Skill-Based Pay



Skill-based pay refers to a pay system in which pay increases are linked to the number or depth of skills an employee acquires and applies and it is a means of developing broader and deeper skills among the workforce. Such increases are in addition to, and not in lieu of, general pay  increases employees may receive. The pay increases are usually tied to three types of skills:
  • horizontal skills, which involve a broadening of skills in terms of the range of tasks
  • vertical skills, which involve acquiring skills of a higher level
  • depth skills, which involve a high level of skills in specialised areas relating to the same job.
Skill-based pay differs in the following respects from traditional pay systems which reflect skills differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled workers:
  • ¬†Skill-based pay is a person-based and not a job-based, system. It rewards a person for what he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum skills, but pay progression is directly linked to skills acquisition (rather than to general pay increases applicable to all) .
  • It rewards (and therefore emphasizes) a broad range of skills which makes the employee multi-skilled and therefore flexible.
  • It positively encourages skills development.
  • A skill-based pay system may not necessarily reflect how well the skill is used, as this falls within the performance component of pay. But there is nothing to prevent injecting performance criteria into the system. In such cases the system will be more performance oriented than a structure which merely recognizes different rates of pay for skills.
  • The system needs to be underpinned by opportunities for training which is critical to the success of the system. The traditional structure is not dependent on such opportunities.

Reasons For Skill-Based Pay


More than ever before in industrial relations history a commonality of interests in the skills of employees has developed between employers and employees. Skills provide employees with a measure of protection against unemployment, as well as opportunities for higher earnings. At the same time, skills provide employers with an important means of achieving competitiveness.

Many countries today are seeking to advance to more technology and skill-based industries, while others have become (or are becoming) 'post
industrial1 societies, in which the application of knowledge determines productivity, performance and competitiveness. Comparative advantage based on. for instance, cheap labour or raw materials, has declined in importance relative to competitive advantage based on the ability to add value to a particular resource or advantage. Such comparative advantage partly (often largely) depends on people - their standards of literacy and education, work attitudes, value systems, skills and motivation. Critical today is the ability to innovate and develop clusters of competitive enterprises in particular industries.
For the more industrialized countries this means 'capturing' some of the key industries of the next century - microelectronics, biotechnology, new materials science industries, telecommunications, civil aviation, computers and software, robotics and machine tools and entertainment. An employee with skills is most flexible and productive when he develops a broad range of skills, is able to learn the next higher skill, develop analytical skills and is also able to work in a team. Important aspects of today's skills package include multi-skills, cognitive skills, interpersonal and communication skills, positive work attitudes and quality consciousness. Training is no longer only for current competence, but is also to prepare for the next stage of skills. Thus pay systems which promote current and future skills needs are increasing in importance among employers.

The impact of rapid technological change, the increasing globalization of product markets, greater customer choice and the emphasis on quality* necessitate a frequent updating of skills, and flexibility to respond to rapid changes in the requirements of markets. A flexible workforce, which is one that is multi-skilled, ensures that production is not interrupted due to the narrow skills of workers, and that workers are themselves responsible for the quality of products.


Advantages Of Skill-Based Pay

Among the advantages of skill-based pay are the following:
  • It contributes to job enlargement and enrichment by breaking down narrow job classifications.
  • Flexibility is increased by encouraging the performance of multiple tasks. It enables job rotation, and filling of temporary vacancies due, for instance, to absenteeism. It therefore contributes to a leaner workforce.
  • It enhances productivity and quality through better use of human resources.
  • It facilitates technological change, which may meet with resistance in a purely job-based system.
  • The higher pay levels, continuous training, and job enlargement through the broadening of skills, tend to reduce staff turnover.
  • Elimination of unnecessary jobs can result from a workplace having broad, rather than narrow, skills. It also reduces the need for supervision.
  • Job satisfaction is engendered through employees having greater control over the planning
  • and implementation of their work.
  • Broadening of skills leads employees to develop a better perspective of operations as a whole.
  • It is an incentive for self-development.
  • It provides employment security through skills enhancement.
  • It reduces the need to look to promotion to higher levels (which are always limited) as the only way to enhance earnings, and it facilitates the planning of an employee's career development path.
  • Since the reward flows from the application of a skill and it does not reduce opportunities for others to similarly increase their skills and earnings, there is likely to be less competition among individuals.
  • Since the pay increases on account of skills are linked to a measurable standard, the criticism of subjectivity often associated with performance appraisals and individual-based performance-related pay, is avoided


Facts [+]

"Red-circling" refers to freezing a highly tenured or highly skilled employee's base pay in the event that the pay rate is above the established range maximum assigned to the job grade or classification. A red-circled employee is usually not eligible for further base pay increases until the top pay rate for their job grade/classification is increased.