Skill-Based Pay
What is skill-based pay?
Skill or competency-based pay is a pay structure that rewards employees based on their skill set, knowledge, and experience, rather than their job title or position. A skill-based pay system encourages employees to reach their desired pay rate by taking initiative and actively improving their skills and work.
What is the difference between traditional and competency-based pay plans?
The main difference between traditional and competency-based pay plans is pay flexibility. Because traditional pay plans are based on an employee’s job title and position, their pay can often be limited by their ability to progress in seniority. However, in a competency-based pay plan, employees can increase their pay potential by improving their skills and gaining knowledge related to their field.
What industries typically use skill-based pay?
Skill-based pay is most often implemented in industries where employee competence and new skills are of great benefit to the business.
For example, in manufacturing, employees could have their compensation increased as they undergo training on specific pieces of equipment. In this instance, although their job title will stay the same, they are actively broadening their professional skills and, therefore, helping to increase wider company productivity.
Meanwhile, data analysts on skill-based pay systems could potentially earn more if they undertake a new qualification or training program, with the overall aim of improving efficiency and relevant industry knowledge. Similarly, workers in the pharmaceutical industry may also be compensated if they undergo further employee development, such as learning a new skill, like capsule production or how to handle certain materials.
Competency-based pay is more beneficial when specific skills lead to certain outcomes for the business. Overall, this makes it easier to accurately determine who should be rewarded and when.
An example of what skill-based pay involves
Skill-based pay involves rewarding employees who increase and develop their skills in ways that are beneficial to the wider company, and then increasing their pay accordingly.
An example could be a manufacturer in a warehouse who undertakes a training course to develop a new skill, such as using a specific machine in accordance with health and safety regulations. This employee may not be promoted for learning this skill, but they may be rewarded with an increase in pay as they have effectively boosted their value to the company.
Competency-based pay pros and cons
Like all compensation plans, competency-based pay has both advantages and disadvantages. The following are some examples of competency-based pay pros and cons to help you determine if this pay structure could work for your company.
The advantages of skill-based pay
- Individual self-motivation: Instead of basing pay on seniority and job classification or level, the employee is empowered to achieve more and is rewarded for it.
- Company-wide motivation: Competency-based pay encourages a culture of self-motivation and self-improvement. It can create a company of employees who actively seek to improve their overall work behavior and find new ways to contribute to the business. Competency-based pay helps to tie your company’s culture directly to its success.
- Increased transparency: Employees can better understand what they could potentially earn with a competency-based pay system. It’ll also help them understand what skills they need to acquire to reach their goals.
- Reduced turnover: Employee turnover is costly. A competency-based pay plan can help curb the effects by ensuring employees feel that their skills and knowledge are valuable to the business. In turn, this can help improve employee satisfaction and retention.
The disadvantages of skill-based pay
- Greater pay subjectivity: As your company deviates from a traditional pay system, you can unwittingly introduce subjectivity into the equation. The actions of an employee might not be judged correctly, or, worse, they might be overlooked.
- Vulnerability to favoritism: Employees may start to accuse a business of favoritism when one worker gets rewarded more than another. They may even think that they are being treated unfairly and that their skills aren't being fairly recognized.
- Inaccurate measurement of company needs: It’s difficult to determine which skills are important to a company and which skills translate to productivity. Since that’s the basis for a competency-based pay system, it may introduce more inaccuracy when gauging company needs.