Skill-Based Pay

Most leaders are probably aware of the fact that in most organizations pay is determined by the level of the job responsibilities.

Thus, CEOs make more than presidents, presidents generally make more than vice presidents, sales managers make more than assistant sales managers, and secretary IVs make more than secretary IIIs because higher-level jobs have more responsibilities.

Skill-based pay is different in that you are paid for the range, depth, and types of skills and knowledge you are capable of using, rather than for the level of responsibility you exercise in the job you currently hold.

The difference is important: it is conceivable that in an organization with a skill-based pay plan, a secretary III could be paid more per hour than a secretary IV, for instance, if it turns out that the person who happened to be the secretary III had more skills than did the person in the secretary IV job.

A skill-based plan was implemented at one organization’s manufacturing facility. The organization was trying to boost the flexibility of its factory workforce by implementing a pay plan that would encourage employees to develop a wider range of skills in order to make it easier to find employees able to take over any vacant position in the plant as the plant’s needs changed.

In this plan, the employees were paid based on their attained skill levels. For each type of job in the plant, workers could attain one of three levels of skill: limited ability (ability to perform simple tasks without direction), partial proficiency, and full competence (ability to analyze and solve problems associated with that job). After starting a job, employees were tested periodically to see whether they had earned certification at the next higher skill level. If so, they received higher pay even though they continued to hold the same job.

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This system allowed higher-skilled workers to receive higher pay than others doing the same job. Employees could then switch to other jobs in the plant, again starting at skill level one and working their way up if they so desired.

In this way, employees could earn more pay for more skills, particularly as they became skilled at a variety of jobs, and the company ended up with a more highly skilled and, therefore, more flexible workforce.

Skilled-based pay makes sense in terms of what we know about motivation. People have a vision of who they can be, and they seek to fulfill their potential. The individual development emphasis of skill-based pay helps employees to do exactly that.

Skill-based pay also appeals to an employee’s sense of self-efficacy in that the reward is a formal and concrete recognition that the person can do a more challenging job and do it well.

Leaders can use skill-based pay to motivate employees by encouraging them to be in charge of their own development and control their own work lives. In the end, in the skill-based pay plan, employees put their efforts to increase their skill base in order to get higher pay.

Skill-based plans are generally more accepted by employees because it is easy for them to see the connection between the plan, the work, and the size of the paycheck. Consequently, the plans provide strong motivation for individuals to increase skills that in the end benefit them and their organizations.

In accordance with most theories of motivationsOpens in new window, for pay or incentive plans to work, certain criteria are advisable, as follows:

  1. Rewards must be linked to performance and be measurable.
  2. The rewards must satisfy individual needs.
  3. The rewards must be agreed on by the leader and employees.
  4. The rewards must be believable and achievable by employees.