Skills-Based Pay Lawler and Ledford (1987) argued twenty-six years ago that skill-based pay was going to become an increasingly popular concept in compensation management. Ledford and Heneman (2011) define skill-based pay as "a compensation system that rewards employees with additional pay in exchange for formal certification of the employee's mastery of skills, knowledge and/or competencies." The authors juxtapose this against a "job-based pay system," defined as a system where employees are entitled to receive their pay even if they are not proficient in their position.

There are two issues with the concept from the outset. The first is that employees should be proficient in their position, since they have been given that position. It makes little sense for an employee to remain in a position with no skills. Trotter (2013) notes that a person's skills and competencies contribute to them receiving the position, at least in any company where merit is taken into consideration. Where there are companies that do not take merit into consideration -- union shops that still use length of service as the primary method of determining promotions -- the problem is likely the system of allocating people into jobs, rather than the system of pay. Furthermore, if a person is experienced and otherwise qualified, usually the skill can be added quickly.

The second issue is that skill-based pay as described is not mutually exclusive to job-based pay. The term "additional pay" indicates that skills-based pay is a supplement to job-based pay, rather than a replacement for it. That said, the question skill remains as to whether there has been increased adoption of skills-based pay in the past quarter century.

Skill-Based Pay

The idea behind skill-based pay is that is...

The first is that that the organization is motivating its employees to add skills, using the opportunity to earn more money as the carrot (Ledford & Heneman, 2011). These authors note that skills-based pay is not a monolithic system, either, but a loose terminology for a number of different systems that when combined form one of the most widely-used compensation systems. Some systems reward employees for gaining greater depth, other systems reward employees for greater breadth in their education. In either concept, the type of training or skills is identified and assigned a pay premium, so that an employee will receive a raise once the skill or ability is acquired.
Employees typically will leverage the carrot, because the financial rewards provide sufficient incentive to increase one's skills. They are usually proactive in this endeavor, indicating that either the financial reward is strong, or that there is some intrinsic motivation involved as well. The mere presence of the financial reward provides some concept of what the company would want to see, so the employee pursues the training knowing what will be valued -- in other words the desire to train was pre-existing and the opportunity to earn extra simply taps into that pre-existing motivation that the employee already had.

Effectiveness of Skills-based Pay

The issue of skills-based pay has not been studied extensively, despite the concept having some legs in the human resources community. Hon (2012) notes that there might be a connection between the psychological needs of the employees and the effectiveness of skills-based compensation plans. Where employees are creative, they are often motivated by skills-based pay, because they will often feel that there…