Skill based pay structure advantages and disadvantages

Learning Objectives

When you finish studying this chapter, you should be able to:

1. 5 Define person-focused pay.

2. 5 Describe the usage of person-focused pay.

3. 5 Name and explain the reasons companies adopt person-focused pay programs.

4. 5 Summarize the varieties of person-focused pay programs.

5. 5 Contrast person-focused pay with job-based pay.

6. 5 Explain the advantages and disadvantages of person-focused pay plans.

Chapter Warm-Up!

Go to the Assignments section of your MyLab to complete the chapter Warm-Up!

Improved performance, the bottom-line purpose of training and development, is a strategic goal for organizations. Toward this end, many companies strive to become learning organizations. A learning organization is a firm that recognizes the critical importance of continuous performance-related training and development, and takes appropriate action. Learning organizations view learning and development opportunities in all facets of their business. In a learning organization, employees are rewarded for learning and are provided enriched jobs, promotions, and compensation. Person-focused compensation programs provide the basis for such rewards that are tightly coupled with strategic training and development activities.

Defining Person-Focused Pay: Competency-Based, Pay-for-Knowledge, and Skill-Based Pay

1. 5. 1Define person-focused pay.

Person-focused pay plans reward employees for acquiring job-related, knowledge, skills, or competencies rather than for demonstrating successful job performance. Person-focused pay rewards employees for the promise of performance in the future; merit pay and incentive pay reward employees for promise fulfilled (job performance). This approach to compensating employees often refers to three basic types of person-focused pay programs: pay-for-knowledge, skill-based pay, and competency-based pay. Sometimes, companies combine person-focused pay programs with traditional merit pay programs by awarding pay raises to employees according to how well they demonstrate competencies.

Pay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula. Skill-based pay, a term used mostly for employees who do physical work, increases the workers’ pay as they master new skills. For example, both unions and contractors who employ carpenters use skill-based pay plans. Carpenters earn additional pay as they master more advanced woodworking skills (e.g., cabinet making).

Both skill- and knowledge-based pay programs reward employees for the range, depth, and types of skills or knowledge they are capable of applying productively to their jobs. This feature distinguishes pay-for-knowledge plans from merit pay, which rewards employees’ job performance. Said another way, again, pay-for-knowledge programs reward employees for their potential to make meaningful contributions on the job.

Human resource (HR) professionals can design person-focused pay plans to reward employees for acquiring new horizontal skills, vertical skills, or a greater depth of knowledge or skills. Employees can earn rewards for developing skills in one or more of these dimensions based on the kind of skills the company wants to foster. Horizontal skills (or horizontal knowledge) refer to similar skills or knowledge. For example, clerical employees of a retail store might be trained to perform several kinds of record-keeping tasks. They may maintain employee attendance records, schedule salespeople’s work shifts, and monitor the use of office supplies (e.g., paper clips and toner cartridges for laser printers) for reordering. Although focused on different aspects of a store’s operations, all three of these tasks are based on employees’ fundamental knowledge of record keeping.

Vertical skills (or vertical knowledge) are those skills traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others). These types of supervisory skills are often emphasized in person-focused pay plans designed for self-managed work teams because team members often need to learn how to manage one another. 1 Such work teams, which can be referred to as self-regulating work groups, autonomous work groups, or semiautonomous work groups, typically bring employees together from various functional areas to plan, design, and complete one product or service. For example:

A manager of a food processing plant [who] wanted employees who were “a combination of self-reliant and resourceful.” In this plant, good hiring systems and excellent training systems were critical, including systems for training operators in maintenance skills. Several plants had adopted interesting innovations to promote good training and certification. These innovations included:

· Several plants put all training on their intranet, so employees could access it at any time.

· One plant used hundreds of “One-Point Lessons” (OPLs—one-page sheets including a digital photograph of the appropriate equipment). Because each OPL focused on only one problem and its solution, OPLs were easy to search and use on the job.

· Several plants invested heavily in documentation of training and required practical skills demonstration. 2

Depth of skills (or depth of knowledge) refer to the level of specialization or expertise an employee brings to a particular job. Some person-focused pay plans reward employees for increasing their depth of skills or knowledge. Human resource professionals may choose to specialize in managing a particular aspect of the HR function (e.g., compensation, benefits administration, training evaluation, or new employee orientation). To be considered a compensation specialist, HR professionals must develop depth of knowledge perhaps by taking courses offered by WorldatWork on job evaluation, salary survey analysis, principles of person-focused pay system design, merit pay system design, and incentive pay system design, among others. The more compensation topics HR professionals master, the greater will be their depth of knowledge about compensation.

The term competency has become an increasingly important topic in HR practice because of the changing nature of work. Competencies build upon the use of knowledge, skills, and abilities, which we describe with job analysis. A competency refers to an individual’s capability to orchestrate and apply combinations of knowledge and skills consistently over time to perform work successfully in the required work situations. Traditionally, as we have seen, work has been described by many dimensions including knowledge, skills, and abilities. Indeed, although while this is largely still the case, HR and compensation professionals have embraced the ideas of competencies as the field has increasingly taken on strategic importance.

A competency model specifies and defines all the competencies necessary for success in a group of jobs that are set within an industry context. Figure 5-1 shows the basic framework for the Department of Labor’s competency model structure.

Foundational competencies  At the base of the model, Tiers 1 through 3 represent competencies that provide the foundation for success in school and in the world of work. Foundational competencies are essential to a large number of occupations and industries. Employers have identified a link between foundational competencies and job performance and have also discovered that foundational competencies are a prerequisite for workers to learn industry-specific skills.

Industry-related competencies  The competencies shown on Tiers 4 and 5 are referred to as industry competencies and are specific to an industry or industry sector. Industry-wide technical competencies cut across industry sub-sectors making it possible to create career lattices where a worker can move easily across industry sub-sectors. Rather than narrowly following a single occupational career ladder, this model supports the development of an agile workforce.

Occupation-related competencies  The competencies on Tiers 6, 7, 8, and 9 are referred to as occupational competencies. Occupational competency models are frequently developed to define performance in a workplace, to design competency-based curriculum, or to articulate the requirements for an occupational credential such as a license or certification.

Figure 5-2 illustrates an example of a competency model for Solar Photovoltaic Installers who work in the renewable energy industry. The lower tiers, from personal effectiveness competencies through industry-sector technical competencies, apply to most jobs within the renewable energy industry. Hydroelectric production managers and wind engineers are examples of jobs within this industry. The top tiers, in this case, management competencies and occupation-specific competencies, apply to one or more, but not all, jobs within this industry. Figure 5-2 lists sample management competencies and occupation-specific competencies for the solar photovoltaic installer job.