Pay for Skills, Knowledge, and Competencies
- LAST REVIEWED: 03 December 2019
- LAST MODIFIED: 28 March 2018
- DOI: 10.1093/obo/9780199846740-0140
- LAST REVIEWED: 03 December 2019
- LAST MODIFIED: 28 March 2018
- DOI: 10.1093/obo/9780199846740-0140
Plans that pay for skills, knowledge, and competencies (SKCs) reward employees with compensation in exchange for formal certification of the employee’s mastery of applicable SKCs. Skill is expertise in performing tasks; knowledge is acquired information used in performing tasks; competencies are more-general skills or traits needed to perform tasks. Pay for SKCs is a form of person-based pay that rewards characteristics of the person rather than the job. More common job-based pay is based on the job the person performs, and the employees receive that pay even if they are not proficient in their position. There are many types of SKC pay plans, some of which have been used for decades. These include skilled-trades systems for blue-collar workers and the dual-career ladder for scientists and engineers, both of which reward greater specialization. Others are familiar only within specific corners of the economy. Plans vary in their goals, types of SKCs rewarded, methods of payment, conditions that fit each type, design, and implementation processes. The variety of SKC pay plans and their unfamiliarity lead most authors to devote an unusual amount of attention to definitions and examples. Ledford and Heneman 2011 outlines a useful two-dimensional typology of SKC pay plans. One dimension entails the use either of bonus or base pay (salary or wage) rewards. The second dimension rewards for SKC depth (for specialization), breadth (for flexibility), self-management (for lean management structures), or a combination of these. The oldest and most-familiar plans use base pay increases to reward greater depth of skill. Examples of depth systems include the apprenticeship system for skilled-trades employees, dual-career ladders for scientists and engineers, and progression plans for information technology. A type most often termed “skill-based pay” (SBP) involves base pay, emphasizes breadth, but also usually rewards some degree of depth and self-management SKCs as well. These plans are often used for front-line employees in manufacturing, call centers, and back-office processing operations. The plans promote employee flexibility, some degree of specialization, and self-management. The vast majority of research on pay for SKC has focused on these multidimensional base pay plans, often in high-involvement organizations. Finally, bonus SKC plans can be very adaptable to changing conditions. The primary use of bonus plans is by the US military (see Plans in Government outside Education). There is very little research or writing on bonus-oriented plans, despite their promise. It is likely that different types of SKC pay plans have different reasons for adoption, effects, implementation issues, and contingency factors. However, no comparative research exists on different types of SKC pay systems that address these issues. There is more research on skill-based pay plans for nonmanagement employees than for any other type. Clearly, there are many opportunities to round out the research on SKC pay.
Armstrong, Michael, and Duncan Brown. “Relating Competencies to Pay: The UK Experience.” Compensation & Benefits Review 30.3 (1998): 28–39.
Proposes a typology of competency pay systems. One dimension concerns whether the plan is based on jobs, roles, or the person; the other concerns use for evaluation (pay level) or pay adjustments (increases).
Lawler, Edward E., III. “Paying the Person: A Better Approach to Management?” Human Resource Management Review 1.2 (1991): 145–154.
Argues that person-based pay, such as skill-based pay can overcome the limitations of job-based pay and offers the potential for competitive advantage. Outlines six design steps. Discusses challenges and research opportunities.
Lawler, Edward E., III. “From Job-Based to Competency-Based Organizations.” Journal of Organizational Behavior 15.1 (1994): 3–15.
Argues that competency-based organization designs potentially are superior to job-based designs in mid-1990s organizations. Examines a number of aspects of competency-based designs in addition to skill-based pay, including work design, selection, pay for performance, training, and careers.
Lawler, Edward E., III. “Competencies: A Poor Foundation for the New Pay.” Compensation & Benefits Review 28.6 (1998): 20.
Critical of using competencies rather than skills as the basis for pay because the concept of competency is ambiguous and invites use of invalid and discriminatory traits as competencies. Argues for use of person descriptions that specify what the person should know and do.
Ledford, Gerald E., Jr. “Paying for Skills, Knowledge, and Competencies.” In The Compensation Handbook: A State-of-the-Art Guide to Compensation Strategy and Design. 6th ed. Edited by Lance A. Berger and Dorothy R. Berger, 135–141. New York: McGraw-Hill, 2015.
Discusses four types of SKC pay, and, for each type, what each SKC rewards, the form of pay, concrete examples, conditions for best organizational fit, and common problems. Notable for discussing how these dimensions vary for different forms of SKC pay.
Ledford, Gerald E., Jr., and Herbert G. Heneman III. Skill-Based Pay. Alexandria, VA: Society for Human Resource Management, 2011.
Best overview for practitioners. Offers a typology of SKC pay plans, with examples of each type, use for different populations and by different types of organizations, research on effectiveness, goals and contingency conditions, and implementation challenges.
History and Trends
There was little academic attention to SKC pay until the 1980s. The first academic journal article relevant to the topic is Jenkins and Lawler 1981, and Lawler 1981 is a classic book on pay that includes a discussion of pay for skills, focusing mostly on use in high-involvement plants. The first published survey of multiple plans is a generally favorable study of twenty plans (Gupta, et al. 1986). During the late 1980s and early 1990s, a number of practitioner-oriented articles and case studies appeared. Compensation & Benefits Review published a special issue on skill-based pay (SBP) that includes three major case studies (see Ledford 1991). Jenkins, et al. 1992 remains the most comprehensive survey study to date; this study, covering ninety-seven plans, was sponsored by the American Compensation Association. During the 1990s, attention shifted to competency pay plans for professionals and managers, such as O’Neal 1995 and William M. Mercer, et al. 1996, and competency pay has been a focus of many articles since that time. Ledford and Rivers 2015 provides an overview of research themes on SKC pay since 2000, finding that there was a steady if not heavy stream of thirty studies during that period, with evidence of a maturing of research as topics became more focused and theory driven.
Gupta, Nina, G. Douglas Jenkins Jr., and William P. Curington. “Paying for Knowledge: Myths and Realities.” National Productivity Review 5.2 (1986): 107–123.
Reports on data from the first survey study of SBP plans, with information from twenty organizations. Results were generally positive.
Jenkins, G. Douglas, Jr., and Edward E. Lawler III. “Impact of Employee Participation in Pay Plan Development.” Organizational Behavior and Human Performance 28.1 (1981): 111–128.
First academic-journal study of an SBP plan, focusing on the benefits of employee participation in pay plan design.
Jenkins, G. Douglas, Jr., Gerald E. Ledford Jr., Nina Gupta, and D. Harold Doty. Skill-Based Pay: Practices, Payoffs, Pitfalls and Prescriptions. Scottsdale, AZ: American Compensation Association, 1992.
Monograph based on a study of ninety-seven SBP plans, covering a wide range of topics, including reasons for adoption, plan characteristics, effects, and implementation issues.
Lawler, Edward E., III. Pay and Organization Development. Addison-Wesley Series on Organization Development. Reading, MA: Addison-Wesley, 1981.
Includes some of the first extended discussions of SBP. Treats it as a person-based pay system used for many professionals and some production employees. Discusses its use as part of an organization design for a high-involvement manufacturing plant.
Ledford, Gerald E., Jr. “Three Case Studies on Skill-Based Pay: An Overview.” Compensation & Benefits Review 23.2 (1991): 11–23.
Introduction to a special issue that includes detailed case studies of SKC pay from Honeywell, General Mills, and Northern Telecom, providing a general framework for analysis of the cases.
Ledford, Gerald E., Jr., and Charles Rivers. “Research Update: Pay for Skills, Knowledge, and Competencies.” Workspan, June 2015: 10–12.
Overview of findings from thirty papers published between 2000 and 2015, examining common themes and areas of omission in these studies.
O’Neal, Sandra. “Competencies and Pay in the Evolving World of Work.” ACA Journal 4.3 (1995): 72–79.
Practitioner-oriented article that links use of competencies to changes in work, the labor market, and business needs. Contrasts job-based, role-based, and contribution-based competency models and suggests organizational conditions relevant to each. Argues for competency pay to support these approaches.
William M. Mercer, Hewitt Associates, Towers Perrin, and Hay Group. Raising the Bar: Using Competencies to Enhance Employee Performance. Scottsdale, AZ: American Compensation Association, 1996.
Large-scale survey study on use of competencies for human resources (HR) systems found use for compensation in fifty-four firms and use for performance management, usually including compensation decisions, in seventy-three others. Most plans were so new that strong conclusions about plan effectiveness were not possible.
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