Skill Based Pay

Published 03 Jan 2017

The current competitive business environment demands that employees possess a new set of skills and knowledge. In order to be effective, employees need to complement their knowledge with technical and inpidual competencies varying from a number of advanced knowledge including the ability to make independent judgment in order to reach amicable decisions. However, most institutions still perceive job positions as considerably above clerical jobs which form the underlying entry-level recruitments. Unless these institutions recognize the necessary skills required in the ever increasing and sophisticated business functions by appropriately providing compensation and training, the probability that they would remain at a disadvantaged position competitively is high.

Moreover, infective and inadequate staff presents high risks to many organizations. To ensure that employees acquire these essential skills, organizations should develop a compensation model that is based on the skills and knowledge of the employees in an organized skill ladder accompanied with development and training programs (Gustafson, 2000).

Organizations are increasingly seeking alternative compensations schemes in order to promote competitiveness within their employees. Several organizations have migrated from the traditional compensation structures based on job to skill-based compensation structures. The traditional compensation structures take into account the characteristics of the task to be accomplished, while skill based compensation structures emphasizes on the attributes of the employees related to work. These attributes include knowledge, competencies and skills.

Rewarding these attributes enable organizations to effectively draw the attention of their employees on development opportunities and consequently enhance self-directing behavior. The self-directing behavior of employees and improved skill base enable organizations to improve flexibility of their workforce and the overall productivity of the organization (Milkovich & Newman, 2008).

The purpose of this is therefore to examine the new compensation model commonly known as skill-based or knowledge based pay, its benefits and practicability of implementation.

A new compensation model

Conventional compensation pay systems are based on the position an employee is assigned without taking into account the new skills and knowledge that may be acquired by the employees. In order to earn more wages and salaries, employees must undergo promotions into higher positions in the organizational ladder which is arranged in a vertical hierarchy. Many human resource specialists have suggested alternative compensation models such as the new skill-based compensation scheme to replace the existing traditional models. Under this model, employees would be paid based on the additional skills and knowledge acquired that can improve the overall performance of the employee and consequently benefit the organization.

Skill-based compensation plans recognizes the in-depth of skills and knowledge acquired by the employees during the course of their work. The foundation of this compensation model is based on paying employees more money as they obtain and demonstrate additional skills that are of value to the organization (Silva, 1998). There always exists a distinction regarding skills and competencies as there are lack of consensus on how to define them. However, there is an inherent agreement that they are relative to inpidual and not the position they hold and therefore must be measurable. The differences existing between skill and competency revolve around the realm of skills require to be successful in a specific job and the enabling skills required by inpiduals in accomplishing their work.

Skills therefore refer to the technical expertise while competency refers to the enabling skills. The analysis of skill-based compensation model therefore comprises both skills and competencies. A skill-based compensation model was a new pay model coined by Schuster and Zigheim. The underlying concept behind this new payment model is its focus on business performance based on an inpidual rather than the job. In order to achieve organization’s goals, organizations usually complement skill-based compensation with a variable pay mechanism. Skill-based payment models are always unique to each organization and therefore there is no standardized design for these schemes (Schuster & Zingheim, 1992).

To successfully implement skill-based compensation plans, organizations need to determine a definite skill channel and then develop educational and training programs responsible for enabling the employees to proceed along those channels. Under this compensation scheme, employees are assigned positions and their compensation is calculated on the basis of demonstrated skills and competencies (Lawler & Gerald, 1992). For instance, a new recruit would start from a trainee position or a support role. The employee skills and work progress are then assessed periodically.

Upon determining that the employee has acquired extra competencies through experience, on-job training and education, the employee automatically qualifies for additional compensation based on this additional value to an organization without taking into account new job assignments. Organized competency development plans associated with skill based compensation schemes gives employees and organizations increased flexibility.

This makes it possible for periodic rotations from one duty to another and thereby eliminating the possibility of job stagnations and consequently ensuring flexible responses to unanticipated shifts in organizations and changes in staffing. An employee with broad-based skills, for instance, would be assigned a wide range of tasks such as billing, bargaining balances for self pay, holding a temporary position in order to reduce the accumulation of pending jobs (Gustafson, 2000).

Practicability of implementation

Successful implementation of skill-based compensation model depends on a number of critical factors. These factors include effective skill determination; education and development commitment; and sufficient funding. In order to effectively determine the require skills, organizations should carry out a comprehensive examination of the available revenue-cycle processes. This examination should identify all the necessary technical competencies including such knowledge as billing, mathematical calculations in prorating balances, and compliance prerequisite. The audit of the available skills should also cater for the fundamental necessities such as customer service, problem solving, scheduling of tasks and self management.

In order to foster continued commitment to education and development programs, organizations should assists employees in obtaining additional skills. In order to achieve technical and other desire competencies, organizations should conduct training programs on maintenance and development. Additional competencies would include management of time, planning and scheduling of personal work and efficient bargaining and communication. Establishment of actual mechanisms for accessing the skills and learning should be thoroughly undertaken. Successful implementation of skill-based payment model is a strategic investment plan and therefore not designed to offer immediate earnings on investment.

The fundamental goal of this compensation model is executing a cost-effective and a customer oriented revenue cycle. Achieving this objective relies heavily on the cooperation and participation of employees. Nurturing this participatory culture of the employees calls for a long standing plan and adequate funding to sustain the development process (Milkovich & Newman, 2008).

Benefits of skill-based compensation model

Successfully implementing skill-based compensation schemes includes improved employee commitment, improved customer service and increased problem and conflict identification and resolution. As a result of payment model based on skills and competencies, employees become more devoted to self-improvements. This is because the organization encourages them to develop a wider outlook of their roles. This enables them to concentrate on achieving more results and effectively respond to changes in the working environment. Additionally, the employees develop a greater loyalty and obedience to institutions because these institutions have recognized their value.

Compensation model based on skills enhances customer services since the employee base has shifted from specialized employees to multi-skilled professionals capable of dealing with broader customer issues. This has helped in reducing the gap between business institutions and their customers. Problem and conflict resolution has been made much easier by skill-based compensation schemes. This is because the focus of employees has shifted from performing specialized tasks to performing a wide range of tasks using multiple skills. This has enabled employees to picture out and analyze the operation of the whole organization.

After solutions to problems are effectively identified by employees, the employees could implement them with little or no intervention at all from the management. The development of effective outcomes of revenue-cycles depends heavily on the performance of employees. These employees therefore needs to be highly skilled and sufficiently motivated and compensated in order to realize such results (Ledford, 1995). In conclusion, organizations should therefore employ skill-based compensation schemes and training mechanisms in order develop such employee base.


  • Gustafson, B.M. (2000). Skill-Based Pay Improves PFS Staff Recruitment, Retention, and Performance. Retrieved March 31, 2009
  • Lawler, E.E. & Gerald, E.L. (1992). A Skill Based Approach to Human Resource Management. Center for Effective Organizations, University of Southern alifornia
  • Ledford, G.E., Jr. (1995). Paying for the Skills, Knowledge, and Competencies of Knowledge Workers. Monograph; CEO Publication G 95-6 (282)
  • Milkovich, G.T. & Newman, J.M. (2008). Compensation. ISBN: 978-0-07-296941-2. McGraw-Hill
  • Schuster, J. R., & Zingheim, P. K. (1992). The New Pay. San Francisco, California: Jossey-Bass Publishers
  • Silva, S. (1998). Performance-Related and Skill-Based Pay: An Introduction. Retrieved March 31, 2009 from
Did it help you?