A skill based pay system (SBPS) can best be described as a system in which the

capabilities of individuals are the primary focus and which cause them to be
managed in a way that facilitates organizations developing organizational
capabilities that provide competitive advantage (Lawler III, p6, 1993). Simply put,
employees are paid in accordance with the number of positions they are able to
fulfill in an organization.
However, academics argue that, for the skill based system to work 2010 - Master
Thesis Nick Snoeker - 13 effectively, certain organizational elements have to be
met. For instance, Lawler (1986) found that the system works best in a high
involvement environment. In addition, Gomez-Mejia and Balkin (1992) suggested
that the following elements benefited the results of a SBPS: the organization is
situated in a start up or growth phase, has a participative culture and offers other
incentive programs complementing skill based pay.
Murray and Gerhart (1998) suggest that a relevant theory to describe a SBPS is the
expectancy theory. Here, skill seeking and acquisition is motivated by rewarding an
employee for skill or knowledge competencies. In terms of the model of Vroom
(1964)7 , the incremental pay increases are the reward outcome, the value of the
increase is the valence, the exertion of skill competency is the effort outcome and
the level of skill seeking behavior is the input effort (Murray and Gerhart, 1998).
This is in accordance with Tosi and Tosi (1986) who state that workers in a skill
based pay system have strong incentives to increase knowledge and skill since
higher skill levels are associated with both higher status and with pay.
Uncertainty about the exact demands, additional investments in learning and the
fear of falling behind are all elements that make a SBPS more risk bearing. Tosi and
Tosi (1986) report that especially workers with low motivation, ability and tolerance
for work ambiguity will be unsatisfied with a SBPS.
Risk aversion can be of major influence regarding the attraction an employee
experiences towards either a job based or a skill based pay system. Employees
have to choose between the general job based pay system and the SBPS that
requires firm-specific investments. These firm specific investments in skills might
not be transferable across firms and are thus considered more risky than the jobs
where you are paid in accordance with your position and for which you only need a
few skills. In other words, one should consider the uncertainty of the firms future
payoffs for the acquired skills (Shaw, 1996). Another form of risk involvement under
a SBPS is the risk of not being able to keep up with colleagues, which effectively
renders the employee redundant or results in wage stagnation

The Wide-Spread Use of Skill-Based Pay Systems

Some of the potential outcomes of skill-based pay systems include a flexible workforce,
lowered labor costs, and increased quality and productivity. Considering the merits of
skill-based pay systems, it is obvious why about half of the Fortune 1000 companies
use them (estimates are between 30 and 67 percent of the Fortune 1000).

Implementing Skill-Based Pay Systems

Skill-based pay systems are based on the idea that employees will be proactive in
obtaining new, job-related skills if they are compensated for such efforts. This is a basic
principle of behavioral psychology: Actions that lead to rewards will be repeated. The
underlying concept behind a skill-based pay system is relatively simple: increase an
employees compensation as he or she acquires and becomes more proficient with job-
related skills.

Newly implemented skill-based pay systems can be met with resistance, especially from
long-tenured incumbents who have continuously received pay increases based on
tenure. This can be challenging to overcome, but in most cases the tenured employees
have a great deal of job-related skills, allowing them to enter into the new pay system
with a high level of compensation.

To correctly implement a skill-based pay system, it is important for the skills in the
system to be job-related. For example, a welder being rewarded for learning to use a
larger, more powerful welding machine is appropriate, but the same individual should
not be compensated for learning to fix a plumbing system.

Another important aspect of a well thought out skill-based pay system is that the amount
of compensation increase should be relevant to the difficulty of the skill: Learning to
construct a basic spreadsheet in Excel is not as difficult as learning to write macros in
Visual Basic, so the former should not be associated with as large of a pay increase as
the latter.

The final important characteristic of an effective skill-based pay system is regular testing
of skill proficiency. When incumbents initially learn skills, they should be tested for
proficiency. In most cases an incumbent will not be as proficient with a newly acquired
skill as with a skill they have possessed for an extended period of time. Additionally,
employees who do not use a skill for a long period of time may lose proficiency. In light
of both of these factors, it is important for skill proficiency to be tested at least every
year. This will allow for the pay system to more accurately reflect skill proficiency.

Increased Effectiveness of Skill-Based Pay Systems

Skill increases at the individual and workforce level result from the implementation of a
skill-based pay system, both of which lead to a more productive workforce. However,
some changes to the structure of skill-based pay systems can allow for greater
effectiveness. Some of these changes include: Skills learned early in the system should
be easier to learn

Employees who have early success with skill-based pay systems are more likely to
continue gaining new skills.

The first reward an individual receives should be relatively large

Larger rewards early in the pay system motivate employees to continue working hard to
obtain more skills, which is the ultimate goal of skill-based pay systems. Put simply, the
first skill learned, regardless of difficulty level, should be compensated at a high level,
and every skill learned after that should be compensated based on the difficulty level of
the skill. While this may seem contradictory to the earlier

mentioned rule about making sure the size of the pay increase is related to the difficulty
of the skill, the two ideas are mutually exclusive. If every employee received the same
bonus after obtaining his or her first skill, it will not seem unfair that an easier skill is
rewarded at a greater level.

Management should encourage employees to obtain new skills as much as possible

Skill-based pay systems put the responsibility of earning pay increases in the hands of
the incumbents. Some employees, especially those new to skill-based pay systems,
may not work as hard to obtain new skills. As such, it is important for management to be
supportive in giving employees the time, encouragement, and resources necessary to
obtain new skills.

Skill-based pay systems, as with any compensation management strategy, can be

ineffective if used incorrectly. It is important to consider the suggestions outlined in this
article before implementing a skill-based pay system. Ultimately, the implementation of
a skill-based pay system can lead to greater profits as employees become more skilled
and more proficient, allowing for them to perform their jobs more effectively.

Skill-based pay refers to a pay system in which pay increases are linked to the number or depth
of skills an employee acquires and applies and it is a means of developing broader and deeper
skills among the workforce. Such increases are in addition to, and not in lieu of, general pay
increases employees may receive. The pay increases are usually tied to three types of skills:

horizontal skills, which involve a broadening of skills in terms of the range of tasks

vertical skills, which involve acquiring skills of a higher level

depth skills, which involve a high level of skills in specialised areas relating to the same
job.

Skill-based pay differs in the following respects from traditional pay systems which reflect skills
differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled
workers:

Skill-based pay is a person-based and not a job-based, system. It rewards a person for
what he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for
minimum skills, but pay progression is directly linked to skills acquisition (rather than to
general pay increases applicable to all) .
 It rewards (and therefore emphasizes) a broad range of skills which makes the employee
multi-skilled and therefore flexible.

It positively encourages skills development.

A skill-based pay system may not necessarily reflect how well the skill is used, as this
falls within the performance component of pay. But there is nothing to prevent injecting
performance criteria into the system. In such cases the system will be more performance
oriented than a structure which merely recognizes different rates of pay for skills.

The system needs to be underpinned by opportunities for training which is critical to the
success of the system. The traditional structure is not dependent on such opportunities.

Reasons For Skill-Based Pay

More than ever before in industrial relations history a commonality of interests in the
skills of employees has developed between employers and employees. Skills provide
employees with a measure of protection against unemployment, as well as opportunities
for higher earnings. At the same time, skills provide employers with an important means
of achieving competitiveness.

Many countries today are seeking to advance to more technology and skill-based
industries, while others have become (or are becoming) 'post
industrial1 societies, in which the application of knowledge determines productivity,
performance and competitiveness. Comparative advantage based on. for instance,
cheap labour or raw materials, has declined in importance relative to competitive
advantage based on the ability to add value to a particular resource or advantage. Such
comparative advantage partly (often largely) depends on people - their standards of
literacy and education, work attitudes, value systems, skills and motivation. Critical
today is the ability to innovate and develop clusters of competitive enterprises in
particular industries.
For the more industrialized countries this means 'capturing' some of the key industries
of the next century - microelectronics, biotechnology, new materials science industries,
telecommunications, civil aviation, computers and software, robotics and machine tools
and entertainment. An employee with skills is most flexible and productive when he
develops a broad range of skills, is able to learn the next higher skill, develop analytical
skills and is also able to work in a team. Important aspects of today's skills package
include multi-skills, cognitive skills, interpersonal and communication skills, positive
work attitudes and quality consciousness. Training is no longer only for current
competence, but is also to prepare for the next stage of skills. Thus pay systems which
promote current and future skills needs are increasing in importance among employers.

The impact of rapid technological change, the increasing globalization of product

markets, greater customer choice and the emphasis on quality* necessitate a frequent
updating of skills, and flexibility to respond to rapid changes in the requirements of
markets. A flexible workforce, which is one that is multi-skilled, ensures that production
is not interrupted due to the narrow skills of workers, and that workers are themselves
responsible for the quality of products.

Advantages Of Skill-Based Pay

Among the advantages of skill-based pay are the following:

It contributes to job enlargement and enrichment by breaking down narrow job

classifications.

Flexibility is increased by encouraging the performance of multiple tasks. It

enables job rotation, and filling of temporary vacancies due, for instance, to
absenteeism. It therefore contributes to a leaner workforce.

It enhances productivity and quality through better use of human resources.

It facilitates technological change, which may meet with resistance in a purely

job-based system.

The higher pay levels, continuous training, and job enlargement through the
broadening of skills, tend to reduce staff turnover.

Elimination of unnecessary jobs can result from a workplace having broad, rather
than narrow, skills. It also reduces the need for supervision.

Job satisfaction is engendered through employees having greater control over

the planning

and implementation of their work.

Broadening of skills leads employees to develop a better perspective of

operations as a whole.

It is an incentive for self-development.

It provides employment security through skills enhancement.

It reduces the need to look to promotion to higher levels (which are always
limited) as the only way to enhance earnings, and it facilitates the planning of an
employee's career development path.
 Since the reward flows from the application of a skill and it does not reduce
opportunities for others to similarly increase their skills and earnings, there is
likely to be less competition among individuals.

Since the pay increases on account of skills are linked to a measurable standard,
the criticism of subjectivity often associated with performance appraisals and
individual-based performance-related pay, is avoided

n one of the first comprehensive studies of skill-based pay plans, a management

researcher at the University of Arkansas found that such plans are more successful
and sustainable in manufacturing facilities than in service organizations. The
research also revealed that support among supervisors and employees for the
innovative plans consistently predicts their success and survival.
Our results show that facility characteristics - manufacturing or service, for example
- and supervisor and employee support are consistently related to the success of
skill-based pay plans, said Nina Gupta, a management professor in the Sam M.
Walton College of Business. This was especially true with productivity and cost-
effectiveness, two important measures of success.
Compared to conventional job-based compensation, skill-based pay rewards
employees for acquiring new skills. In a manufacturing environment, these skills may
be as simple as training all employees to operate a forklift or punch press, but
usually the skills are tied to specific processes and technology within an individual
manufacturing plant. For example, in the pharmaceutical industry, a company may
train workers to perform processing tasks such as capsule and tablet production and
packaging tasks such as labeling and materials handling, as well as warehousing and
quality control tasks.
Conventional systems pay each worker to perform one job all the time. With skill-
based pay plans, the goal is to have all workers know all jobs so that they can move
from job to job as needed. Employees are given a pay increase for learning and
demonstrating proficiency in a new skill, regardless of whether they actually use that
skill on the job. Usually connected to an organizations strategic mission, skill-based
pay plans are often part of broad changes that affect many facets of an organization.
Hundreds of Fortune 1,000 companies have adopted these plans for at least some of
their employees. Many of these companies report improvements in workforce
flexibility and productivity, but, until now, these benefits have not been thoroughly
tested by independent, empirical research.
Gupta and three colleagues, professors at the universities of Kentucky and Northern
Iowa and a management consultant, examined skill-based pay plans as implemented
at 97 facilities in the United States. They focused on three critical aspects of skilled-
based pay plans - design characteristics, supervisor/employee support and facility
characteristics - to determine overall success as measured by workforce productivity
and flexibility, cost-effectiveness and survival.
Many companies have adopted skill-based pay plans based on the assumption that
they are ideally suited for organizations that emphasize technical innovations. The
researchers findings, however, did not support this assumption. Companies seeking
new and different types of business or those focusing on technical innovations
frequently need to modify the definition, training, assessment, maintenance and
compensation of skills necessary within their organizations. Because skill-based pay
plans require considerable investment in all of the areas, frequent modifications
would be too expensive, Gupta said.
 Also, skill-based pay structures necessitate precise specification of skills, which is
more feasible when production processes vary minimally, are well understood and
are easily separated into components. This helps explain the plans success in a
manufacturing environment.
Skill-based pay plans promote workforce flexibility, but only in the context of
precisely defined skills, Gupta said. Productivity and flexibility gains from these
plans may be wiped out if production or service-delivery technologies are constantly
changing.
Gupta said that regardless of organization type, managers should not view skill-
based pay plans as supremely effective or successful. In isolation, they are no more
effective than other types of compensation systems.
It is not simply whether a particular compensation system is used, Gupta said, but
rather the specific components and characteristics within that broad approach that
predict effectiveness. The particular way the system is implemented and fits within
the organizational context is critical.

What Is Skill-based Pay?

Skill-based Pay (SBP) is an innovative reward system that promotes workforce flexibility by rewarding individuals
based on the number, type, and depth of skills mastered. This practice differs significantly from traditional reward
systems that calculate base pay according to the specific job an employee performs (see Figure 1).

SBP plans have existed in a variety of forms and industries (i.e., manufacturing, retail, financial services) for the last
two decades and are known by many other names (e.g., pay for knowledge, knowledge-based pay, and multi-skill
compensation)(1). The philosophy shared among all of the SBP plans is the more an employee learns and is able to
apply on the job the more he or she earns.

Although SBP plans vary according to their objectives and components, all have the following similarities. They
typically exclude managers and cover hourly production as well as a number of white collar staff groups (e.g.,
finance, engineering, management information systems, and customer service). Most plans also contain a detailed
curriculum of education to facilitate new skill acquisition. The more effective plans use small group improvement
activities (SGIA) to promote improved understanding of the overall business and to facilitate desired employee
behaviors. Many plans also use a structured process to certify the skill mastery of employees.

Types of SBP Plans

There are five types of SBP plans, which can be categorized by the type of skills tracked and rewarded as follows:

1. Vertical skill plans measure the acquisition of input/output skills (e.g., a drill press operator mastering preventive
maintenance and in-process inspection) within a single job.

2. Horizontal skill plans reward the acquisition of complementary skills (e.g., individual learns how to do both
accounts payable and accounts receivables) across several jobs.

3. Depth skill plans reward skill specialization (e.g., computer programmer specializing in database programming).

4. Basic skill systems reward employees for developing expertise in the basic skill areas (four function math; reading,
writing, and speaking English). This type of plan is excellent for companies that have a large number of employees in
the workforce who speak English as a second language.

5. Combination plans reward any of the skills previously discussed. Based on our experience, this type of SBP plan is
most commonly used.

An organization should select the type of SBP program that most closely supports its strategic objectives and will
provide the greatest source of competitive advantage. For example, if a manufacturing company's strategy is to
increase market share through lower prices (via cost reduction and improved customer responsiveness), it may utilize
Just-In-Time (JIT) as an enabling initiative. If the organization is interested in implementing SBP to support JIT, it
should, at the very least, use a system that rewards both horizontal and vertical skill progression. This will 1) improve
both operational and employee flexibility, 2) eliminate nonvalue-adding activities (cost), and 3) reduce overhead
(fewer management and support staff).

Skill Progression

Instead of identifying and collapsing tasks into a "job," skill-based pay systems generally make use of extensive job
redesign. In most organizations, work has been designed around Frederick Taylor's scientific management principles,
which focus on task specialization, efficiency of effort, and minimizing time and motion. SBP systems usually redesign
jobs using sociotechnical principles that focus on the completion of a discrete piece of work, foster task variability,
promote task significance, provide ongoing "real time" feedback, and enhance decision-making autonomy. Once the
work has been redesigned, tasks are then reconfigured into "skill blocks" that facilitate the accomplishment of work
while promoting employee development. This is especially important for organizations that have recently downsized,
since the collapsing of organizational levels challenges organizations to create new development opportunities
(horizontal career progression instead of vertical) for employees.

SBP systems vary distinctly in the number and sequencing of skills an employee can learn. In manufacturing
companies that use group technology, employees may have the opportunity to learn all of the jobs within a prescribed
cell. Organizations that do not use group technology usually have a structured sequencing or job rotation process that
specifies the minimum number of skill blocks an employee must learn and may establish a minimum time to progress
from one skill block to another. This allows the company to both recapture some of the money invested in education
while controlling productivity fluctuations that occur during job rotation. Productivity fluctuations are a normal by-
product of an employee's learning curve and an outgrowth of job rotation. When you rotate a person who is fully
proficient in a skill block to a new skill block, productivity will fall during the transition period.

Certification of Skill Mastery

All well-designed SBP systems require demonstration of skill mastery using certification criteria. A key variable that
affects the overall effectiveness and acceptance of a SBP plan is developing measurable, objective, and job-related
certification criteria. Our experience suggests the criteria should measure both the technical aspects of the job (e.g.,
incumbent able to make a correct journal entry) as well as team skills (e.g., active contributor at team meetings). This
will usually address employee concerns regarding inequity during the certification process.

The evaluation of skill certification can be the responsibility of management, an evaluation committee, or peer review.
Evaluation is usually accomplished through observation, oral or written tests, or on-the-job performance. Several of
the more sophisticated systems have established quotas for the number of employees who can be at a given skill-
block pay level at one time.(2) These plans also require employees to periodically recertify mastery. For example,
employees may be required on an annual basis to recertify mastery in all of their skill blocks to maintain their current
salary level. If they are unable to recertify mastery in one or more areas, their base salary may be decreased
according to their previous precertification level. This recertification process reinforces the pay-for-performance
culture that is essential for a successful SBP plan.

Pay Progression

SBP plans typically require fewer classifications and pay grades than traditional reward systems. This translates into
more flexible work rules and eases administrative burdens, as fewer people are needed to administer the system and
administration can be delegated to line managers or teams. Fewer classifications also make it easier for employees
to understand the subtleties of the plan. Some plans also include a merit increase.(3)

The following scenario illustrates pay progression for a production worker. Sal Monella has been hired to fill a
vacancy in the ABCDE subassembly cell for a manufacturing company that produces thingamabobs. This cell is
composed of five physically linked operations. As an entry level operator, he is paid a base rate and is initially
responsible for the operation of machine A. After a combination of on-the-job and classroom education, Sal
demonstrates mastery of setup, inspection, and preventive maintenance. He receives a nominal pay increase and is
rotated to operation 2, where he repeats the same process until either all of the operations in the subassembly have
been mastered or he maxes out (is unable to learn any additional skill blocks and still maintain mastery on skill blocks
already certified).

In a white collar setting the process is very similar. Skill blocks are designed and a skill progression sequence is
identified that provides an organization with the greatest competitive advantage. A curriculum of on-the-job and
classroom education is developed. Employees who complete the education and are able to certify skill mastery are
rotated to another skill block.
Benefits and Costs of SBP Plans

SBP systems provide a win-win situation for both management and employees. Organizations that have successfully
implemented SBP plans report the following benefits:

* Benefits from the Organization's Perspective

Many organizations that have successful programs report that SBP promotes flexible work arrangements. This is an
outgrowth of fewer job classifications and increased employee involvement. Another by-product of SBP is improved
operational and employee flexibility. This results from flexible work rules, cross training, and job rotation. Many
organizations also report improvements in operational problem solving because employees rotate and learn
upstream/downstream functions and are able to identify and correct variances sooner.(4) This commonly affects the
bottom line in the form of quality or productivity increases.

Many of our clients also believe that SBP tends to significantly reduce overhead because fewer management,
supervisory, and administrative support personnel are needed. SBP systems empower employees by leveraging
decision making. In an effort to maximize self-sufficiency, many management, supervisory, and support
responsibilities are delegated to employees. This frees up these groups to do higher value-adding activities and
typically reduces their staffing levels longer term. Since employees have enhanced opportunities to learn, job and
company satisfaction improve. This tends to translate into lower absenteeism and tardiness levels.

* Benefits From the Employee's Perspective

SBP systems also offer a number of advantages to employees. In the better-designed programs, job satisfaction
tends to improve because of the enlarged job scope. Generally speaking, there is a direct positive relationship
between the level of task variability in a job and the level of job challenge or job satisfaction. We have also witnessed
significant improvements in employee perceptions of job security. Because organizations that use SBP tend to
operate with a lean staff and have fewer layers of management, they tend to respond less dramatically to changes in
the business cycle.(5)

Through our experience in implementing several of these reward systems, we also find that employees believe SBP
programs provide substantially greater opportunity for pay increases and allow significantly greater opportunities for
employee development. This is a direct result of training and job rotation and provides a vehicle for the organization's
"fast trackers," who would otherwise be frustrated by a lack of career growth opportunities. Without this growth
potential, these future leaders may be less committed to the organization and seek opportunities outside the
organization.

We have also found that the successful SBP plans improve employee understanding of the overall business. Instead
of being a specialist, the job rotation system allows an employee to learn multiple functions, supervisory or
management skills, and some administrative or technical support roles. Employees also frequently report that SBP
plans improve their quality of work life. When employees believe management is committed to their development, a
high trust culture evolves. This tends to improve labor/management relations, intergroup cooperation, teamwork,
employees' self esteem, and loyalty to their employer.

And lastly, employees tend to perceive SBP as more equitable because objective measures are used to identify and
reward the highly skilled and those who acquire new skills. SBP supports a true merit or pay-for-performance culture.
Employees will receive financial and nonfinancial rewards for modeling the behaviors management wants to foster
and demonstrating skill competence on the job. Employees who do not want to or can not adapt tend to de-select
themselves, enabling management to discard the "black hat" they traditionally have had to wear. There are three
major costs of SBP plans. As a plan matures, hourly labor costs (except starting salaries) may rise above the market
average. This, coupled with increased training costs and fluctuations in short-term productivity, makes SBP most
viable in environments where management is patient enough to wait for the returns. As most plans mature the
increase in labor costs is usually more than offset by reduced overhead, improved quality, and enhanced customer
responsiveness.

Because these plans require considerable job redesign and human resources system modifications, most
organizations need external consulting assistance during the assessment and design phases. And finally, since SBP
represents such a profound change in employee rewards it requires considerable time and effort in preselling the
program, especially in organizations that have a long tenured or mature workforce.

How To Determine If SBP Is Appropriate For You

The following should be considered when deciding on the viability of a SBP system:

1. Fit with vision, strategy, and operational initiatives. The first and most important variable to consider when
assessing the appropriateness of any reward system is the degree to which it supports your business strategy and
operational initiatives. Our experience suggests that SBP most closely supports customer satisfaction improvement,
cost reduction, cycle time reduction, and productivity improvement strategies.

2. Technological characteristics. SBP is ideally suited for organizations that have highly interdependent operations
and jobs that can be easily enriched. Service organizations (customer service functions, engineering teams, training
departments, etc.) that lend themselves to team workflows are also excellent candidates for an SBP plan. SBP
should be avoided in highly automated environments where employees have little impact on operational
performance.

3. Culture characteristics. SBP plans are not turnkey systems that plug into any organization; they must be
customized. SBP plans tend to be most successful in organizations that stress ongoing learning, growth, flexibility,
skill acquisition, and pay for performance (rather than pay for seniority).(6) The prevalent management style should
be highly participatory to facilitate new skill acquisition. It is also imperative to assess employee needs and attitudes,
such as their trust in management, their desire to learn new skills, etc.

4. The capability and commitment of the Human Resource department. SBP plans typically affect a number of
policies and systems (e.g., job posting employee recruiting procedures and selection criteria, performance
management, human resource information, succession, and orientation/training for new hires). These systems
typically must be modified to closely support SBP.

5. Size of location. SBP is more difficult to install in a large office location or plant than in a smaller facility. There is
also a positive relationship between the size of the location (SBP is easier to implement in locations with less than
500 employees), the complexity of the plan, and the length of time needed to implement SBP.(7) Our experience
suggests that it typically takes six to 12 months to design and successfully implement an SBP system (in a location
with 500 or less employees).

6. Labor/management relations. As with most other human resource interventions, SBP should not be installed in an
environment where there is an adversarial relationship between labor and management.

7. Financial stability of organization. Companies that have wide revenue fluctuations or have been losing money over
an extended period of time may have difficulty in adequately funding an SBP program.

How To Implement SBP

Based on our experience in successfully implementing and studying SBP plans, we will discuss below a broad, nine-
task process for design and implementation.

Task 1: Conduct readiness assessment. Nothing is more sacred to employees than the way they are paid. So, before
adopting SBP, we advocate conducting a readiness assessment to determine the appropriateness of SBP. A key
component of this assessment is a determination of employee's desire for flexible job assignments, pay-for-
performance, and continual learning of new skills. If the readiness assessment indicates a "good fit," an SBP system
requires further significant analysis to determine the degree of fit. Additionally, we suggest each company analyze
potential effects on key subsystems (information systems, other Human Resource policies and procedures, etc.),
assess compatibility with the existing cultural characteristics, and solicit labor/union input at the earliest opportunity.

Task 2: Develop Change Plan. Effective change plans tend to include a commitment and communication strategy.
The commitment strategy identifies which group of employees must support SBP to ensure success and identifies
any of their outstanding issues or concerns. These issues must be addressed in the design of the SBP plan. The
communication strategy specifies what will be communicated to each group of employees and how, and also
identifies mechanisms for soliciting and incorporating their input on an ongoing basis.

Task 3: Review Work Processes. This task includes an indepth analysis of work methods and process flows to
identify the optimal job or process design. Natural separations in the way work is processed soon become obvious as
well as which groups of employees should be covered by the plan.

Task 4: Develop Classification Plan. Once the boundaries of the plan have been defined, pay grades are developed.
This is accomplished by identifying compensable factors for each job and developing a job classification system. It is
important to have employees actively involved in this task to ensure their understanding, commitment, and trust.
Task 5: Develop Certification Measures and Procedures. When developing certification criteria we strongly advocate
using measures that balance operational performance (output, quality), new skill acquisition, and team behaviors.
Once the criteria are final, administrative procedures should be developed that identify who is responsible for
measuring skill mastery, how skills will be measured, and so on.

Task 6: Develop Rotation System. A rotation system should be designed either to interface with an existing human
resources information system or, depending on the size of the organization, to be administrated manually. An integral
component of this system is a comprehensive curriculum plan, which should sequence the technical and nontechnical
education needed for each skill block. On-the-job and classroom training is then developed and sequenced.

Task 7: Develop Administrative Control Procedures. Once the SBP plan has been conceptually designed, it is
important to develop administrative control procedures that clearly describe the components. Issues that are
frequently addressed range from specifying the minimum number of jobs that must be mastered to topping out.

Task 8: Modify Human Resource Policies. At this point in the implementation all Human Resources policies and
systems are reviewed and, if necessary, revised to more closely support the SBP transition. Usually the performance
management, new employee orientation, employee selection, training and development, and bonus systems are
modified to closely support the SBP plan.

Task 9: Modify Current Reporting Relationships. The final step in the implementation process is to review the current
reporting relationships and increase spans of control where applicable. This step usually occurs after the system has
been operational for an extended period of time and is a normal outgrowth of the multi-skilled employees who require
less supervision.

Summary

SBP is an exciting reward system that can be used to closely align employee results and behaviors with the business
strategy. It is especially appealing to organizations that have completed downsizing, reengineering, mergers or
acquisitions or learning organization or quality management initiatives because it promotes employee flexibility,
knowledge transfer, and a broad-based perspective that most global organizations strive for.

Figure 1: A Comparison of Traditional and SBP Reward Systems

Traditional Systems SBP Reward Systems

Pay based on current Pay based on the width

job employee per- and breadth of skills an
forms. employee can perform.

Multiple job classifi- Typically less than five

cations and rigid work job classifications
rules. needed.

Focus on formal Informal and formal

feedback mechanisms feedback provided on
one or two times per an ongoing basis.
year that may not be Feedback directly tied
directly tied to salary to salary or career
or career progression. progression.

Employee involve- Requires job rotation

ment and job rotation and employee involve-
not required. ment systems.

Jobs tend to be highly Job allow greater task

specialized and variety and decision-
repetitive. making autonomy.
Gale Copyright:
Copyright 1996 Gale, Cengage Learning. All rights reserved.

https://rorytrotter.com/2013/04/10/skill-based-pay-structures-versus-job-based-pay-
structures/
http://news.uark.edu/articles/11420/skill-based-pay-yea-or-nay
http://bizcenter.com/index.php?page=skill-based-pay-excerpt
http://articles.chicagotribune.com/1994-08-07/news/9408070100_1_skill-based-
towers-perrin-pay
http://www.knowledgewave.com/blog/competency-based-pay-structure-advantages
https://books.google.co.in/books?
id=nWTsZVBXyy4C&pg=PA165&lpg=PA165&dq=COMPANIES+WHERE+SKILL+BASE
D+PAY+IS+GIVEN&source=bl&ots=LzDv3zdV2Z&sig=1O-
PaIBABLUQk5zBx9zwT9Hdpo8&hl=en&sa=X&ved=0ahUKEwiS0MXO0f3SAhUjj1QKH
bMfBDQ4FBDoAQgYMAA#v=onepage&q=COMPANIES%20WHERE%20SKILL
%20BASED%20PAY%20IS%20GIVEN&f=false
https://books.google.co.in/books?
id=JzXl2qVVKbMC&pg=PA37&lpg=PA37&dq=COMPANIES+WHERE+SKILL+BASED+P
AY+IS+GIVEN&source=bl&ots=Z0qquj3smq&sig=GaCK92y8rYgOZhoWjoCUicAJvoc&
hl=en&sa=X&ved=0ahUKEwiS0MXO0f3SAhUjj1QKHbMfBDQ4FBDoAQg8MAY#v=one
page&q=COMPANIES%20WHERE%20SKILL%20BASED%20PAY%20IS
%20GIVEN&f=false
http://www.workforce.com/1993/06/01/master-the-compensation-maze/
https://books.google.co.in/books?
id=w0gzdzySXcIC&pg=PA123&lpg=PA123&dq=COMPANIES+WHERE+SKILL+BASED
+PAY+IS+GIVEN&source=bl&ots=zTneQO_fSB&sig=d4NBPPAKIPoVT_8PYQeJ29dfKtE
&hl=en&sa=X&ved=0ahUKEwiGxcrd0f3SAhVhz1QKHVs-Bes4HhDoAQg-
MAY#v=onepage&q=COMPANIES%20WHERE%20SKILL%20BASED%20PAY%20IS
%20GIVEN&f=false
ttps://books.google.co.in/books?
id=dNrZ1JatyMMC&pg=PA49&lpg=PA49&dq=Knowledge-Based+Pay?
&source=bl&ots=aWiTh5am4_&sig=d2EBmAeIYc9IjKbiKKDqGWOSkh0&hl=en&sa=
X&ved=0ahUKEwjJnpKV5P3SAhXpqVQKHZyPD4Y4ChDoAQhRMAk#v=onepage&q=K
nowledge-Based%20Pay%3F&f=false