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Pay for Skill – Danger Alert!

There are many different organizational philosophies around compensation and how employees should be paid and/or rewarded. I am not necessarily convinced that any one pay philosophy or pay practice is universally better than another; however, I do believe you need to strive to find an approach that will work for your organization. I firmly believe that if you have invested in conducting proper job evaluations and market pay studies, you will have, at the very least, established a solid foundation on which to build. That is, you will have a pretty good handle on how you will bring new hires into your company based on what the market is paying for their knowledge, skills and abilities. People that bring the desired level of KSA’s should be paid around the midpoint (market) of your pay band, less experienced are paid closer to the minimum and those with more experience and expertise perhaps come in closer to the maximum of your band.

DangerBut what about once they have been with your organization for some time? What criteria do you use to determine if they receive a pay increase or not? Do you provide pay increases every year based on changes in cost of living? While that might seem “fair” to you and your employees at first, you aren’t exactly incentivizing for better performance and rewarding accordingly! Another approach, which I am a bigger believer in, is merit pay or pay for performance. The basic tenant of this approach is that those employees that perform better (i.e. make you more money) get the highest pay increases and rewards. Now, in order for this to work, you need to have established a pretty decent performance management system or culture whereby goals are set and measured objectively and people are held accountable for their results. That can be a big “IF” for a lot of companies.

Another approach I have seen in companies, especially those in the professional services industries, is to pay or reward for skills. Typically, in most professional services companies, they invest quite heavily in the training and development of their people. The more you know about C# programming or Oracle databases, in theory, the more valuable you are to the company. The company can then “sell” your knowledge and capabilities to its clients and thus increase its own revenues. So, what happens in these situations is that employees receive pay bumps or “market” increases based on their enhanced skills portfolio. Warning – this can be a slippery slope!

This approach, a pay for skills model, can wreak havoc on your companies’ compensation scheme. What I have seen happen is that employees’ go on training courses, obtain certificates, certifications, etc. and then expect an immediate raise. They often come back from writing the certification exam with all kinds of salary surveys that show how employees that get a certification in XYZ earn 1/3 more than their peers who don’t have the certification. What they don’t tell you is that if you dig into the numbers, these surveys are pretty much manipulated by the vendor to justify the cost of the certification…but I digress.

This then becomes a perpetual cycle of being held hostage every time your employees go on training. By paying for “skill,” you end up NOT paying for the value derived from the skill. Meaning, just because Joe is now a Certified Widget Designer (CWD), it doesn’t necessarily mean that Joe is a GOOD widget designer. Sure he has demonstrated some level of knowledge required in order to obtain the certification; but that doesn’t mean Joe is applying it on the job or creating new/more value in his current role. You need to recognize and reward him for that based on his performance.

Now, if Joe leverages his new CWD certification and designs a new cutting edge widget, or mentors/trains others to become better widget designers, then that is a different story and that my friends, is an increase in performance! As well, if Joe goes on to be so good at making widgets he now has his eyes on leading a team and he gets promoted – well that is a promotional increase – all valid reasons for a pay bump!

So a word of caution if you are paying for skills right now – at some point in time you are going to be held hostage by this approach. Your staff will quickly figure out that the only way to get an increase is go on training and get some sort of certification. Are you willing to approve and pay for any and all training requests now so that all staff has an opportunity for pay increases? If not, why not? What message does that send? What are you telling your employees about the importance of their performance? Is that even important to you? I simply caution on the pay for skill approach and doling out buckets of cash for certifications. That is a short term “solution” that will only end up in longer term pain for you. You are basically encouraging a mercenary type of approach and not demonstrating the causal compensation link between your company and its employees. You want to recognize and reward employees for doing great work – there are better ways to do it then pay for skill. As always, I welcome your comments and feedback.

Image courtesy of digitalart/FreeDigitalPhotos.net



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