6 Things to Consider When Setting Compensation for Skills-Based Hiring

With skills-based hiring on the rise, employers are increasingly grappling with a thorny issue: how to set compensation. Companies have historically determined pay based on a candidate’s education, experience, and role. But now that they’re often hiring for skills and potential, the equation has grown murkier. 

“People are trying to figure it out,” says Michael Folwaczny, global head of human resources corporate development at Siemens. “I think it’s a superhot topic. But it’s not one that is scientifically or clearly defined yet, to where you can say, ‘OK, these are the five steps you need to take’ and then be able to do them.” 

If your company isn’t already talking about this, it’s a good time to start. In a recent Harvard Business Review article, LinkedIn CEO Ryan Roslansky writes that LinkedIn has seen a 21% increase in U.S. job postings that advertise for skills and responsibilities rather than qualifications and requirements. He also notes that the number of positions that don’t require a degree jumped by nearly 40% from 2019 to 2020. 

In other words: More companies are considering candidates based on their skills, not degrees. That’s a step forward, considering that only 32.1% of adults in the United States have a degree from a four-year college. But the conversation about how to compensate these skills-based hires is just beginning. Here are six things to contemplate as your company joins the discussion.

1. You’re struggling with this for a reason: There’s not enough information

Traditionally, companies determined pay for a specific role by turning to industry compensation surveys for guidance. They looked at the job title, seniority level, and candidate experience and education and saw what other companies were paying. But for employers hiring nondegreed workers, there’s simply not enough data. 

“There’s a dearth of information in official statistics — and not just in internal company surveys — on workers without degrees, even though they make up two-thirds of the working population,” says Shad Ahmed, chief operating officer of Opportunity@Work, a nonprofit devoted to helping nondegreed workers gain access to higher-wage jobs. 

With the help of 25 scholars, Opportunity@Work is conducting research on this group of workers, which it calls STARs (Skilled Through Alternative Routes), through what it calls the STARs Insights initiative. These are workers who do not have a four-year degree but have attained valuable skills on the job, in the military, through training programs, and at community colleges. 

While it’s still early in their analysis, Opportunity@Work has found wage gaps between degreed and nondegreed workers. Among pharmacy aids, for example, STARs — who make up 70% of that employee population — earn 60% less than people in the same role with a bachelor’s degree ($20/hour and $49/hour, respectively.)

Among STARs in all occupations, Opportunity@Work has also found a difference in wage earnings by race and ethnicity. White, non-Latino STARs earn 9% more than their Black STAR coworkers and 8% more than their Latino coworkers.

As Opportunity@Work and other organizations conduct more research, more information will likely become available within the next few years. That will make the compensation conversation easier. Until then, Shad says, “Pay equity between those who have a degree and those who don’t is an area of opportunity we should all be tracking and understanding.” 

2. Consider skills-based pay as a model

One model to consider as you move forward is skills-based pay. Michael described this in a 2019 LinkedIn post as one in which “compensation directly focuses on the individual and their unique skills, rather than the mere title of their position.”

In this model, employees are rewarded for the range, depth, and different categories of their skills. If, for example, an employee earned a certification in cybersecurity, they would receive additional compensation through their salary or an incentive. 

This type of system rewards multiskilled and deeply skilled employees and encourages skill development and cross-training. It’s a win for companies because it results in flexible and versatile employees who can work in a variety of roles. And it’s good for workers because it means they’re highly employable. 

“Skills-based pay,” Michael writes, “motivates employees to attain a wide range of capabilities, which facilitate business in the digital age, like the ability to work without close supervision, rapid adjustments to market changes, teamwork, and the general higher employee flexibility.” 

3. Examine how you assess skills and certifications

Of course, to pay employees based on their skills, you need to know how to assess the skills and how to find or create certifications that would merit a certain level of pay or incentive. 

Your company may have already developed or landed on assessment tools. LinkedIn, for example, offers skill assessments for a range of technical, business, and design skills. Members who pass an assessment can choose to include a skills badge on their LinkedIn profile. Other platforms similarly offer assessments of soft skills that can lead to certifications. 

Skills validations, whether with badges or certifications, are a good way to determine whether a candidate can do a job, which is helpful in determining compensation. “But the flip side with certification,” Shad says, “is that many roles don’t have standard certifications yet. There’s no agreed-upon industry standard about the new certifications out there.”

For employers who are trying to make sense of which are most important for them, it’s still early in the journey. Time will be critical, as companies understand which certification for any given role will become the industry standard. 

As this evolves, remember: You need to be able to assess a skill or certification before you can determine what it’s worth. 

4. Think about applying skills-based pay to existing employees too

Skills-based pay isn’t just for candidates who are new to the company. You can also offer skills-based incentives and compensation to existing employees. 

The benefit of this is that employees continue building their skill sets. “At Siemens,” Michael says, “we have a tremendous focus on learning overall and especially on digital learning. Part of our senior management’s long-term incentive is calculated based on the achievement rate of Siemens overall, of how many digital learning hours we have.”

While Siemens has not yet connected newly acquired skills to additional pay, Michael envisions one scenario in which this type of model might be particularly useful. He uses an engineer as a hypothetical example. They have deep technical expertise and don’t want to step into leadership but nonetheless take a managerial role to increase their compensation. 

If, on the other hand, you rewarded that engineer based on the skills they acquired, then they’d have a clear career path to earning higher pay without a move into the managerial role — and the company still benefits from having an outstanding engineer. 

5. Consider the structural changes that might be involved

One of the reasons that companies haven’t forged ahead with compensating for skills and potential is because it’s . . . complicated. 

Michael says HR would need to change its people development approach from an emphasis on the traditional progression of jobs — moving from manager to senior manager, for example — into “a real understanding of skills, or pockets of skills.” 

Companies would need to have an agile computer system that administers, assesses, and maintains a skills-based compensation approach. And they would need to create new roles in the organization, such as “skills managers.” These would be employees who look at the organization from a strategic perspective and determine which skills might be hot in the future and how the company needs to develop them. 

You read that right: Skills themselves will become a skill. 

“There is a tremendous need for additional competence in compensation and benefits,” Michael says, “because the markets and environment are changing.”

6. Think about trying out a hybrid approach

Using skills-based pay exclusively, Michael writes, “would turn into a chaotic spider web of skill certifications, job assessments, and different pay rates.” The best approach, he says, might be a hybrid one. 

Companies could approach hybrid compensation in several different ways. One approach would be to put it in silos. Employees working in an innovation lab, for example, could be compensated on a skills-based model while those in facility management could be compensated more conventionally on their title, experience, and educational level. Another hybrid approach, Michael says, would be to offer a certain salary for a specific role — and then pay a premium on top of that for skills acquired. 

Shad offers yet another idea: Pay the exact same for a specific role, whether the employee has a degree or not. “If you’re trying to prove that skills are equivalent to how you were thinking about the talent pool before, then the compensation should be commensurate with talent that has a degree.”

It’s a radical idea, but worth considering. 

Final thoughts

In many ways, this conversation comes down to one question: What is an employee worth? We want to gauge the value an employee brings to the business and then reward them for that. 

That value may — or may not — be linked to where someone went to school and where they’ve worked before. But an employee’s real value is tied to their performance not their pedigree and is reflected in the tools they bring to the job every day. The best employees offer companies a combination of hard skills, soft skills, knowledge, and insight. In considering a new approach to compensation, these capabilities are what companies should focus on most.

To receive blog posts like this one straight in your inbox, subscribe to the blog newsletter.