Base Compensation on Skills

I wonder how a Skills-Based Approach should affect the way employers pay employees; planning, building and validating of skills have a strong correlation with an employee’s job performance. Should employers consider a skill-based pay system versus the traditional job pay system?

Here is a good definition of a skills-based pay system (“SBP”):

Skills-based structures link pay to the depth or breadth of the skills, abilities, and knowledge a person acquires that is relevant to the work. Structures based on skill, pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of those particular skills.[1]

Skills-based pay systems were first introduced by manufacturing companies to improve efficiency in a production line.  According to the authors of The Skill-Based Pay Design Manual, advantages of these early pay systems include:[2]

  • Flexibility to complete other tasks.
  • Improved problem solving.
  • Improved horizontal communication.
  • Improved vertical communication.
  • Motivation to build skills and knowledge.
  • Management invests in the growth of their employees.
  • Improved job satisfaction.

Of course, there are differences between manufacturer and service based companies regarding building and paying for skills (for the bulk of their workers).

Skills required for a production line are more related to knowledge of operating machinery, and most workers are expected to have the capability to effectively learn the skills – like learning how to drive a car. The idea is to build breadth in a skill set where workers are interchangeable to complete various tasks.

With services, professionals specialize in a cluster of skills and perform a particular function. The idea is to build depth in a skill set where workers develop a deeper expertise with their skills.

The optimal balance of breadth versus depth in a professional’s skill set is something that is being debated by educators and employers as they try to address issues such as the skills gap and job preparedness of college graduates. (Let’s table this debate for a later blog.)

In an article Skills Based Pay Structures Versus Job Based Pay Structures, Rory C. Trotter suggests two criteria companies should consider before committing to a skills based pay system. Are they hiring employees based on their potential? Do they plan to groom a new hire to play a bigger role?[3]

(With a depth-oriented SBP) the goals are building critical specialized skills, attracting talent and retaining employees over the long period needed to build specialized skills… (With a breadth-oriented SBP) the goals are to reward an appropriate balance between employee flexibility through skill breadth, skill depth, and self-management skills.[4]

To conclude, I think a skills-based pay system works in our Information Age and a skills-based approach lays out a blueprint:

  • Planning stage. Employers define required and recommended skills for employees, and publish how passing a skill assessment increases wages (on an intranet or employee handbook).
  • Building stage. Employers provide training, guidance, and funding to build skills.
  • Presenting stage. Employers provide a platform where employees can present their skills, which is advantageous for clients, co-workers, management, etc.
  • Validating stage. Employers promote employees in validating their skills – certifications, references, and assessments – by funding the process and increasing wages upon completion.

Learn more about a Skills-Based Approach:

[1] George T. Milkovich, Jerry M. Newman, Carolyn Milkovich (1993). Compensation. Irwin. (Cited in Rory Trotter’s article referenced below).

[2] Joseph H. Boyett and Jimmie T. Boyett (2004). The Skills-Based Pay Design Manual. New York: ASJA Press.

[3] Rory C. Trotter. ” Skills Based Pay Structures Versus Job Based Pay Structures.”

[4] Gerald E. Ledford, Jr. and Herbert G. Heneman III (2011). “Skills-Based Pay”. Society for Human Resource Management.

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