Skill based pay plans


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 production and maintenance workers at JLG Industries in Pennsylvania earn an extra 30 cents an hour for each new skill they acquire within a specific family of job activities. Employee hour for each new skill they acquire within a specific family of job activities. Employees at American Steel & Wire can boost their annual salaries by up to $12,480 by acquiring as many as 10 skills. And Frito-Lay Corporation ties its compensation for front-line operations managers to developing their skills in leadership, workforce development, and functional excellence.

What are Skill-Based Pay Plans?

Skill-based is an alternative to job-based pay. Rather than having an individual’s job title define his or her pay category, skill-based pay (also sometimes 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. Filling 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 generalists and fewer specialists. While skill-based pay encourages employees to acquire a broader range of skills, there are also other benefits. It facilitates communication across the organization because people gain a better understanding of other’s jobs. It lessens dysfunctional “protection all of territory� behavior. Where skill-based pay exists, you’re less likely to hear the phrase “It’s not my job!� In addition, 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. Finally, skill-based pay appears to lead to performance improvements. A broad-based survey of Fortune 1000 firms found that 60% of those with skill-based pay plans rated their plans as successful or very successful in increasing organizational performance, while only 6% considered them unsuccessful or very unsuccessful.

What about the downside of skill-based pay?
People can “top outâ€? —learning the skills the programs calls for them to learn. This frustrates employees after they’ve become challenged by an environment of learning, growth, and continual pay raise. 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 more money even though there was little immediate use for their new skills. IDS eventually dropped its skill-based pay plan and replaced it with one that equally balances individual contribution and gains in work-team productivity.
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 FRG theory. Among employees whose lower-order needs are substantially satisfied, the opportunity to experience growth can be a 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, high 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-train, to be generalists rather than specialists, and to work cooperatively with orders in the organization. To the degree that management wants employees to demonstrate such behaviors, skill-based pay should act as a rein- forcer.

In 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 variable in job performance, the use of skill-based pay may increase the perception of equity and help optimize employee motivation.

In India this is not very popular with managements or employers due to their thinking that some unforeseen problems may arise with trade unions. However managements are encouraging their favorite and competent people to undergo long term training or study granting them leave with pay. After their successful completion of the training or study they are absorbed back into the company and groomed for higher positions.

Other reasons are skill-based plans don’t address the level of performance. They deal only with the issue of whether or not someone can perform the skill. For some skills, such as checking quality or leading a team, level of performance may be equivocal. Although it’s possible to assess how well employees perform each of the skills and combine that with a skill based plan that is not an inherent part of skill-based pay.

  • Amit


    thanks a lot for sharing this information with us. i found it really gr8. i can put this point to my president.

    thanks once again.

  • mahbub

    Its an informative and realistic approach for OD Planning And i found it effective while i was planning to introduce such theory in my ORG.

  • There are two good books on skill-based pay for persons who want to learn more details. Both are on One is called “Skill-Based Pay: Design and Implementation.” You can find the other by searching for the topic.