.

Q5: Is retaliation allowed for asking about pay?
No. Article 25 of the Directive explicitly prohibits retaliation against employees who exercise pay transparency rights.