Is it Time to Consider Adapting Skill-Based Pay?

by Giordano, Joe Friday, September 05, 2008
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Skill-based pay is an alternative to the traditional employee performance appraisal system that rewards employees with an increase in pay rate as they demonstrate the acquisition of knowledge, skills, and expertise. It allows companies to establish a direct link between employee compensation and work related skills.

The basic concept of skill-based pay is the identification of predefined sets of skills, knowledge, tasks, and competencies that establish levels of expertise individual employees are expected to master. It provides incentives for employees to achieve pre-established goals. It allows the company to communicate the importance of acquiring technical skills and expertise by rewarding those employees who do so with pay rate increases.

Essential skills and abilities for each position within the company must be clearly identified to the point that measurable performance standards can be established. These standards can include formal education, certifications, licensing, hands-on testing, and a documented checklist of task accomplishments.The key is that skills, not tasks, must be identified and used as the basis for compensation decisions.

Conversion to a skill based pay compensation system requires a long-term commitment to employee training and development. Individual employees must be afforded the opportunity and resources to acquire the knowledge and abilities identified for career progression. Equally important, all levels of management must commit to the concept and understand the need for employees to have training and development opportunities. This commitment, or lack of, should be reflected in individual performance evaluations of the management staff. Additionally, companies must recognize in advance the fact that most existing pay rate scales may not accommodate a skill based pay system and could require revision and modification as part of the implementation process.

Each job title within your organization can be broken down into three levels (entry, intermediate, and advanced). Each level should have a pay scale range. The pay scale ranges will overlap; for example, the top end of an intermediate level position will be comparable to the bottom level of an advanced position. Assessment panels with subject matter expertise would be established and charged with reviewing requests for pay increases and recommending the appropriate pay rate within the established pay scale range.

What are some advantages to adapting a skill based pay system?

• The development of a highly efficient cross trained workforce
• Development of a career progression ladder for your workforce
• Increase the technical skills and competencies of your employees
• Increased productivity
• Establishing clear standards for recruitment of new employees

Conversion to a skill based pay system is a long-term project that will take months not weeks to complete. It will involve a major commitment of time, resources, and energy. It will also require an extensive employee communication and education campaign. The benefits of increasing the technical skills and knowledge of your workforce will justify the time and effort necessary for revising your compensation system.

For additional information on skill based pay or for finding affordable solutions to your company’s training needs contact Joe Giordano, owner of Consulting, Training, and Development Services, at (410) 860-6664.