Skill based pay

From CEOpedia | Management online

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

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

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

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

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).

Examples of Skill based pay

  • Horizontal Skill-Based Pay: This system rewards employees for learning new skills in the same field. An example of this could be an engineer who is rewarded for learning a new programming language or a salesperson who is rewarded for learning a new sales technique.
  • Vertical Skill-Based Pay: This system rewards employees for learning and mastering skills that are more advanced than their current level. An example of this could be a manager who is rewarded for taking a course on leadership or a software engineer who is rewarded for completing an advanced coding course.
  • Depth Skill-Based Pay: This system rewards employees for mastering a particular skill in depth. An example of this could be a customer service representative who is rewarded for mastering a particular problem-solving technique or a software developer who is rewarded for mastering a certain coding language.

Other approaches related to Skill based pay

  • Variable Pay: This system is based on the performance of the individual employee or the company as a whole. The employee is rewarded with a bonus or commission depending on the performance evaluation.
  • Group Bonus: This system is based on the performance of the group of employees. The group is rewarded with a bonus based on the group's performance.
  • Multi-Skill Approach: This system is used to develop multi-skilled employees. Employees are encouraged to gain experience and skills in multiple areas to increase their employability and productivity.
  • Individual Development Accounts: This system is used to encourage employees to develop skills and knowledge. Employees are rewarded with financial incentives for completing training and developing their skills.

In summary, Skill-Based Pay is just one approach to reward and motivate employees. There are other approaches such as Variable Pay, Group Bonus, Multi-Skill Approach and Individual Development Accounts to reward and motivate employees for their knowledge, skills and competencies.


Skill based pay — recommended articles
Multi skilling — Job specification — Job scope — Training and development — Hard skills — Job analysis — Employee selection — Competency modeling — MBS Method

References

Author: Karolina Liskiewicz

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