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Can skills-based pay work?





Posted by Sarah Lardner on 07 June 2024

Can skills-based pay work?

Skills based pay

Becoming a skills-first organisation means identifying the skills relevant to work and matching people with the required skills to the tasks at hand. The simple answer is that yes it can be done, if it is done correctly: matching employees to those skills and remunerating based on that requires a considered approach.

What is skills-based pay?

The key feature of skills-based pay is that employees are assessed against relevant skills aligned to job requirements. In terms of remuneration, salaries are determined based on the specific skills and competencies they possess, rather than their job titles, length of service or the responsibilities they carry out. Outside of pay, the purpose of this approach is also to incentivise continuous improvement and added value by expanding skill sets, aiding career progression. 

Key positives

Learning and development - This approach encourages continuous learning and development and skills attainment linked to their role. Pay is then linked to the skills and the level of proficiency and salaries progress as employees master new skills or attain a higher level of proficiency.  Aligning pay in this way incentivises learning and the adoption of new skills.

Adaptable workforce - the organisation can also benefit from having a more capable and flexible workforce able to apply their skills to a greater number of roles and tasks.

Common challenges

Strategic alignment - these upsides can only be realised if the required skills are aligned with roles, and the roles themselves are in sync with the organisation’s strategic aims and objectives.

Clarity - employees need a clear line of sight to understand how their (new) skills can be applied and add value, and how they can aid with career progression as part of a company’s pipeline and legacy planning.

Resources – gaining clarity around the required vs current skills, and the shaping of roles means resources, knowledge, and technology to capture data and use it to best effect.

Onus on management – in general, the approach requires strong and knowledgeable managers who can apply a fair and objective assessment of skills on an individual and collective basis. If this is not the case, assessments on pay can end up being linked to irrelevant skills, or skill levels can be inflated to get the outcome they need.

Sector by sector approach

Remember that not all skills are the same. There are technical skills (programming languages, software development, cybersecurity, data analysis), Technical Certifications (Consultancy Management, Project Management), Soft skills (communication), Leadership and Management Skills, and Functional skills (customer relationship management, sales, market research).

It is important to consider how different skills are perceived within an organisation. In general, organisations place more value on skills that are in-demand and/or acquired through many years of study. This can come at the expense of employees who have chosen a different route but are equally capable and add the same value.

Let’s look at some sectors embracing Skills-Based Pay (SBP).

Manufacturing - uses it to incentivise employees to develop a broad range of skills, enhancing flexibility, efficiency, and productivity.

Technology – aligns pay to the changing tech landscape, encouraging employees to continuously update their skills in areas like AI, data analysis and cybersecurity.

Healthcare - ensures healthcare professionals continuously develop new competencies, improving patient care quality.

Retail - used to reward employees who gain specialised knowledge around products, customer service and project management.

10 steps towards skills-based pay

  1. Be clear about why you are taking this approach 
  2. Grasp which skills and competencies are essential to achieve your strategic goals
  3. Develop a framework that sorts and clearly defines skills and levels, mapping and documenting specific skills and competencies
  4. Develop simple and unbiased criteria for assessment, including any validation required for any accredited skills
  5. Enable an environment where skills acquisition is possible
  6. Develop a career progression framework that enables advancement based on skills
  7. If linked to pay, design a pay structure and pay progression policy. Be clear to establish clear pay bands linked to skill levels and competencies and review regularly for fairness and competitiveness
  8. Align with performance management practices for consistency and reinforcement
  9. Create a training strategy and programme for managers, senior leaders and HR
  10. Develop a change and communication programme to ensure a successful transition

Embrace technology: Advance

Technology holds the key to managing this successfully and our Pay Review tool Advance is a market-leading solution in this area. Advance puts you are in control, integrating and analysing your pay data in a way that time-hungry spreadsheets cannot do, and allowing you to customise, set and re-model your annual pay review according to defined or hypothetical pay principles. The configurable dashboards allow you to manage pay pot distribution and financial planning and track how pay is progressing against your budget and policies at the click of a button.

While many organisations are moving towards skill-based pay, it is likely to be a significant shift for most. The benefits are there for both organisation and employee but the transition is not straight forward and will always require a considered approach. 

If you need help or advice with pay review strategy, contact

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