Geographic compensation arbitrage — and what the directive does to it

A Senior Engineer in Berlin: €78k. The same role in Lisbon: €52k. The same role again in Bucharest: €38k. Each defensible by local market reference. All three appear in the same per-category Article 9 metrics when the company files its annual report.

The directive does not ban geographic differentiation. It asks the company to explain it — once, in writing, applied consistently. The geographic adjustment that produced the local-market-defensible numbers is one of the four typical structural-factor categories: it sits inside the directive's framework, not outside it.

Three cities, one role

Each number is defensible in its own market. The triangulation produces a company that pays €38k–€78k for what is, by the directive's Article 4 framework, the same work (or work of equal value).

How the directive looks at this

Article 4 requires equal pay for equal work or work of equal value, by reference to objective and gender-neutral criteria. Geographic location is an acceptable objective criterion when:

• The differentiation is documented. A geographic-adjustment policy exists in writing, with defined cost-of-location factors per region or city.
• The factors are gender-neutral. The cost-of-location adjustment is the same regardless of who is in the role. A man and a woman in Lisbon both receive the Lisbon number; a man and a woman in Berlin both receive the Berlin number.
• The application is consistent. All roles follow the same geographic-adjustment framework. The Senior Engineer policy is not different from the Senior Designer policy.

Met all three: the geographic differentiation is structural, defensible, and explains the portion of the per-category gap attributable to location mix.

Met two of three: the differentiation is partially defensible. The undefended portion appears in the residual.

Met one or none: the geographic differentiation is undocumented compensation policy. The full gap appears in the residual.

The composition effect

The directive's per-category metrics aggregate across the entire population of the category. If the gender mix differs by location, the location-driven pay difference becomes a gender-driven pay difference in the aggregate — even when no individual decision was gender-influenced.

A common pattern in European SMEs: men over-represented in the Berlin senior cohort, women over-represented in the Lisbon senior cohort. The Berlin pay is higher, the Lisbon pay is lower, both defensible per the geographic framework — and the per-category gender mean for "Senior Engineer" comes in showing a gender gap that is entirely explained by location mix.

The directive examines the gap. The geographic explanation must be in the documentation. If documented, the gap is decomposed into "explained by location mix" plus residual. If not documented, the entire gap sits in the residual — and is examined under Article 10 if it exceeds 5%.

The tension the directive creates

Geographic differentiation has been the standard practice. The directive does not prohibit it. But the directive forces a question that geographic differentiation alone did not: is the same work being done across these locations, and if so, how is the pay difference justified?

Three responses companies are working through:

Maintain geographic differentiation, formalise the policy. Document the cost-of-location factors, apply them consistently across all roles. The differentiation persists; the documentation makes it defensible.

Move to a single-geography pay model. Some companies are flattening — a global pay band per role, with no location adjustment. Simpler to defend; expensive in higher-cost locations; constrains hiring in lower-cost locations because the pay overshoots local market by a wide margin.

Move to a tiered model. Two or three broad pay tiers (e.g., "high-cost markets" and "low-cost markets") rather than per-city granularity. Reduces the within-category dispersion while preserving some location sensitivity.

Each is defensible. The directive's framework rewards documentation more than it rewards any particular structural choice.

What this means for new hiring

Article 5 requires the indicative pay range to be disclosed before the interview. For a geographically differentiated company, the published range needs to reflect where the role will be based. A "Senior Engineer, remote within EU" advert with a €40k–€80k range is technically compliant but functionally useless — the candidate cannot self-select based on the range.

The defensible alternative: publish the range for the specific location the role is being hired in, or publish multiple ranges per location with the location-attribution documented. The Article 5 record then aligns with the offer that follows, with the geographic adjustment visible in both.

Geographic differentiation was defensible in 2023. In 2027, it has to be documented to remain defensible.

A salary survey prices the role per market. The directive does not ask what the role costs in Berlin and Lisbon separately. It asks what the company does with the difference — and the survey, by construction, has no view of that.

Where the diagnostic starts

Determining whether the geographic-adjustment policy holds up against the directive's framework requires the policy to exist in writing first, and the payroll data to be decomposable by location to test consistent application. The ReadinessCheck™ surfaces whether the policy documentation is in place, by axis of the directive's principal obligations.