Organizations hire people for their skills, then typically put them in jobs and pay them based on their job title or rank. But if organizations hire people because of their competencies, why don’t they pay them for those same competencies? Some organizations do. For instance, employees at American Steel & Wire can boost their annual salaries by up to $12,480 by acquiring as many as 10 new skills. Frito-Lay Corporation ties its compensation for front line operations managers to developing their skills in leadership, workforce development, and functional excellence. Skill based pay is an alternative to job based pay. Rather than having a individual’s job title define his or her pay category, skill based pay (also called competency-based or knowledge based pay) sets pay levels on the basis of how many skills employees have or how many jobs they can do.
What’s the appeal of skill based pay plans? From management’s perspective; flexibility staffing needs is easier when employee skills are interchangeable. This is particularly true today, as many organizations cut the size of their workforce. Downsized organizations require more generation and fewer specialists. Skill based pay also facilitates communication across the organization because people gain a better understanding of each others’ jobs. Where skill-based pay exist you’re less likely to hear the phrase. It not my job! In additional, skill based pay helps meet the needs of ambitious employees who confront minimal advancement opportunities. These people can increase their earnings and knowledge without a promotion in job title.
What about the downside of skill based pay? People can “top cut” – learning all the skills the program calls for them to learn. This can frustrate employees and after they’ve become challenged by an environment of learning growth, and continual pay raise. And skills can become obsolete. When this happens what should management do? Cut employee pay or continue to pay for skills that are no longer relevant? There is also the problem created by paying people for acquiring skills for which there may be no immediate need. This happened at IDS Financial Services. The company found itself paying people more money even though there was little immediate use for their new skills. IDS eventually dropped its skilled based pay plan and replaced it with one that equally balances individual contribution and gains in work team productivity. Finally skill based plans don’t address the level of performance. They deal only with issue of whether or not someone can perform the skill.
Linking Skill based Pay plans to motivation theories:
Skill based pay plans are consistent with several motivation theories. Because they encourage employees to learn, expand their skills and grow, they are consistent with ERG theory. Among employees whose lower order needs are substantially satisfied, the opportunity to experience growth can be motivator.
Paying people to expand their skill levels is also consistent with research on the achievement need. High achievers have a compelling drive to do things better or more efficiently. By learning new skills or improving the skills they already hold, achievers will find their jobs more challenging.
There is also a link between reinforcement theory and skill based pay. Skill based pay encourages employees to develop their flexibility to continue to learn, to cross rain, to be generalists rather than specialists, and to work cooperatively with others in the organization. To the degree that management wants employees to demonstrate such behaviors, skill based pay should act as reinforcement.
Inn addition, skill based pay may have equity implications. When employees make their input outcome comparisons, skills may provide a fairer input criterion for determining pay than factors such as seniority or education. To the degree that employees perceive skills as the critical in job performance, the use of skill based pay may increase the perception of equity and help optimize employee motivation.