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Pay Structures Based on Employee Skills

One major trend in wage systems in recent years is to base pay on what workers can do — the skills, knowledge, and talents they bring to the company — and not the nature of the positions they fill. To do so, the company adopts a pay structure that best supports the compensation philosophy and job valuation method used.

Variable pay system

Variable pay systems link a percentage of a position’s pay to defined performance and accomplishment targets.

How the system usually works: You establish a base pay rate and define group and individual objectives as a variable salary component. Some systems set base pay at about 80 percent of the possible compensation under the variable system. You can base proportions of the variable component on the attainment of departmental or company objectives and on individual achievement.

Advantages:

  • It imposes a direct relationship between pay and production.

  • It guarantees employees a stable base income, while providing incentives for superior performance.

Disadvantages:

  • If employees can’t meet performance targets, it can lead to morale problems in an economic downturn.

  • It can result in unequal pay among workers doing essentially the same jobs.

  • Administering it can be exceptionally labor intensive.

Broadbanding

With broadbanding, you reduce a lengthy series of narrowly defined base-pay categories to a few broad ranges.

How the system usually works: You boil down a cluster of related jobs into one pay band. For example, you currently have six different job titles and pay groups for your administrative staff (office assistant, office manager, receptionist, executive assistant, administrative assistant, and senior administrative assistant), with base salaries ranging from $22,000 to $52,000 a year, depending on job title.

Under broadbanding, you eliminate all job titles and salary ranges and combine everything into one band — administrative staff — with the same overall pay range as before but with no hard-wired connection between specific salaries and job titles.

Keep in mind that the actual salaries you pay don’t change. You may still have one person earning, say, $40,000 and another earning $25,000. On the other hand, managers now have the option of basing pay on factors that derive from job performance or some other criteria, as opposed to job title.

Managers also have the option of moving employees around as the work requires — according to the employees’ skills — without needing to worry about job titles.

Advantages:

  • Gives managers flexibility in setting base salaries and work assignments

  • Eliminates bureaucratic barriers to transfers and employee development (such as job titles)

  • Eliminates unnecessary distinctions between similar jobs

  • Lets managers reward superior performance more easily

Disadvantages:

  • May prove disconcerting to long-time employees who may see broadbanding as a threat to their status.

  • Can result in inconsistent compensation decisions across departments.

  • Unless guidelines are clearly established, management can be open to charges of favoritism or discrimination.

  • It may be more difficult to document the exempt/nonexempt status of jobs at specific points in time.

  • In unionized industries, you can implement the system only through collective bargaining.

Skill-based and competency-based pay

Under a skill-based pay system, you set pay scales by skill level and not by job title. Although skill-based pay is still an option, few companies use this approach today, partly because, if a firm’s required skill sets change rapidly, it must continuously reinvent the system.

Competency-based pay systems base compensation on an employee’s traits or characteristics rather than on specific skills. This method is used by only a few employers today because it’s very tricky to develop and administer.

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