by Effective Compensation, Incorporated
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.
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.
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.
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.
·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.
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