Skill Based Pay Pros & Cons (Compensation method explained)

5 of September, 2022

When deciding on compensation models, things can feel a little chicken-and-egg. How to save time on payroll variations? Should workers be paid for the skills they’ve been certified to do or paid for their competence in the task at hand? If you embrace a skill based pay system, how do you keep motivation high? If you don’t embrace skill-based compensation, will workers be under-trained? Find out the answers in the following article.

Skill-based compensation origins

In the early days of manufacturing, skill-based compensation encouraged workers to acquire new knowledge. In a factory setting, it made sense to promote people who could make a better widget, teach others to make a better widget or re-engineer the widget entirely. More recently, tech fields have taken a similar approach. Certifications for particular programming languages or product management techniques assured human resource teams that new hires were qualified for a job and gave sitting employees a way to prove their continued worth.

In both cases, skill-based pay finds its merit in organizations that are flat–that is, there is a small layer of leadership but a large layer of people who are hands-on with the product. In flat organizations, acquiring new skills allows workers to deepen their knowledge while continuing to climb the pay scale.

Skill-based pay benefits

Autonomy

In a skill-based pay environment, autonomy rules. Employees grow in their role by participating in company-funded training and certifications, or they don’t.. Either way, employees direct their own destiny. 

Retaining employees

Retention in skill-based pay environments is generally higher as employees report more satisfaction in overall management of their work life. Since salary adjustments are based on skill, office politics shrink. Working with middle managers, who sometimes act as micro managers, is simply not a part of the job. 

Employees and self improvement

Improving skills and deepening knowledge base gets rewarded by an increase in salary in skill-based pay systems. This is great for self-starters and those with an entrepreneurial spirit. Their actions cause a very specific reaction from their employer, namely bumps in pay. 

Skill based pay drawbacks

Skill relevance

Sometimes employees may train for a skill that seems relevant at the time, but won’t be using it in the long term. In a skill-based system, the employer is still paying for that knowledge even if it is irrelevant to the task at hand. 

Salary inequity

If two people work doing the same job but their salary is different, it doesn’t feel fair, right? But in a skill-based system, one person may have more certifications than the other and therefore find themselves at a higher pay grade. Pay variations are an intrinsic part of skill-based pay. 

Higher administration costs

Keeping track of each employee and their individual training and certification history is labor intensive for human resource administrators. Really it’s a job unto itself. Payroll variation tools, like the one offered by Sesame HR, can help manage the data, but without a good tool, the admin costs in a skill-based pay system can be significant.