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Does Skill-Based Pay Make Sense for Your Organization?

Does Skill-Based Pay Make Sense for Your Organization?

Interest in skill-based pay plans has been increasing recently.  Many organizations are interested in using pay as a motivating factor to encourage employees to acquire higher-level job skills.  Others have created more loosely defined jobs that change frequently, making job evaluation difficult.
Skills, for the purposes of this article, refer to the unique set of knowledge and abilities that are requisite to an employee’s qualification to hold and adequately perform the duties of the job.  The term “competencies” is often used interchangeably with “skills.”  Our observation is that the term “competencies” usually refers to a wide range of personal traits and behaviors such as communication, teamwork and initiative.  Competencies are usually not measurable enough to be used for the purpose of determining differences in pay levels.
It is also important to remember that “skills” are not synonymous with education, experience and/or tenure, these are means of acquiring skills, not the skills themselves.  For example, education does not always result in the development of job-related skills.  Conversely, many employees without much formal education can and do acquire high levels of job-related skills.  The acquisition of skills is always an individual matter that is affected by motivation, intelligence, personal circumstances, and other factors.

If you’re considering this relatively new approach to compensation management in your organization, here are some key factors that will determine the potential success of your skill-based pay plan:

  • Ability to define job skills. As with any compensable factor, skills require clear definition if they are to be the basis upon which pay decisions are made.  This generally means that jobs are defined in terms of skills required as opposed to functions, duties and responsibilities.  Defining skills is more feasible for simple, repetitive jobs than it is for professional or managerial jobs that require complex intellectual, analytical and interpersonal skills.
  • Ongoing need for increased levels of skills. Because skill-based pay will motivate most employees to develop more and higher level skills, the organization should be sure that these skills are actually needed.  Sometimes the need is for employees to be cross-trained to facilitate coverage for time off (vacations, illness, etc.)  Sometimes, the need is due to a labor market shortage of skills and the decision is to develop (make) the skills internally instead of attempting to hire (buy) them in the marketplace.
  • Participative environment. The development of a skill-based pay plan demands the active participation of supervisors and managers. Not only does the organization need technical and job content input from these employees, but their participation will lead to greater acceptance, adoption and utilization of the resulting plan.
  • Willingness to allocate the necessary resources. Creating a skill-based pay plan is not for the faint-hearted!  Usually, a great deal of time is involved, so the need should be clear and significant enough to justify the expenditure of this valuable resource.  Time is required to:
  • Identify and define in writing the specific skills that will be measured for each job and job level.
  • Develop pay levels for the defined skill levels, using both external labor market and relative internal indicators.
  • Explain to supervisors and employees how the new plan will work.
  • Quantitatively assess each employee’s baseline skill level in relation to his/her current job.
  • Maintain the plan on an ongoing basis, including periodic assessment of employee skill levels through documented observations of their applications of skills and/or formal testing.
  • Willingness to provide training. To be motivational, the skill-based pay plan must include accessible, effective training opportunities.  Otherwise, employees will be frustrated by the unavailability of ways to increase their skills and the plan will fail.

Our emphasis is always on the measurement of compensable factors, whether it is the job, employee skills, or employee performance.  Of these three factors, skill is usually the most difficult to measure.  However, the rewards of developing a skill-based pay plan can be great for those willing to dedicate the necessary resources to the process.  Some of the potential benefits of a well-designed skill-based pay plan are increased levels of often-scarce skills, staffing flexibility, motivated workforce, reduced undesirable turnover, and improved payroll cost-effectiveness.

Shari Dunn

Upon receiving her B.A. degree in psychology from the University of California at Berkeley, Ms. Dunn headed to New York City to take a position in the human resources department of the Marine Midland Bank, and later worked at Nabisco in operations research. Returning to the San Francisco Bay Area, she became a Research Associate for McKinsey & Co. Next, she moved to Deloitte (then Touche Ross) as a consultant. It was at these two ...

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