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July 2008

Paying for Skills Is Inevitable…Or Is It?

by Pat Zingheim & Jay Schuster

Jobs don’t make organizations successful, people do. Yet all people systems focus principally on jobs as the element of design. What is the future of paying the person rather than paying the job? Paying for skills is not a new concept but needs an application that not only reflects the competitive pressures to retain scarce talent with critical skills but also has the availability of a web-based tool to facilitate managing skills for compensation purposes. The system needs to build a “bridge” between valuing skills in the marketplace and surveys with information on what jobs are paid—in a market where jobs are the center of surveys, the cross between jobs and paying for skills is a needed link.

SZA has conducted workforce retention, pay and reward studies in 2007/2008 in the following industries: health care, high tech, public sector, West Coast fast growth, and West Coast privately held (see our article and study on Schuster-Zingheim and Associates, Inc.’s website, "Workforce Retention and Pay and Reward Practices in America’s Best Hospitals"). In every study, CEOs, COOs, CFOs, and HR leaders are looking for ways to recognize skill and competency in meaningful ways.

The Business Case for Skills

Job-based systems focus only on how the job responsibilities, goals, experience requirements (in general terms) and other requirements are described. “Career growth” and “getting paid more” require moving to a job that is evaluated as more important or that is worth more in the marketplace. Job descriptions seldom focus on the specific skills, competencies, results and performance required for career growth. Rather, semantic differentials are most often the foundation of job hierarchies. For instance, we define job differences in terms of words like “considerable” as compared to “extensive” in hopes of leveling the job system. So if an employee and manager chart a course for the individual to become more valuable in terms of what they bring to the organization and, in turn, what they receive in terms of pay and reward growth, this must be translated back into a semantically defined job family. To get more pay, the individual needs to be “promoted” to a more valuable job—a problem if you believe that people and not jobs provide differential advantage.

In a labor market in which competition for scarce and critical skills is strong, an organization must be able to focus directly on recognizing the value of talent, not the value of jobs. Early users of pay systems based on skills and skill acquisition and growth will be at a notable advantage in the battle for talent retention.

Where Do We Start?

The most common foundation for pay management is the competitive labor market. The reason is that, to quote the phrase, “If the grass is much greener on the other side of the fence, people will leave.” But the competitive job market is defined in terms of jobs and not people or skills.

Whether or not you agree with point-factor job evaluation, this form of job evaluation and valuing was a significant and long-lasting theory, philosophy, strategy, tactics, and operational program all lumped into a single solution. The Hay point-factor job evaluation system dominated the management of pay for generations and still does outside the United States. This was the last gasp, however, for pay solutions based on internal job values as the predominant determiner of pay ranges, levels, or individual pay because it did not make a worthy transition to a market-based solution.  

Turning to paying for skills, we find a related series of issues. Jobs and not skills are the foundation of measuring the market in terms of competitive practice, so paying for skills has been mostly an internal valuation tool that makes a crude adaptation to the marketplace. Like point-factor job evaluation, skill pay with skill blocks for manufacturing jobs in the 1990s was often over-designed and cumbersomely complex—few organizations have time for that anymore.

The Marketplace for Skills

Different skills have varying values to organizations and in the competitive marketplace. Until a viable way exists to gather and apply market information to the skills for which organizations need and want to pay, it is essential to find some way to translate the market value of jobs into the market value of skills. There are some possible ways to create that needed bridge to the marketplace:

Direct Pricing of Skills: This is the ideal way to relate skills to the marketplace because new roles are constantly evolving that are composites of several skill sets. Recombinations of skills such as “technology” and “customer service” or “artistic” and “selling” show that what was the combination of skills that traditionally comprised a “job” are changing. So the goal would be to combine the market value of different levels of skills to determine the value in the market of the person holding these skills. Obviously, this would be ideal.

Several attempts at direct pricing of skills have occurred, but more efforts are needed. The problem is that most organizations still address design and placement in the context of jobs and not skills, so it is cumbersome and difficult to gather the market value of skills. And the process probably calls for enough subjective judgment that the information is some time away from perfection. The several attempts that have been directed toward directly pricing skills have been valuable. But they typically focus on only one skill category, such as software/computer technology, making it difficult to address cross-organizational comparisons. However, more work is and should be done to make this the foundation of market-based skill pay.

Indirect Pricing of Skills: Here is the most promising area for advancement of market-based skill pay. It involves pricing a specific sample of benchmark jobs that have the common skills and then translating the result into the value of the skills. This is a far less accurate process, creating room for criticism relative to subjectivity, but it is one way of translating jobs to skills. More research is clearly needed but the focus on skills is becoming increasingly critical to pay management. In recent studies SZA has conducted, top medical centers and cities in tough labor markets were trying to pay more for skills than jobs on an incremental basis. So the need is clearly there to draw parallels between jobs and what skills are worth.

Conclusions

One of the most telling bits of research SZA uncovered for upcoming articles on cities in fast-growth, difficult labor markets is that these cities were not able to compete for talent with the standard “book of public sector pay tools.” These city governments have people retiring when they are most important to the organization and the best new talent—particularly those in scarce-skill jobs—are not interested in merely liberal benefits, retirement and a secure job. Traditional public sector classification systems are being adapted to provide for pay progression based on skill acquisition and application. If organizations like the public sector are changing, will other organizations in more typically flexible types of industries consider doing so as well? Skills are going to continue to be around. Are we going to pay for them or not?

 

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