Pay for skills - the right way 

An increasingly tight labour market and shift towards a skills economy is transforming how skills will be classified, developed and paid for in the future.

When asked what workforce initiative would deliver the greatest ROI in the next two years, over a third of executives put investments in upskilling and reskilling at the top of the list.

There is a clear mutual benefit to upskilling the workforce for both employers and employees. Employees are given the opportunity to learn the new skills they need to stay competitive and well paid. While employers get to develop the skilled workforce needed to take advantage of investments in technology to enable growth. But how can we move beyond simple linkage and find practical ways to deliver greater productivity from skilled people?

One objection to be overcome, often raised by the CFO, is that if we invest more in training our people, what happens if they leave? Meeting this objection head on requires two arguments. Firstly, intent to stay is often correlated with having opportunity to advance one’s career, so people are less likely to leave if you invest in their training. Secondly, in a tight labour market, where on it costs over 6 months’ salary on average to find, train and bring a new employee up to speed, it makes economic sense to reskill existing people.

When it comes to addressing how best to reward people based on their skills, versus the more conventional job role/job title basis, several other factors also need to be considered.

To start with, we need to understand how skills and tasks relate to each other now and how this may change in the future. This includes whether the tasks involved lend themselves to more of a ‘flow’ model or whether fixed roles will continue to be required. For example, can someone’s skills flow into a new project, gig or temporary arrangement, so that skills drive the basis for success? Or is there a benefit of encouraging employees to extend their skills through multi-skilling? Or is this really a situation where tasks are fixed and largely repetitive, where experience defines most outcomes?

When fewer than half (47%) of organisations acknowledge they are yet to develop an approach to classifying skills at any level within their company, it’s clear that many struggle to get going. Yet skills assessment and job architecture systems can help answer these questions. Fundamentally, employers need to ask themselves five questions:

  • What skills do we need and how can we incorporate a consistent way of talking about these skills (a skills taxonomy) within a common architecture?
  • What skill proficiency do we expect in the role?
  • How will we assess the skills that will drive our business forward?
  • How will we reward top skills?
  • How will we get going and operationalize the new skills-based strategy?

Answering the taxonomy question requires choosing between developing an in-house classification or using a market or industry standard approach. Increasingly, external taxonomies define the market for certain skills, so organisations are adopting external definitions to drive more agility in how they understand those skills.

Assessing proficiency of skill is becoming easier, thanks to platforms such as Mettl, an online talent and skills assessment system. Yet there is inevitably a degree of subjective assessment, comprising manager review, self-assessment and 360-style review, which can suffer from human bias as with any form of appraisal process.

When it comes to focusing on reward, how should we create and deploy appropriate pay-for-skills processes?

Starting with how we describe skills (the taxonomies) skills come in two categories. The codified variety, such as programming capability in R or Python or so-called ‘soft skills’ such as empathy and emotional intelligence.

The former – codified skills – are the easiest to segment and fit into reward systems. They can encompass professional skills or defined qualifications (a proxy for skill). For example, we know the going rate for a new graduate with a defined knowledge base or for someone with financial qualifications and 10 years’ skill in M&A transactions.

The second category – essentially behavioral skills – are becoming easier to codify and evaluate. Hogan Assessment and other psychometric evaluation techniques have brought rigour to this side of the equation. The market clearly values these soft skills, if you consider just how many job postings on LinkedIn now call for them. This means that as our ability to describe discrete skill sets improves via more standard taxonomies, it becomes easier to price them in the marketplace.

As our own organisation’s Mercer Skills Pricer demonstrates, an understanding of skills adjacencies, and the value of skills, empowers organisations to implement pay-for-skills in a more structured way, based on external data (salary surveys) and task requirements.

Quantifying the underlying value of the capabilities an individual brings and marrying this to the work that needs to be performed can also provide a basis for more agile reward practices. For many organisations this type of change will be a journey, with greater segmentation of reward based on how well a person’s skills match the required tasks.

Technology is driving change in the way we work and in the nature of the tasks to be performed. Tight labour markets and economic self-interest are also causing companies and individuals to focus more on skills. Installing requisite pay-for-skills systems is challenging but many employers are making the leap. IBM and Unilever are just two of the companies to have started implementing this approach.

HR has the chance to influence the next significant move in the productivity imperative or watch as talented people move away in search of opportunities to acquire new skills and secure better pay. Moving towards a pay-for-skills system isn’t an either/or choice, but it is a choice. Have your say on pay, in a new way.

If you want to discuss more about the practical ways to operationalise a new pay strategy, please get in touch with your Mercer consultant.

About the author(s)
Nick Starritt
Mark McGowan
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