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Skill
Based Pay
A Brief Overview
by Effective Compensation, Incorporated
What is Skill Based Pay?
The payment of additional salary or hourly pay to
employees for learning, and being able to perform,
additional tasks or skills. It is sometimes expanded to
compensate employees for demonstrating relevant
competencies.
How does Skill Based Pay work?
Jobs, or groups of jobs, are divided into component
parts. Employees are hired into a base job level that
presumes that they either know or will develop proficiency
in a core set of tasks. To encourage them to learn
additional skills, the organization provides additional
training on other skill sets and commits to raise their
base pay level once they demonstrate a satisfactory level
of competence with each skill set.
Why was Skill Based Pay developed?
In its simplest form, Skill Based Pay has been used to
allow an employee to "cover" for an absent
co-worker. It has been used since at least the 1940's for
assembly line workers. It has recently been
"re-discovered" as organizations attempt to
downsize and cross-train workers. "Quality"
oriented organizations use the cross training process to
help employees understand the broader organization and
product demands. Skill Based Pay is often used to
stimulate employee interest in training that will provide
them with a broader focus.
What obstacles does Skill Based Pay face?
While Skill Based Pay has significant benefits,
successful programs need to address the following issues:
Skill Block Definition: Describing reasonable sized
skill sets requires thoughtful attention from people very
familiar with the job to group skills into logical, useful
clusters. Skill sets should be significant enough to
demonstrate real competency differences, but small enough
to allow them to be mastered within a reasonable time
frame.
Skill Set Pricing: A rational process needs to be
employed to determine how large a salary increase (or
incentive) is appropriate for each skill set. This may
relate to the competitive value of the skills, the amount
of effort required to perform the additional tasks, the
difficulty of learning the skill set, or some other
process accepted as reasonable by those affected.
Skill Validation Tests: In order to verify that the
skills are at designated levels, it is necessary to
develop credible tests to validate the employee's
competency. The tests typically include comprehension
(including theoretical background), sample performance
tests (including precision and speed), and troubleshooting
abilities.
Skill Currency Assurances: Many organizations
require that employees periodically either actually
perform the tasks for specified time intervals or take
"re-certification" tests to assure that they are
maintaining the skills for which they are being
compensated.
Technological Changes: As organizations change, the
necessary skill sets change. The entire Skill Based Pay
process needs to include an ongoing process to assure that
the skills being compensated for still have value to the
organization.
Training Cost/Time: By their very nature, Skill
Based Pay programs encourage employees to focus on
learning new activities rather than performing their base
job. This results in "downtime" that must be
covered by other employees and often also requires trainer
time from elsewhere in the organization. Many
organizations limit the amount of time that employees can
spend on training, and/or require them to spend a
specified amount of time before they can train or take the
test for a new skill set.
Payroll Costs: If every employee becomes proficient
in all of the tasks, the organization not only would have
thorough back-up capacity, it would have higher payroll
costs than it would have if employees only knew their own
job. In most cases, the organization does not need every
employee to know every job. Accordingly, it must decide
how much redundancy is beneficial. Many organizations
limit the number of employees that they are willing to pay
for certain skill sets in order to control payroll
expense.
Legal Considerations: Organizations need to
consider the potential legal exposure that may accompany a
Skill Based Pay program. Firms should be sure that the
process does not discriminate against employees in
protected classes and that they compensate non-exempt
employees for on-the-job training time.
Where does Skill Based Pay Work?
Although its genesis has been in blue collar
environments, Skill Based Pay is being successfully used
in a wide cross section of non-exempt and professional
positions. It is even being used for managerial level
positions, although it is often called
"responsibility based pay" when managers
demonstrate the competence to oversee multiple functions.
The key elements that appear to be critical for Skill
Based Pay to work include:
-- thoughtful program design that stays current
with changing technologies,
-- carefully designed skill elements, that are
accepted as relevant and reasonable both by management
and the employees covered by the program,
-- consistent, even handed program administration
that is seen as operating the program with integrity,
and
-- interested managers that support the
cross-training intent of the program.
What is the best way to implement a Skill Based Pay
program?
ECI recommends, once the decision to consider a Skill
Based Pay program has been made, that the organization use
a participative task force to
- review the components of the various jobs being
considered,
- identify specific skills where 1) the company would
benefit by having more employees that could perform
the skill and/or 2) current skill levels are
insufficient to meet either the quantity or quality of
desired performance levels,
- determine whether a valid training and certification
program exists or could be developed for the skills,
- determine the relative value of the skills - which
requires selecting a valuation process,
- determine how the defined skill sets, certification
process and relative values relate to employee
perceptions and concerns,
- develop program cost estimates under various
scenarios,
- develop an implementation process, including
determining:
-- how to handle employees who already have the
skills,
-- whether any adjustments to base pay levels are
required,
-- what "safety" procedures will be used to
assure that program abuses do not occur,
-- how the program will be communicated to employees
and supervisors,
-- what monitoring and adjustment procedures will be
used, and
--
who will be responsible for the program.
- obtain management approvals, and
- implement the program, perhaps on a test basis.
How long does it take to implement Skill Based Pay?
While the answer will clearly vary based on the number
of jobs included and the level of commitment to the effort
made by the organization, Skill Based Pay programs
normally require four to six months to implement. This is
partly due to the number of issues that must be addressed.
More significantly, time is required to obtain input from
a broad number of participants who know the existing jobs
and who will be interested in the program. Programs that
are developed in a participatory manner are much more
likely to succeed since the program elements are more
likely to be perceived as relevant and reasonable.
What Alternatives to Skill Based Pay Exist?
Presuming that the objective is to increase employee
knowledge of job skills and to provide increased work
force flexibility in covering needed functions, ECI
identifies the following alternatives to Skill Based Pay:
- Job Rotation: By merely having employees do
other jobs periodically, the organization can be sure
that more than one person knows the job. Psychological
studies have shown this form of job enrichment
increases employee's interest in the job even if no
extra pay is involved.
- Certification/Training Incentives: Employees
completing approved internal or external training
programs might be given cash bonuses or other
recognition awards (like the "Mr. Goodwrench"
program) to recognize their increased value. These are
typically one-time payments that do not increase the
employees salary.
- Merit Pay: If the training and flexibility is
worthwhile and benefits the organization, it is
possible to use a traditional merit pay approach to
reward the employee's for their increased value.
- Promotions: By developing a career ladder
that allows employees to be promoted to higher levels
based on the number of skills they have and their
performance on the job, the concepts of a skill based
pay program can be incorporated into a traditional
salary program through the definition of the various
job levels.
Effective Compensation, Incorporated is an
independent consulting firm, providing a full range of
compensation-related services on a cost-effective basis. We
assist organizations in becoming more effective through
improving their employee cultures. If you are interested in
learning more about how ECI can assist you with
performance-oriented pay or other compensation-related issues,
please contact:
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