Which of the following is true of skill-based pay programs for recognizing employee contributions?

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Job-based Pay is undoubtedly the most common model of compensation. In many businesses, it’s common place. It’s simple to understand and easy to apply. Every position in an organization has a specifically determined value for the company. This value is identified by the name e. g. Service Engineer and the experience level (junior, senior, etc.), and is the result of internal and external job evaluations. Such evaluations include market pricing or estimated education/experience needed for the job. Thus, the wage of every employee is tied quite tightly to its’ job role and seniority. Employees move forward through outstanding performance, which leads to a promotion, which eventually leads to a pay increase.

Now, Skill-based Pay is different.

Here, compensation directly focuses on the individual and their unique skills, rather than the mere title of their position. A skill is acquired and creates observable expertise in performing tasks. Employees are rewarded for the range, depth and different categories of skills they possess. More specifically, they are paid for the skills they are capable of using, rather than for the job they are actually performing. Compensation rates focus on the employee’s characteristics, often based on skill certifications. Skills can be rated internally or externally. In a Skill-based Pay system, employees receive additional pay only after they demonstrate the skills that the system rewards. Typically, a raise can be tied to:

• horizontal skills (broadening of skills, expanding range of tasks),
• vertical skills (acquiring new skills of higher level) and
• depth skills (very high level of skill in a specialized area)

Therefore, Skill-based Pay rewards multi- or deep-skilled employees and encourages skill development and cross-training, which is essentially the main idea behind the whole system. However, opportunities for training must be given for the system to work properly. Skill-Based pay isn’t an invention of Industry 4.0. In fact, the system has been around for at least 30 years now. However, there are new methods for creating opportunities to make it work in the digital industry we live in today.

Why you should do it

One major advantage of a Skill-based Pay system is that it decreases the cost of doing business through a higher employee flexibility. A single employee can be assigned to multiple different jobs, since he or she is trained in numerous different areas. As a result, costs can be reduced by lowering the workforce numbers. Productivity and quality are enhanced through a smarter use of human resource, ideally occupying every employee at all times. Additionally, it facilitates technological change through virtually smarter employees and lowers absenteeism, because employees appreciate this increased sense of responsibility. Moreover, it also lowers turnover rates because employees can develop new skills and grow in their own professional field within one company, thus diminishing the need to seek higher opportunities elsewhere. Finally, Skill-based Pay just makes a lot sense in our developed and digital industry. For example, some companies are actively driving digitalization and automatization in manufacturing and operational back offices. The result: employees act as knowledge workers rather than button pushers. Low-skill jobs are being automated, so the remaining jobs require higher skills. Skill-based Pay motivates employees to attain a wide range of capabilities which facilitate business in the digital age like the ability to work without close supervision, rapid adjustments to market changes, teamwork and the general higher employee flexibility.

In a nutshell: using a Skill-based Pay system leads to possibly fewer, more highly paid, more productive and smarter employees.

Why you probably don’t do it

Much like any new concept implemented in even the most lucrative of work spaces, a Skill-based Pay compensation will not provide instant gratification. While establishing a Skill-based Pay System, the average wage is going to be higher without adding value to the company immediately. Especially because you might end up paying your employees for skills that aren’t even used for their current job. In general, Skill-based Pay is more complex to manage than Job-based Pay, hence administration as well as costs increase. Furthermore, it is imperative for the organization to offer training opportunities continuously. Obviously, this can be a huge commitment, both financially and time-wise. But that’s not the only issue: Some employees simply don’t want to learn all the time. Reluctance to acquire new skills disables a Skill-based Pay system completely. On the contrary, differently minded employees might “max out” too soon, learning all the relevant skills for the company too quickly. Apart from that, it can be difficult to assess certain skills and compare different jobs with a similar pay rate to each other, causing many discussions about compensation. Lastly, there is a risk of malinvestment: If employees invest time in learning new skills, naturally they expect to use their new skills at work. Again, the organization spends time and money on the training. However, if they don’t get to use their new skills the potential for dissatisfaction and morale problems are large, which, in the worst-case scenario, could lead to a job change to an organization willing to make use of those skills.

So, what is better Job-based Pay or Skill-based Pay?

Why not both?

Actually – both is certainly the best.

Using Skill-based Pay systems exclusively would turn into a chaotic spider web of skill certifications, job assessments and different pay rates. At the same time, talent, money and productivity could be left behind easily if only Job-based Pay is applied.

In my opinion, a combination between Job-based Pay and Skill-based Pay systems can be a wise choice, since any form of Skill-based Pay compensations recognizes individual contribution to the business, employee satisfaction is likely to increase. For example, employees working in an innovation lab could be compensated Skill-based, whereas employees in say facility management are paid Job-based. Alternatively, you could choose the base pay to be Job-based while incentive plans are Skill-based, e.g. in manufacturing.

I strongly believe that - if handled smartly - Skill-based Pay systems are a good way to add value through human resources to any business.