Is it time to reconsider skills-based pay?

Recent, credible studies suggest that it may be time to reconsider skills-based pay relative to performance related pay[1]. The evidence indicates, perhaps unsurprisingly, that PRP works well when tied to observable outcomes, but non-incentivised outcomes may not improve. It might also ‘crowd out’ intrinsic motivation; and it's associated with negative job attitudes. Conversely, the evidence relating to skills-based pay is uniformly positive in terms of organisational outcomes, employee attitudes and employee behaviours. So why did skills-based pay get such a bum rap in Australia?

Two reasons spring to mind. One is that the skills on which the pay was based did not reflect the real needs of the business. For example, they may have reflected an outdated view of an industry rather than the current needs of an organisation with a unique operating model, organisation structure, job design and work processes. Alternatively, the skills were relevant but their assessment by managers was not robust, so everyone gravitated to the top of a pay band irrespective of their performance of those skills.

That is not to say that a well-designed and maintained performance-related pay plan can’t work; but that the time and effort required may be prohibitive in a time of accelerated change. Job descriptions, performance objectives – even work plans – can change suddenly and rapidly in the face of a volatile and uncertain environment. The most obvious current example of this right now might be requirement for schools to cycle, quickly and repeatedly, from school-based to remote learning and back again; though examples abound across industries. This is why a more stable, enduring basis for pay determination may be worth another look.

The knowledge, skills and behavioural requirements of a job also change, of course, but they tend to do so more slowly than the specifics of the environment these requirements address. For example, many of the trades employed in building a diesel submarine – though obviously not all of them - will remain relevant to building a nuclear submarine. So why not document the knowledge, skills and behaviours expected of employees? Why not encourage an ongoing conversation about the application of these capabilities to the work-in-hand? Why not reward individuals for the consistent application of capabilities that demonstrably add value to the organisation?

Skills-based pay may require a one-off investment in the definition of capabilities. It may also require management training to ensure that the conversation stays alive, and that the assessment process is robust; but the process itself is more likely to be embraced as an ongoing feature of the work environment than a point-in-time performance-related pay decision. Linking performance and pay in a traditional work environment can damage relationships. Invest the supervisor's time and effort in on-the-job coaching could better meet the developmental needs of the person and the productivity needs of the organisation.

[1] E.g. ‘Evidence for Performance-Related and Skills-Based Pay,’ Durham University Business School, 2017