Human Resources – Skill Based Pay…Has it Caught On? Skill-based compensation systems sharply differ from traditional job-based compensation systems in that they focus on the development of multi-skilled employees. Proponents of skill-based systems believe that it leads to flexibility, increased productivity, greater job satisfaction, lower absenteeism and lower employee turnover. Though skill-based systems provide a number of advantages, they also present drawbacks. Nevertheless, this type of compensation system has evolved to become one of the dominant systems in both public and private sectors.
Human Resources -- Skill-Based Pay…Has it Caught on?
The skill-based pay structure sharply differs from the traditional job-based pay structure. Compensating an employee according to skill set, skill-based pay focuses on developing multi-skilled employees with an eye toward greater flexibility and productivity. Presenting both benefits and drawbacks, skill-based pay has developed to become one of the dominant compensation systems.
Compare and contrast a skill-based pay structure with a traditional job-based pay structure.
A traditional job-based pay structure compensates an employee according to the job he/she holds, sometimes with modifications dependent on the market (Mitra, Gupta, & Shaw, 2011). In contrast, a skill-based pay structure compensates an employee according to the employee's skill set: an employee with a greater skill set will receive higher compensation than another employee performing the same job but having a lesser skill set (Mitra, Gupta, & Shaw, 2011, p. 55). One strategic goal of the skill-based pay system is the development of multi-skilled employees who can perform a variety of tasks (Byers & Rue, n.d.). This system focuses on 3 categories of skills: horizontal, consisting of broadening skills for a range of tasks; vertical, consisting of obtaining higher-level skills; and depth, consisting of high-level specialized skills for the employee's existing job (de Silva, n.d., p. 12). This somewhat radical departure from the traditional system is based on the concept that multi-skilled employees increase organizational flexibility by enabling the organization to more easily handle "workflow irregularities" (Mitra, Gupta, & Shaw, 2011) and ultimately enhance the productivity of the organization (Mitra, Gupta, & Shaw, 2011). Furthermore, greater job satisfaction, lower absenteeism and lower employee turnover are expected to flow from skill-based pay, as the organization is encouraging and investing in the employees' individual development, skill-based pay systems tend to provide higher compensation and the skill-based system tends to result in greater job security (Mitra, Gupta, & Shaw, 2011).
Skill-based systems also present some disadvantages that are not inherent in the traditional pay system. First, by paying employees for personal development of skills, employers must pay greater compensation. Secondly, concentration on skill development means that some resources that would normally be devoted to production must be redirected, thereby lowering productivity. Third, as employees develop skills, there are necessarily inexperienced individuals performing tasks as they develop their skills, thereby decreasing productivity and increasing the risk of errors. Fourth, individual employees can "top out," reaching a point at which they cannot receive greater compensation for attaining even more skills. Fifth, skill-based pay involves greater administrative time and effort for effectively managing the pay system (Lawler & Ledford, 1986). Finally, there can be false expectations due to the fact that appropriate positions may not be available when an employee acquires desired skills (Byers & Rue, n.d., p. 57). Consequently, while skill-based pay carries advantages, it also presents some significant drawbacks to employers.
b. Were the authors correct? Have skill-based pay structures gained in popularity in organizations since 1987? Discuss in detail, providing examples.
Citing both advantages and disadvantages of skill-based pay systems, Lawler and Ledford maintained in 1987 that skill-based pay systems were "catching on" in the business sector (Lawler & Ledford, 1986). Byers and Rue agree that skill-based pay systems are growing in popularity, though their effectiveness depends on their operation and implementation (Byers & Rue, n.d., p. 56). In fact, de Silva maintains that globalization has increased the need and use of skill-based compensation systems and that public and private employers in Japan, Korea and Singapore have increasingly moved to skill-based systems (de Silva, n.d., p. 3). In addition, Mitra et al. concluded from their studies of skill-based pay systems that 98 of 240 facilities in their sample employ some form of skill-based pay, though these tended to be younger, smaller organizations (Mitra, Gupta, & Shaw, 2011). The DeGarmo Group gives an even more glowing report of skill-based pay's usage, stating in 2008 that 30% - 67% of all Fortune 1000 companies employ skill-based compensation systems (Daly, 2008). Finally, Ledford maintains that skill-based pay is one of the most widely-used compensation plans, employed by such notable private sector organizations as: Mother Nature's Best (Ledford, Jr., 2011, p. 2) and Proctor & Gamble (Ledford, Jr., 2011, p. 5). In sum, though skill-based pay is not the only compensation used by organizations, has clearly caught on and is one of the most dominant plans implemented since 1987.
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