Considering Skill-Based Pay

Frank Giancola, in his article "Skill-Based Pay - Issues for Consideration" in the May 2007 issue of Benefits & Compensation Digest introduces his topic with the following sage advice about this - and other - newer and trendy compensation approaches:

New approaches in compensation management generally are characterized as being simple in concept and complex in execution.  Unfortunately, not all compensation professionals are aware of this principle, and some may find themselves moving ahead on a new idea without fully understanding all of its implementation issues.

So, so, SO true.  Many compensation - and human resource - professionals rush into new and/or trendy compensation models without realizing that these approaches have broad implications for overall human resource management.  Frank uses this statement as a springboard to examining the challenges surrounding skill-based pay, what many consider to be the "wave of the future" in compensation.

The phrase "skill-based pay" refers to programs where compensation is based on the skills of the employee, rather than that employee's job, so it is a person-based approach rather than a job-based approach.  This means that rather than inventorying and establishing a pay structure based on the monetary value of jobs, it requires inventorying and establishing a pay structure based on the monetary value of skills.  The impact, challenges and potential pitfalls associated with this "pay paradigm shift" are considerable and must be (but rarely are) fully appreciated before such an initiative is undertaken. 

To help the practitioner considering implementation of skill-based pay, Frank provides a detailed, objective picture of the steps, which I attempt to briefly summarize below.

1. Determine the skill requirements of the organization.  This includes skills currently needed as well as those anticipated for the future.  The step entails inventorying, organizing and establishing progressive paths and timetables for skills and their development.  Note that the application of this approach to professional and managerial employees typically focuses on competencies, which are considered broader and higher level than skills (which tend to be narrower and more task-oriented).
2. Inventory current employee skills/competencies.  The article recommends the practice of developing a folder for each employee detailing current skills and levels of proficiency, areas for development and plans to help the employee acquire new skills.
3. Value skills/competencies and establish corresponding pay structure.  This involves using market pricing to determine the monetary value of skills and skill sets, a challenge since most pay surveys are job-based (rather than skill-based).  Frank notes that most skill-based pay programs are coupled with broad band structures (fewer, broader ranges than a traditional structure).  Implementing the new structure will likely result in costs; pay adjustments made to bring employees in line with the new program.
4. Develop training resources to enable employees to develop the desired skills.  One of the most common major errors made in skill-based pay implementation, according to the article, is underestimating this need.
5. Establishing skill certification procedures.  Another potentially big stumbling block for skill-based pay systems; there must be a process and set of procedures for certifying employee skill acquisition before associated pay increases are awarded.  This must address "on what basis certifications will be granted, who will conduct them, when they will be conducted and whether re-certification is necessary for seldom used skills".

The article quotes well-known compensation consultants N. Frederic Crandall and Marc J. Wallace as saying, based on their experience, that firms implementing skill-based pay will experience a 15-20% increase in their pay rates.  (As the article notes, there are other costs as well including increased training and development investments and the additional time and staff required to accomodate cross-training.)  I believe that organizations considering skill-based pay must go into it with this increase in payroll costs as a foregone conclusion.  The question then becomes:  Is the organization positioned to derive sufficient benefit from a more highly skilled/cross-trained workforce so as to receive an adequate return on that investment?

To cap off this long post, I want finally to share some of Frank's suggested reading list on designing and installing skill-based plans:

• N. Frederic Crandall and Marc J. Wallace.  "Paying Employees to Develop New Skills" in Aligning Pay and Results: Compensation Strategies that Work from the Boardroom to the Shop Floor, Howard Risher, ed. New York: AMACOM. 1999
• Barbara J. Dewey. "Changing to Skill-Based Pay: Disarming the Transition Landmines."  Compensation and Benefits Review, January-February 1994.
• Edward E. Lawler.  Rewarding Excellence: Pay Strategies for the New Economy. San Francisco: Jossey-Bass. 2000.
• Leslie A Weatherly. Competency Models - An Overview.  SHRM Research.  (February 2005).
• Patricia K. Zingheim, Gerald E. Ledford Jr. and Jay R. Schuster.  "Competencies and Competency Models:  Does One Size Fit All?"  WorldatWork Journal, Spring 1996.
• Patricia K. Zingheim and Jay R. Schuster.  Pay People Right!  San Francisco: Jossey-Bass.  2000.

Comments

[SAYANTAN BASU]

Very good approach of making such a complecated strategy look simple.