Skill based pay

Skill based pay
See also

Skill-Based Pay is a system focused on people, their knowledge, skills and competencies. It’s purpose is to motivate employees to learn and develop, through getting rewards for mastering job-related skills (D. A. Baldvin 2003, p. 49). In this system pay increases occur due to the number or depth of the employees’ skills. The pay increases are connected to three types of skills: horizontal, vertical and depth skills. It rewards multiple skills that make employees flexible, but may not consider how well they are used (M. S. Bhattacharya, N. Sengupta 2009, p. 88).

Salaries are determined by skills. In many organizations, especially public ones, skills are measured based on formal education and seniority (R. M. Burton, B. Obel, G. DeSanctis 2011, p. 196).

Application of the skill-based pay system[edit]

Skill-based pay systems are more common in flat organizations, with a team-based approach in them. They may be only recommended for the lowest-level jobs. It is known to be most effective in production settings, but can be used in knowledge work as well. In companies operating on private sector skill-based pay may be applied for jobs like tellers and loan officers (D. A. Baldvin 2003, p. 49-50).

Skill-based pay is most successful in (J.H Boyett, J. T. Boyett 2004, p. 6):

  • Organizations which can identify and communicate their objectives and goals.
  • Processes where performance is interrelated.
  • Work environment where employees are encouraged to participate.

The system must be carefully planned before implementation and customized to the organization in order to work properly and successfully (D. A. Baldvin 2003, p. 50). Successful appliance of the skill-based pay system requires (J.H Boyett, J. T. Boyett 2004, p. 6):

  • Employee involvement
  • Employee perception of the system’s fairness
  • Fair and understandable management

Skill based job[edit]

Designing a skill-based job involve identification of tasks and skills related to the job. Tests and measurements must be done in order to determine whether an individual learned those skills. Then those skills must be priced so that pay rates can be determined. Employees are being paid for the skills they can and are willing to perform (D. A. Baldvin 2003, p. 49).

Advantages and disadvantages[edit]

Advantages(D. A. Baldvin 2003, p. 50), (M. S. Bhattacharya, N. Sengupta 2009, p. 90):

  • Workforce flexibility
  • Lower labour costs
  • Employees’ commitment
  • Employees’ self-management
  • Higher average pay rates
  • Productivity enhancement
  • Multi-tasking encouragement

Disadvantages(D. A. Baldvin 2003, p. 50):

Job-based Pay and Skill-based Pay differences[edit]

Main differences between those two system are the following (M. S. Bhattacharya, N. Sengupta 2009, p. 90):

  • In Job-based Pay system workers are paid for performed job, whereas in Skill-based Pay system they are being paid for the depth, range and type of skills they have.
  • In job-related pay, pay rates are tied to factors related to job, like responsibilities. In skill-based pay, salary is related to skills.
  • Pay administration and job pricing is simpler in a job-based pay.
  • Seniority is important in job-based pay.

In traditional systems, employees are assumed to be skilled at all the tasks that their job contains. Seniority in skill-based system only matters when it takes time to gain new skills (D. A. Baldvin 2003, p. 49).


Author: Karolina Liskiewicz