What is Skill-Based Pay (and Why Should You Introduce It)?

What exactly is skill-based pay?

Skill-based pay is an alternative form of salary structure where employers assign a dollar value to an employee’s specific capabilities and then compensate them accordingly. The exact value assigned to each skill will vary depending on its complexity, the demand for it in the job market, and how important it is to the success of the company.

This salary model also takes into account an employee’s experience level with those critical skills and their ability to utilize them effectively. Essentially, skill-based pay presents employers with a manner of rewarding employees for their knowledge, past insights, and level of expertise.

The advantages and disadvantages of skill-based pay

Benefits of skill-based pay

From an employer’s point of view, there are several benefits of implementing skill-based pay structures.

#1 Benefits customization

For one, this system allows businesses to better customize salaries according to individual staff members’ abilities rather than paying everyone the same regardless of their skill set.

#2 Attracting top talent and improving retention

As a result, it becomes easier for companies with skill-based pay structures to attract top talent with hot skills who can then be rewarded appropriately for their contributions. Not only that, but it also means a business can maintain their workforce and high employee retention rate, as competency-based pay encourages staff to keep learning and improving their abilities whilst staying in their current roles.

#3 Higher autonomy

On top of this, those employees might possibly be more willing to take full ownership for the quality of their own work. Giving professionals a sense of autonomy to concentrate on bettering themselves and taking on greater responsibility in the business like so is especially crucial for new businesses or startups, as it can result in a greater efficiency of staffing.

#4 Better structure and organization

When employers use skill-based systems, they are better able to identify areas where additional learning or development may be needed in order for their cross-functional teams to stay competitive in their field or industry. This allows them to focus training resources on those areas and provide employees with all of the knowledge and job-related skills required for success.

Offering different levels of compensation based on skill level encourages employees to constantly strive for excellence, which can benefit both themselves and employees alike in terms of productivity and job satisfaction.

A culture of improvement in which professionals seek more training can lead to better performance, increased motivation, and more opportunities to innovate. It’s a reflection of the uniqueness of competency-based payment models, employees of which tend to change their attitudes towards the adoption of new trends, technologies, and developments in order to experiment, grow, and acquire hot skills.

Drawbacks of skill-based pay

Despite all of the benefits listed above, skill-based pay can also be seen as a somewhat controversial concept. Firstly, it is difficult to objectively measure an employee’s competency level, since these types of skill evaluation can be inherently subjective in nature unless clear and detailed criteria (certifications, degrees, etc.) are established.

Skill-based pay structures can create a sense of competition (and not the good kind) among coworkers that leads to an unproductive and conflicted work environment. It can also lead to feelings of unfairness and inequality if skill levels are not fairly evaluated, or if some employees are able to obtain higher skill pay rates than others due to factors such as seniority or favoritism.

What’s more, skill-based pay systems can be complex and time-consuming to manage, requiring considerable planning and effort from the employer to make them work successfully. Moreover, a significant investment in human resources is required to facilitate the recruitment, training, and administration of employees under this compensation model.

Competency-based pay may not be the most cost-effective solution for any business with a large team size that employs many staff or are looking to make cost reductions. As such, it’s necessary to thoroughly research the system and weigh up all of the pros and cons before implementing skill-based pay in your organization.

Differences between skill-based and other salary structures

It’s good to remember that skill-based pay isn’t the only wage model available. While the goal of skill-based pay is to reward employees for their skill level and proficiency, other compensation strategies – including the more traditional models – focus instead on a person’s position or years of service, for example.

Job-based salary system

People employed under this model are paid the same company average flat rate, independent of skill level or performance. In this salary structure, all members of staff in a certain position are treated and compensated equally for the role they are in, irrespective of their capabilities or experience.

Typically, an employee will only receive a pay increase (aside from a company-wide raise to match inflation, say) when they are promoted to a new position in their career journey rather than when they have improved their skill set. This can be an effective option for employers who don’t want to invest in skill-based pay systems, or for those with a small staff.

Note that, while compared to skill-based salary structures, job-based models are simpler to administer and manage, they don’t necessarily provide the same level of incentive or rewards. As a result, job-based pay may not be as well-suited to industries where skills play a vital role.

Experience-based salary system

This type of salary structure focuses on rewarding workers according to their years of service in a specific company, role, or sector rather than skill levels. So, for example, someone who has worked for many years in a particular field completing notable projects at high-profile companies will be paid a higher salary per position than someone who has spent less time in the role.

In this seniority-based compensation model, there is usually an annual review process to give employees an appropriate salary increase and possible bonus for the years of service they have completed. This may be regarded as a fairer system than skill-based because it doesn’t require continual or individual assessment, and is thus less likely to create feelings of competitiveness in the workplace.

While it’s easy to track and compensate employees and candidates with experience-based pay, it doesn’t always reward proficiencies and performance as accurately as skill-based pay does. Experience-based pay is thus often used by organizations looking to reward loyalty and retain talent, as it encourages people to stay in the same role or company for longer than they might otherwise do.

Introducing skill-based pay

Now that we have covered the basics of skill-based pay, seen how the benefits outweigh the drawbacks, and that it compares favorably to other salary structures in certain settings, let’s look at how you can introduce competency-based pay in your organization.

Create skill-based pay bands

ALWAYS have a clear understanding of the skill sets and levels of proficiency you expect from your employees. This will help you determine salary tiers that differentiate skill level and reflect the requirements of each position, outlined in a clear job description and expectations.

Then, identify skill profiles according to the breadth and depth of the competencies needed for different roles – that is, the ability to work in different environments with transferable skills, the requirement to become an expert in a particular field, and the level of self-management needed.

Evaluate your existing employees

Assessing what skills are possessed by your current workforce will allow you to determine which pay band is applicable to each of them, as well as identify any skill gaps. An appropriate salary can be offered to reflect their skill levels and the job market conditions, i.e. the availability of hiring comparable talent from outside of the organization and how much it would cost to do so.

It’s worth having an independent third-party assess each skill level, typically through interviews and assessments, so that all skill pay bands are applied equitably and objectively across the board.

Provide sufficient training

A skill-based pay system ought to be accompanied by the provision of proper tools and development opportunities that are tailored to each employee’s skill needs. This could be formal training, mentoring and coaching, or on-the-job learning opportunities in order to help employees gain the valuable skills and experience needed to move up your skill pay bands. If contributing to the professional development of employees sounds like a good idea to you, consider exploring job opportunities for leadership coaches and join this long journey towards skill advancement.

There should be an emphasis on training not only those skill sets that are currently in high demand, but also those that may be needed in the future as requirements and job roles change in the wake of emerging trends and technological advancements, among other factors.

Review and adjust skill-based pay bands

Continual monitoring and regular review of your compensation model is essential for staying up to date and in keeping with the current skill requirements of your organization. This process involves revising pay bands to account for skill obsoletion or inflation in the job market, and introducing new skill sets that weren’t available when you first rolled out competency-based salaries.

Staying on top of skill development will keep your skill-based pay model remaining current and attractive to both existing and potential employees. As well as this, establishing a monitoring system will reinforce your commitment to rewarding skill and experience, as well as providing recognition to employees that show dedication to their craft.

Conclusion

In conclusion, skill-based pay is an innovative way for businesses to compensate their employees fairly while still taking into account individual abilities and experience levels with certain skill sets. This enables businesses to remain competitive, while also making sure that their talented team has access to all the necessary training for them to succeed within their particular field or industry.

Careful evaluation of competencies and performance allows employers to identify areas of strength and weakness in their workforce and reward or address them accordingly. As such, skill-based pay is an attractive option for companies looking to to remain competitive in a rapidly changing business landscape by incentivizing employees to develop and hone their skill sets.

Using a skill-based pay model facilitates the recognition of and compensation for excellence, while simultaneously helping employers recruit top talent more easily by offering individual salaries that reflect each employee’s unique set of skills and development.

It’s therefore easy to see why skill-based pay, akin to flat organizations with little or no middle management, is quickly becoming a popular alternative to competitors with job-based pay or other traditional salary scales.