Pay-For-Skill Compensation Works

How to Start a Pay-For-Skill Compensation Plan The Most Successful Proven Innovation in an Organization  Dr. Tom DePaoli 

Corporations continue to rapidly implement pay-for-skill compensation plans. These plans have one of the highest success rates among management innovation programs. There are some critical overall reasons for this phenomenal success record.

Pay-for-skill plans have some common characteristics.  These characteristics lay the groundwork for their uncanny achievement record.  Here are the conclusions common to three major studies of pay-for skill systems.

  1. Pay-for-skill strategies are used in a variety of industries and technologies.  They are broad based and idiosyncratic.  Most company’s custom design them for their particular situation.
  2. These pay systems usually go hand in hand with employee involvement, empowerment, and participative programs. Companies who start the plans are normally already committed to employee communication.
  3. Generally they are extremely successful. Increased job flexibility, improved productivity, better employee growth, and leaner staffing are the most common areas cited as very improved.
  4. Management commitment and philosophy are critical to success. Implementation requires tremendous time and resources commitment.
  5. These pay systems can work in a unionized setting.
  6. Barriers are broken down and decision making is pushed to lower levels of the organization. Decisions occur at the task level not at the staff level.
  7. Increased communication not only is necessary but a result of the pay system. The heart of the pay system is the increase in learning and training. Employees must learn more about their job and the jobs of other departments.
  8. Total labor costs fell as a percentage of total cost of goods and services being produced.
  9. The plans do not put companies in legal jeopardy.
  10. A high level of trust is required for the plans to work. Building this trust is not an overnight phenomenon.

In order for pay-for-skill compensation to succeed management needs to make an accelerated investment in their employee’s continuous learning. As much as 10-15% of total work hours gets devoted to learning. This serious investment reassures employees that management is sincere about this process for the long term. Employees and management are required to work very closely together on the design of the system.  Joint learning about job content and the nature of the business occurs simultaneously for both parties.

Other management innovations do not have such a personal benefit for the employee and a well-defined path to achieve the end result. Innovations such as Total Quality Management are broader in scope and are driven to improve competitiveness.  The direct impact on employees is often hard to define. Total overall business effect can be great, but employees may view it as another management “program” that will go away or dissipate.

Pay-for-skill reward plans have an immediate, personal, and nurturing impact on all employees. It demands that management learn and really understand exactly what employees are doing and what skills should be valued and rewarded with more pay. Many current management teams do not have a clue about what is really necessary to complete a job or task in a company.  The proliferation of mindless corporate downsizing is ample evidence of this fact.

With many pay-for-skill plans employees are encouraged to learn and communicate their job design to everyone. They are quickly rewarded for increasing their skills. The immediacy of rewards, constant reinforcement via continuous learning, and the fact that management becomes more knowledgeable about job design and content explains that almost universal success of pay-for-skill plans.

The startup phase of a pay-for-skill plan can be extremely challenging and frustrating for all parties. Surveys were sent out to companies that had existing pay-for-skill systems responded. This survey asked the identity of plants that have pay-for-skill systems.  A total of 103 responses were obtained.

Certain questions were asked about the seed or inceptive methods used to implement pay-for-skill. This data was supplemented by individual questionnaires and phone interviews. Subjective or open-ended questions were included for some people in all levels. Individuals were asked to comment on the implementation of pay-for-skill systems. Solicitation of their views on what groundbreaking methods were most successful in implementation was accomplished.

The survey examined two basic areas:

  1. Each specific technique of the startup phase was examined and related to reveal which were more helpful. An attempt was made to identify the most helpful transformation techniques.
  2. The components of the management philosophy were examined and related to the success of the pay-for-skill system.

Standard statistical correlation analysis was utilized on the components of the survey. Subjective or open-ended questions were included in the final conclusions. A statistical based computer program was used for a principal components analysis with varimax rotation.

Pay-for-skill systems are a massive change for most organizations. They demand strong top management support and deep involvement of the human resources department in the process. There are considerable time-consuming efforts required for implementation.  Communication about the pay-for-skill system and the mutual expectation sharing of its benefits are pivotal in the inceptive stage. These cited techniques are not easy quick fixes. They require the total commitment of resources of an organization.

This comprehensive dedication needs to be preceded by a very progressive management philosophy. The survey showed that a progressive type management philosophy is an important aspect before pay-for-skill systems should be considered. Organizations that emphasize employee involvement, empowerment, and improving their skills have already laid the foundation for pay-for-skill systems. Companies that encourage employee participation in decisions and who sincerely listen to employee concerns have already established the trust factor that is important for successful pay-for-skill systems.

Most respondents could not give hard or quantifiable data on the specific gains from pay-for-skill. The overwhelming majority felt that pay-for-skill was highly successful for their particular organization and would not go back to their former pay plan.  Improved employee morale and better employee knowledge were cited as vital.

Conclusions that can be drawn from the survey are that during the inceptive stage a commitment to quality, team building exercises, and open communication have the most dramatic positive impact of the success of pay-for-skill compensation plans. When an organization commits to a total quality program this commitment often has a positive impact on the way employees view the company and how they witness and contribute to the dramatic skyrocketing of the self-esteem of the organization. The survey indicated that problem solving training exercises are not as effective especially in the inceptive stage of pay-for-skill systems. They may be more effective in the later stages of pay-for-skill maturity.

The following techniques were identified as being the most effective during the start up or inceptive period of pay-for-skill compensation plans:

  1. Assign a pilot area and use a design team.

Most companies started in a specific department first.  After lessons were learned expansion took place to the rest of the site.  A design team was cited as very helpful and acted as the control point for the implementation process.

  1. Concentrate on team building exercises.

Team building exercises and projects that encouraged team building especially with the design team were mentioned in many survey responses as being most productive.

  1. Work diligently on the “trust” factor with employees.

Trust was built in many companies by immediately doing some aspects that were rudimentary to the plan.  Confidential assessments of skills also helped get the continuous learning process on track.

  1. Have clear goals of what the plan is expected to deliver.

Pay-for-skill plans will not make a lousy company great.  Carefully drawn out expectations of what the plans should accomplish and the path to get to various pay levels were continuously cited as key success factors.

  1. Conduct visits and gain knowledge from other pay-for-skill sites.

Visits to other companies that have pay-for-skill plans specifically by top leadership and the design team were found to be essential for implementation.  Even though many of the plans are idiosyncratic or custom to the particular site, many respondents received good overall principles from which to forge a pay-for skill plan.

  1. If you have a total quality program use it to “leapfrog” or improve the transition to pay-for-skill.

Companies that had Total Quality Management programs or who were ISO 9000 certified cited their efforts in these areas as productive to helping the startup phase of pay-for-skill plans.  Both of these efforts show a commitment to long term survivability of the company and also require specific examination of job tasks, work instructions, and inter-department relationships.

  1. Remain open to sensitivity training and strong communication efforts.

Communication all across levels in the corporation is essential to success of pay-for-skill plans.  Rumors or perceived indications of pay reductions can set back a plan significantly.  Companies used all varieties of communications techniques to include meetings, newsletters, workshops, third party learning assessments, and one on one explanations to employees.

Pay -for-skill compensation plans remain one of the most successful corporate innovations.  Utilizing the above techniques during the startup phase will insure the smooth implementation of this powerful competitive tool.

Dr. Tom DePaoli

Dr. Tom DePaoli is the Principal (CEO) of Apollo Solutions ( which does general business consulting in the supply chain, Lean Six Sigma and human resources areas. Recently he retired from the Navy Reserve after over 30 years of service. In other civilian careers, he was a supply chain and human resources executive with corporate purchasing turnaround experience and Lean Six Sigma deployments. He is the author of nine books.  His Amazon author’s page is

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