“Companies using a skills-based approach are a step ahead in attracting and paying for desired skills, leading to enhanced business alignment and agile growth potential.”


The discussion around skills-based pay continues to gather momentum. While most companies still rely on the traditional approach of paying employees based on the job rather than on the different skills that an individual brings to the organization, there is a clear and increasing desire to factor skills into the rewards equation.


Skills take many forms. Soft skills like personality traits, communication methods and social intelligence can be applied across many roles; hard or technical skills such as data analysis or coding that are specific to a role or group of roles; and leadership skills, or qualifications and certifications. A combination of these represents the overall skillset that an individual possesses, enabling them to complete the tasks required for a given job. Mercer believes that cataloguing, recognizing and rewarding these skills has the potential to offer a significant competitive advantage to early adopter companies. Understanding skills benefits the employer and employee. Companies that have a clear view of the skills required for a role can leverage that knowledge to determine the best compensation for those skills. Nurturing and aligning much-needed skills with organizational goals helps employees fast-track their career and translates into a better realization of business strategies.


Mercer recently conducted a survey which indicated that despite the increased focus on skills, most employers have a long way to go to effectively implementing skills-based practices at scale. In this article, I’m highlighting some of the survey findings that relate to market practices as it relates to skill management and paying for skills. 


In a pandemic-impacted world, the need and importance of skills has been emphasized even further.



The Pandemic Effect


COVID-19 has been a major catalyst for companies to start considering skills as a vehicle for redeployment of existing talent pools and becoming more agile in the post-COVID world.


In Mercer’s recent survey of over 430 companies, more than half (57%) of the participants indicated they are using some method to classify skills.

Graph showing two engines with the values of 57% and 43%

The skills narrative has become imperative and companies are increasingly appreciating the need to implement skills taxonomies – the first step in realizing a skills-based approach to use-cases such as skills-based hiring, skills-based learning, and internal skills development practices.


In other words, organizations benefit from understanding which individuals possess particular skills as it makes it easier to move them seamlessly from one role to another that requires a similar skill set.


As a result, a skills-based approach has the potential to save time and hiring costs with an effective skills framework that redeploys existing talent and nurtures employees’ diverse skillsets.


Skills-based Approach: Things to Overcome


However, the majority of companies are still some distance from realizing the full potential of a skills-based approach. Indeed, the implementation of a skills taxonomy is simply the first, foundational step.


Among the companies in our survey that have an approach to classifying skills, 82% still rely on in-house customized solutions which are often housed in sub-optimal tools (e.g., Excel) or internal database systems.


Companies need a dynamic and robust skills-based approach powered by advanced technologies to help attract, retain and nurture the desired skills that fit their business strategies. But our survey shows that 38% of companies are not monitoring skills and 50% rely on informal ways to monitor market demand or skills availability.


Put simply, most companies rely on traditional or informal methods such as conversations with recruiters or browsing through third-party employment sites to find information or candidates.


Furthermore, our survey data indicates that companies often fail to consistently apply premiums for key skills. In fact, more than half of the respondents (57%) do not draw any link between skills and premium, while only 1 out of 10 (11%) companies do so on a formal basis.


Thus, the integration of skills into business strategy is not without challenges.

Three circles showing values. Highest value of 50% for "Yes"


Our survey finds that complexity and change management (50%); requirement for management development (49%); and perceived difficulty of managing a skills-based reward program (44%), are the top three barriers to a skills-based approach to pay.

Bar graph with multiple values for barriers to move to stronger skills-orientation rewards

Understandably, these perceptions need to be overcome. Identifying and hiring the right talent has become imperative for any organization in the post-pandemic reshuffle. 



Key Elements to a Successful Skills-based Approach


There are a few key elements (consistency, proficiency levels, assessment tests ) that businesses need to consider when applying a skills-based approach in their organization. But before you roll out across the organization, we recommend starting with a limited pilot focused on a small group of employees or department to ensure what will work.


Consistency is key. Nearly 6 out of 10 (59%) companies surveyed who have an approach to classifying skills track them across all employee groups. Companies also frequently report the need to develop proficiency levels corresponding to each skill, enabling them to dynamically track the usage and growth of skills in their employees, as well as help them create a formal linkage between the skills needed in an organization and the pay premiums associated with them.


Presently, assessment mostly happens in the form of assessment tests or supervisor/manager feedback. However, this is increasingly changing with the launch of tools such as Mercer | Mettl, helping companies create customized assessments across the entire employee lifecycle.


In our survey of more than 430 companies, 77% have defined different levels of proficiency for skills, with a majority (45%) of companies doing this for 4 to 5 levels. Of these companies, 63% report performing some form of assessment against the relevant skills expectation, whether continuously, periodically or on an ad hoc basis.


IBM told us that performance alone cannot be the tool to measure employee compensation. Skills is also an important factor, which needs to form the basis of an employee’s compensation/reward. 



Going Forward


A post-COVID workplace will look different and companies will need to ensure they have the right skills to pivot effectively in the face of uncertainty. COVID-19 remains an evident catalyst for the development of new organizational agility.


Technology will undoubtedly be a critical factor.


Our survey finds that nearly half (49%) the companies are incapable of forecasting the impact of technology on their need for certain skills and the impact to their headcount.


Emerging technologies such as cloud computing, artificial intelligence, blockchain, and 5G are disrupting and revolutionizing the way we do business. In addition, in such times, it is vital for companies to ensure they remain relevant and are equipped with the right talent and technologies to pivot effectively when needed.


At Mercer, we recommend that companies start with these four considerations, as you plan to incorporate skills-based pay into your organization.


  • Alignment – Align the new pay-for-skills approach with core business strategies.
  • Internal skills data – Developed a skills taxonomy that covers all employee groups and has a transparent framework to regularly assess and update.
  • External skills data – Find quality data to help determine in-demand skills for a particular job in the marketplace.
  • AI to execute at scale –Implement artificial intelligence and machine learning tools that enable skills analysis and determine pay for in-demand skills.



AI Powered Future


Mercer uses artificial intelligence and machine learning techniques to constantly monitor developing skills in the marketplace. Using the power of data science, Mercer is helping companies determine pay-for-skills depending on the location and demand for any given skill in the marketplace.


Finding desired results, IBM is considering applying AI to help managers/supervisors in determining employee promotions through the lens of skills-based approach.


Mercer Skills-Edge Suite helps companies with workforce planning and management – including talent acquisition, reskilling and upskilling, pay-for-skills, and career agility/pathing, among others.

Peter Stevenson
Peter Stevenson

Skills-Edge Go-to-Market Leader, Mercer

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