SkillBasedPay

GeraldE.Ledford,Jr.
President,LedfordConsultingNetwork,LLC
2015BHavemeyerLane
RedondoBeach,CA90278
3103186405
Gerry@LedfordConsultingNetwork.com

HerbertG.HenemanIII
DicksonBascomProfessorEmeritusinBusiness
ManagementandHumanResourcesDepartment
SchoolofBusiness
UniversityofWisconsinMadison
975UniversityAvenue
Madison,WI53706
6082629175
hheneman@bus.wisc.edu

June2011

PreparedfortheSocietyforIndustrial&OrganizationalPsychology,Inc.SIOPScienceSeries
PublishedbytheSocietyforHumanResourceManagement(SHRM)

DILEMMA
HeatherJeffersonistheHRmanageratamanufacturingplantforMotherNaturesBest,afood
processingcompanyintheUnitedStates.Competitioninherindustryisfierce,andexecutiveshave
pulledeverylevertheycaninordertoincreaseproductivityandenhanceprofitability.Theyhave
upgradedtechnology,adoptednewinformationsystems,tightenedthesupplychain,andbegun
leansixsigmainitiatives.Now,seniorexecutivesareaskingthehumanresourcefunctiontohelpin
innovativeways.Someexecutiveshavesuggestedthataskillbasedcompensationsystemforhourly
employeeswouldincreaseperformance,basedonsuccessesreportedfromothercompaniesintheir
industry.Theysuggestthatthisparticularfacilitybeapilottodeterminewhethersuchaplanwould
workfortheentirecompany.WhatshouldMs.Jeffersonsaytotheseexecutives?
WhatIsSkillBasedPay?

Definition

Skillbasedpay(SBP)isacompensationsystemthatrewardsemployeeswith
additionalpayinexchangeforformalcertificationoftheemployeesmasteryofskills,
knowledge,and/orcompetencies.Skillisacquiredandobservableexpertisein
performingtasks.Knowledgeisacquiredinformationusedinperformingtasks.
Competenciesaremoregeneralskillsortraitsneededtoperformtasks,ofteninmultiple
jobsorroles.InSBPsystems,employeesreceiveadditionalpayonlyafterthey
demonstratetheskills,knowledge,and/orcompetenciesthatthesystemrewards.
Thus,SBPisapersonbasedsystem,becauseitisbasedonthecharacteristicsofthe
personratherthanthejob.Inmorecommonjobbasedpaysystems,payisbasedon
thejob,whichemployeesareentitledtoreceiveeveniftheyarenotproficientintheir
position.
Background

Skillbasedpayisoneofthemostwidelyimplemented,poorlyunderstoodand

underresearchedhumanresourcepracticesinusetoday.Partoftheproblemisthat
skillbasedpayisnotasinglesystem,butratherafamilyoflooselyrelatedpay

systemsthathavedifferentorigins,distincttraditions,andsuitabilitytodifferenttypes
oforganizations.Opinionsaboutskillbasedpayoftenmissthemarkbecausethey
applytooneform,withoutappreciationthatotherformsmaybeappropriatefora
givenorganization.Becausethereissomuchconfusionaboutskillbasedpay,webegin
withadetaileddiscussionofitsdifferentformsandpurposes.
Figure1depictsthedifferentformsthatskillbasedpaycantake.One
dimensionisthetypeofskills,knowledgeorcompetenciesthatthesystemcanreward:
depth(gaininggreaterexpertiseinexistingskills);breadth(increasingonesrangeof
skills);andselfmanagement(gainingskillsthatmightpreviouslyhavebeenreserved
forhigherlevelsintheorganizations,suchasplanning,training,budgeting,etc.).The
seconddimensionfocusesonwhethertherewardofferedisabonusorbasepay
increase.DifferenttypesofSBPshavedifferentconfigurationsassociatedwith
differenttraditions,andgoalsandimplementationprocessesdifferacrossthedifferent
SBPtypes.
Figure1
TypesofSkillBasedPaySystems

BonusReward

BasePayReward

Depth

Breadth

SelfManagement

DepthOrientedBasePaySystems
OnetypeofSBPisoldandfamiliar(SystemAinFigure1)intheUnitedStates
andelsewhere.Depthorientedplansrewardemployeesforgaininggreaterexpertise
onexistingskills.Apprenticeshipsforskilledtradesdatetoantiquity,andthemodern
skilledtradessystemdatestotheMiddleAgesinEurope.Inthesesystems,employees
buildskillsforyears,receivingonlyoneortwopromotionsduringtheircareer.Blue
collarskilledtradesmayreceivepayincreasesastheyaremovefromapprenticeto
journeymantomastercraftsmanas,forexample,anelectrician,millwrightor
toolmaker.Theanalogouswhitecollarsystemisthedualcareerladder,whichrewards
deeperlevelsofexpertiseratherthanadvancementthroughthemanagement
hierarchy.Thegoalsofthesesystemsarebuildingcriticalspecializedskills,attracting
talentandretainingemployeesoverthelongperiodneededtobuildspecializedskills.
Thehighestpaidmembersofthedualladder,frequentlydesignatedasFellows,maybe
worldclassexpertsintheirspecialties.Thedualcareerladderiscommoninsuch
industriesasaerospace,pharmaceuticals,hightechnology,andotherswhere
specializedexpertiseisacompetitivenecessity.Professorsoftenfindsuchsystems
appealingpartlybecausetheirowncareersystemisdirectlyanalogoustomedieval
tradessystem.AnacademiccareerisencompassedbythethreejobtitlesofAssistant
Professor,AssociateProfessorandProfessor,witheachpromotiontakingyearsof
work,markedbyformalcertificationofachievement.

Thedisadvantageofthesesystemsisthattheycancreateoverlyspecialized

employeeswhoidentifymorewiththeircraftorprofessionthanwiththemissionofthe

organization.Intheskilledtrades,sharpjurisdictionallinesbetweencraftshasledto
jokesabouthowmanyjourneymenittakestoreplacealightbulb.(Oneansweristhree:
amechanictoholdtheladder,apipefittertoconfirmthatnoplumbingisinvolved,and
anelectriciantoscrewinthebulb).Overthepast20years,thestrongtrendinthe
UnitedStateshasbeentowardmulticrafting,inwhichemployeesgainproficiencyin
twoormoretrades.SuchsystemsaddabreadthdimensionandlookmorelikeSystem
B,whichwewillconsidernext.
BreadthOrientedBasePaySystems
SystemBinFigure1indicatesthetypeofsystemthatismostoftenrecognized
asskillbasedpay.Thegoalsaretorewardanappropriatebalancebetweenemployee
flexibilitythroughskillbreadth(theabilitytododifferentjobsintheorganization);skill
depth;andselfmanagementskills(suchastraining,hiringandperformanceappraisal)
thatarecriticalinsystemswithfewornosupervisors.Thistypeofsystemismost
commoninmanufacturing,butisalsousedinsomeothertypesoforganizationsthat
requirehighemployeeskillandemployeeinvolvement(suchascallcenters,helpdesks,
backofficeprocessingoperationsininsuranceandfinancialservices,andeven
specializedretail).

ThispaysystemoriginatedinProcter&Gambleinthe1960singreenfieldhigh

involvementplants,whichweremarkedbyahighlevelofemployeeinvolvement,a
delayeredhierarchy,useofselfmanagedteams,highlevelsoftraining,andextensive
communicationofbusinessresults.ThistypeofsystembecamethenorminP&Gasthe
highinvolvementmodelbecamediffusedthroughoutthecompany.SBPworked

becauseithelpedfacilitatetheoverallorganizationaldesign.Employeeslearnedthe
technical,socialandmanagerialskillsthattheyneededtomanagecomplextechnical
systemswithlittleornomanagerialsupport.

Inthedevelopedworld,manufacturingandbackofficeoperationsincreasingly

requireemployeestoactasknowledgeworkersratherthanbuttonpushers.Lowskill
operationsarebeingautomatedorsenttolowwagelocationsinthedevelopingworld.
Thejobsthatremaintypicallyrequirehigherskills,flexibilitytododifferentjobs,the
abilitytoworkwithoutclosesupervision,andahighleveloftraining.Employeesmust
understandtheoverallproductionorservicedeliveryprocessandrespondquicklywhen
problemsarise.Noneofthisispossibleifemployeesknowonlyonejobandtherefore
onesmallpartoftheoverallprocess.
Inthepasttwodecades,theriseofleansystemshasacceleratedthesetrends.
Leandemandsmuchmoreofemployees,includingselfinspection,involvementincost
reductionefforts,teamwork,crosstraining,andrapidadjustmenttochangesinmarket
demandfordifferentproducts.SBPisoftenusedtomotivateemployeestoacquire
thesecapabilities.
Arelatedbuthistoricallydistincttraditionhasbeentheuseofcompetency
basedpayformanagersandprofessionals,originallyanoutgrowthofworkon
competenciesbypsychologistDavidMcClelland.Inmanycases,competencypayplans
areanaturalextensionoftheeffortsofcompaniestobuilddistinctivecompetencies
thatmeetorganizationalneeds.Differentplansmayemphasizebreadth,depth,ora
combinationofboth,butthesetypicallygobeyondthetechnicalskillsorientationof

thedualcareerladder.Forexample,afoodprocessingcompanycreatedacompetency
payplanforallmanagersthatbasedpayincreasesontwotraditionalmanagerial
competencies(leadingforresultsandleveragingtechnicalandbusinesssystems)and
twocompetenciesthatreinforcedmajorcorporatetalentmanagementandquality
initiatives(buildingworkforceeffectivenessandmeetingcustomerneeds).Oneareain
whichcompetencysystemshavebecomeverywidespreadiseducation(seesidebar).
ThelimiteddataonSBPusageindicatesgreaterusethanmanyobservers
realize.AsurveyofFortune1000firmsbytheCenterforEffectiveOrganizationsin2002
foundthat56%usedSBP(broadlydefined),andthatthepercentageoffirmsusingit
hadbeenrelativelyunchangedsince1993.However,thevastmajorityofuserscovered
lessthanhalftheirworkforcewithSBP.AstudybytheInternationalPublic
ManagementAssociationsforHumanResourcesfoundthat22%ofpublicsector
organizationsusedSBPin2007.A2007TowersPerrinstudyofover600managersin21
countriesfoundthat27%ofcasesbasesalaryincreasesoncompetencies(definedas
proficiencyincoreknowledgeorbehavior)forexecutives,36%ofcasesformanagers
andprofessionals,and28%ofcasesfornonmanagement.Inaddition,increaseswere
skillbased(definedasacquisitionofnewskills)in9%ofcasesforexecutives,15%for
managersandprofessionals,and18%fornonmanagers.Finally,theprevailing
JapanesesalarysystemincorporatesahighdegreeofSBP.Typically,onepaygrade
schedulecoversallemployees,includingexecutives,andjobgradeisbasedonallthe
jobsandresponsibilitiestheemployeeisabletodo,notwhattheworkerisactually
doing.AstudybyAmericanandJapaneseresearchersfoundthatknowledgeandskill

isoneofthreeroughlycoequalfactors(alongwitheffortandcooperationwith
supervisors)indeterminingpay.ThisreflectstheJapaneseemphasisonjobrotation,
crosstrainingandgainingidentificationwithandunderstandingtheneedsofthe
companyasawhole.
AcademicresearchonSBPislimitedandmuchofitisnotcurrent,butthe
availablestudiesfocusonwhatwehavecalledTypeBsystems.Theavailabledataare
quitepositiveinindicatingthatthereisapayofffromadoptingsuchplans.Forexample,
astudyof97skillbasedpayplanssponsoredbytheAmericanCompensation
Associationfoundthattwothirdstothreequartersoftheseplanswereratedas
successfulonawiderangeofoutcomes,includingreducedstaffing,increased
flexibility,increasedproductivity,higherquality,andlowerturnover,despitehigher
averagewages.Thatis,SBPusershadfewer,morehighlypaid,andmoreproductive
employees.Afollowupstudyseveralyearslaterfoundthattheplanshadahigh
survivalrateandgenerallyenjoyedcontinuedsuccess.Finally,arigorouscasestudyin
anautocomponentplantfoundthattheplanthad58%greaterproductivity,16%lower
laborcostperpartdespitepayinghigherwages,and82%reductioninscrapversusa
comparisonplant.
BonusSystems
ThearmedforcesoftheUnitedStatesarecoveredbyauniquebonusSBP
systemthatisalmostunknownoutsidethemilitary.ThisisshownasSystemCin
Figure1.Covering1.5millionmilitarypersonnel,thisisthemostwidelyusedSBP
systemintheUnitedStates.Asfarasweknow,thissystemhasnotbeenthesubjectof

academicresearch;descriptionsofitarelimitedtoobscurefederalpublications.The
firstauthorlearnedaboutthissystemwhileconsultingtoaQuadrennialReviewof
MilitaryCompensationin1996.

Thegoalofthesystemistomanageattractionandretentioninparticular

occupationalspecialties.AnHRgroupinthePentagonmonitorsthedegreetowhich
theserviceshavebeenabletofilleachofhundredsofoccupationalspecialties.Ifthe
serviceshavedifficultyattractingandretainingqualifiedpersonnel,atemporary
enlistmentand/orreenlistmentbonusisoffered.Thismaybemodestmostsuch
bonusesappeartobelessthan$10,000butitispossibletoofferupto$40,000for
enlistmentbonusesand$150,000inreenlistmentbonuses.Reenlistmentbonusesare
higherpartlybecauseitiseasiertoverifytheskillsofveteranpersonnel.Bonusesare
usedforbothofficers(forexample,aircraftpilotsandmedicalpersonnel)andenlisted
personnel(forexample,SpecialForces).Thenephewofthefirstauthor,aMarine
helicoptermechanic,wasoffereda$70,000bonustoreenlistfortwoyearsattheheight
oftheIraqwar.Thisineffectwouldhavedoubledhiscashcompensation.Enlistment
andreenlistmentbonusesareusedsparingly,anddisappearassoonasstaffinglevels
forparticularspecialtiesarefilled.Thespecialtiesforwhichbonusesarepaidandthe
amountsofthebonuseschangefrequently,indeedsofrequentlythatthemilitarydoes
notannouncethem.

ACongressionalBudgetOfficereport(2007)foundevidencethatreenlistment

bonuseswereanimportantretentiontoolbutthatenlistmentbonuseswerenot
especiallycosteffective.Thismaybebecauseitiseasiertofillmanycriticalspecialties

byretainingincumbents,ratherthanbyfindingqualifiedciviliancandidates.Inaddition
toattractionandespeciallyretention,therearemanyadvantagesofthissystemforthe
military.Thesystemistargetedexactlytothespecialtieswithalaborsupplyshortage,
andthesecanchangeasoftenasneeded.Theveryflat,timeandrankbasedmilitary
salarysystem,whichisimportanttomilitaryculture,canbepreservedwhileinfact
makingavailablethecompensationneededtoattractspecialists.Finally,salarycosts
drawclosepoliticalscrutinywhilebonuscoststypicallydonot.

Webelievethatthistypeofpaysystemshouldbeconsideredmoreoftenby

nonmilitaryorganizations.Inparticular,organizationsinshiftinglabormarketsorwith
shiftingskillneeds,suchashightechnologyfirms,mayfinditadvantageous.Theonly
twocaseexamplesofSBPfailuretobepubliclyreportedarebothinhightech(Inteland
Motorola).Inbothcases,theconstantlyshiftingtechnologicalandbusiness
environmentmadebasepaysystemscumbersomeanddifficulttoimplement.Bonus
orientedsystemscanbecreatedmuchmorequickly,targetedmoreselectively,and
changedorterminatedmuchfasterthantypicalbasepayplans.However,quickly
changingbonussystemsmaybedifficulttocommunicateandmanage,andbonusSBP
systemsmayinvitesloppydesignsbecausethecostoferrorappearstobesolow.

Weknowofnobonusorientedsystemsthatrewardskillbreadthorself

managementskills.However,bonusesinprinciplecouldbeusedtorewardanytypeof
skilldevelopment.Webelievethatskillbasedbonusesaregreatlyunderusedgiventhe
continual,rapidchangeoftheU.S.economyandlaborforce,whichmayleadtopaying
permanentsalaryincreasesforskillsthatbecomeobsoleteovertime.

Figure2summarizesourkeypointsaboutthedifferentformsofSBP.Itdepicts

thetypeofskillemphasized,thegoals,andtheorganizationalconditionsthatbestfit
eachtype.
Figure2
ComparisonofDifferentSBPTypes

TypeA

TypeB

TypeC

Typeofskill
emphasized

Depth

Breadth,depth,and/or
selfmanagementskills

Depthoriented
bonuses

Skilledtrades
systems,dualcareer
ladder,academic
career

SBPsupportinghigh
involvementandlean
systems;competency
payforprofessionals

Criticalskillsbonuses
inthemilitary

Goals

Deeperemployee
expertise

Greateremployee
capabilityandflexibility,
broaderperspective,
increasedselfdirection,
newand/ordeeperskills

Managingrapid
changesintalent
availabilityandskill
needs;attraction
andretentionof
criticalskills

Conditions
thatbestfit
eachtype

Competitive
demandfor
specialized
expertise;multi
yeartrainingcycles
forkeyskills,
makingemployee
retentionhighly
desirable

Highinvolvementand
leanorganizationsthat
requirehighemployee
versatilityandcapability;
organizationsrequiring
newordeeperskillsof
managersand
professionals

Rapidlychanging
demandfor
specializedskills

Examples

HowIsSBPEstablished?

WhatevertheformofSBP,establishmentofaSBPplantypicallyinvolves

severalgeneralsteps:
1. IdentifypotentialSBPjobs;thatis,ajobinwhichdevelopmentofskilldepth
and/orbreadthispossibleanddesirable.

2. Foreachjoblevel,identifythespecificskills(bothdepthandbreadth)sought.
3. EvaluatethepotentialcostsandbenefitsoftheSBPplan(thesearediscussed
below);proceedwithfurtherconsiderationoftheSPBplanonlyifthelikely
benefitsoutweighthecostsfortheorganization.
4. Developtheappropriatetechniquesthatwillbeusedtoassessthenewskills,
knowledgeandcompetenciesgainedand/ordeveloped.
5. Establishcertificationstandardsandprocessesforemployeestodemonstrate
theirsuccessfulskillacquisition.
6. DeterminethedollaramountofSBPfortheacquiredskills,suchasindicating
thepayoutforeachskillblock.
ImplementationFactors
AnotherimportantfactorinsettingupanSBPisitsimplementation.Developing
specificimplementationplans,involvingandcommunicatingwithallaffected
employees,andthencarryingthroughontheimplementationplan,areallnecessary
actions.

SBPtypicallyincreasesaveragehourlyrates.However,SBPalsotypicallyleads

tolowerlaborcostsoverall.Howdoesthishappen?Averagepayratesgoupbecause
employeesreceivemorepayforlearningnewskillsandcompetencies.However,these
costsusuallyaremorethanoffsetbyleanerstaffingandhigherperformance.Itis
criticalfororganizationstodeterminepriortoadoptionofSBPwhethersucharesultis
likely.Someorganizations,especiallythosethatarehighlylaborintensive,mayfind
SBPtooriskytoadopt.

TheincreasedpayandclearlyspecifiedcareerpathsunderSBPtendtomake

theseplanspopularwithmanyemployees.However,someemployeesmaydislikethe
plan,suchassenioremployeesnearretirement,employeeswithlowgrowthneeds,and
thosewithlowabilitytolearnnewskills.Inaddition,employeesingeneralmaybecome
disgruntledwiththelackofopportunitytoearnmorepayiftrainingandcertification
opportunitiesarelimited.

Greateremployeetrainingispotentiallyahighcost.Multipleformsofskill

developmentmaybenecessary,includingacombinationofonthejob,classroomand
offsitetraining.Trainingdevelopmentanddelivery,andmoreimportantlyproviding
enoughtimeforemployeestoreceivetraininginnewskills,canaddcosts.

AdministrativecostsmayalsoincreaseunderSBP.Theremaybehighercosts

forthemanagementofjobrotation,skillassessmentdevelopmentandconduct,
certificationprocesses,andrecordkeeping.

MarketpricingofSBPjobsisdifficult.Typicalmarketpaysurveysexamine

comparablejobsintermsofjobcontentonly.Comparingpayratesforthosejobstopay
ratesforSBPjobsispossiblebutnoteasy.Essentially,entryrates,toprates,and
perhapsalevelinbetweenusuallycanbepricedusingrelevantsalarysurveystoprovide
askeletonforSBPlevels.ThespecificstepsintheSBPplanmaynothaveanalogsin
salarysurveys,butthesestepscanbepricedrelativetoeachotherwithintheoverall
structuretoprovideinternalequity.

Finally,thereisthematterofimplementation.Implementationbeginswith

managementscommitmenttodevelopadesignthathasapositiveROI,

communicatingthegoalsandmechanicsoftheplantoemployees,workingthrough
theinevitableproblemsthatarise,andupdatingtheplanperiodically.Becauseanypay
systemchangeislikelytobeanemotionalissue,thepotentialdollarandgoodwillcosts
ofafailedSBPimplementationarehuge.

WhatShouldHeatherJeffersonSay?

WhatshouldHeatherJeffersonsaytotheseniorexecutiveswhohavesuggested

usingherplantasapilotforanSBPplan?AsaresponsibleHRprofessional,Ms.
Jeffersonshouldhelpseniormanagersinthefollowingways:
1. HelptheexecutivesfullyunderstandthecostsandbenefitsofSBPintheir
particularsituation.ItisimportanttoprovideaclearunderstandingofhowSBP
woulddeliveragoodreturnoninvestmentfortheirbusinessbeforeproceeding
further.
2. WorkwiththemtoconductadiagnosisoftheappropriatenessofSBPfortheir
organization,perhapswiththehelpofataskteam.Factorssuchasworkforce
characteristics,trainingcapability,changeintechnologyandworkprocesses,
howwelltheorganizationhasidentifiedanddocumentedtheskillsrequiredin
theworkprocess,andmanyotherfactorscouldmakeSBPagoodfitorapoor
fit.
3. Helpseniormanagersunderstandthedesignoptionsthatmightmaximize
benefitsandminimizecosts.Forexample,theSBPplanmightapplytoall
employeesoronlythoseinsomeunits.SBPmightbephasedinovertime

startingwithapilotunit.TheskillscoveredbytheSBPplanmaybe
comprehensiveorhighlytargetedtoafewtypesofskillsthatareespecially
criticalintheorganization.Identifyingthedesignoptionsmaytakeconsiderable
preparatorywork.
4. Ensurethatseniormanagersunderstandtheimplementationchallengesand
appropriatetimelinefordevelopingSBP.Implementationchallengesmay
includedifficultyinreachingagreementonkeydesignchoices;convincing
employeesandmanagersthatSBPisintheirinterest;findingtimefortraining,
especiallyiftheorganizationisbusy;andmorebroadly,balancingtheneedto
deliverproductsandserviceswiththeneedtolearnnewskillsforlongterm
benefits.
5. Developacomprehensivecommunicationplan,includingidentificationofthe
targetaudiences,thekeymessagesforeachofthem,mediatobeused,timing
andfrequencyofmessagesifdeliveredmultipletimes,andcommunication
products(brochures,etc.)tobeprovidedatcommunicationevents.
6. Finally,developariskmanagementplanthattakesintoaccountthepossibility
thattheplanmayfailorhaveundesirableconsequences.WouldSBPbevery
unpopularwithcertainemployeegroups(suchaslowskilledemployees,
especiallyiftheyarenearretirementage)?Ifso,doesthisincreasetherisksofa
unionorganizingcampaign?Whataretheoddsthatoverallcostswouldnotbe
offsetbyproductivity,quality,retention,andothergains,threatening
competitiveness?Theanalysisshouldconsiderriskmitigationoptionsifthe

threatsareserious.Aslowerormorelimitedimplementation,greater
communicationefforts,andspecificattentiontogroupsthatmayfeel
threatenedbySBPmaybenecessary.
Bytakingsteps,Ms.Jeffersondemonstratesherstrengthasapartnerinabusiness
decisionaboutwhatSBPmightlooklikeandwhetheritwouldbeappropriateinher
organization.

Sidebar:TeacherCompetencyPayPrograms

Fordecades,theteachingprofessionhasusedthesinglesalaryscheduleto
determineteacherbasepayfornewhiresandforpayprogression.Thisscheduleisa
simplematrixwithsenioritystepsandeducationalcredits/degreesonthetwoaxes,and
salaryasthecellentry.Thesinglesalaryschedulehasbeencriticizedfornotrewarding
teachercompetence,sinceseniorityandeducationalcreditsareweakproxiesfor
teacherclassroomcompetenceandeffectiveness.
Inresponse,competencyfocusedpayprogramsarebeingdevelopedandused
todeterminepayincreases.Theprogramsareasignificantpartofbroadbased
attemptstoimproveteacherquality.Threeprogramsaremostprevalent:competency
blocks,competencybasedteacherevaluation,andtheNationalBoardforProfessional
TeachingStandardscertification.
CompetencyBlocks:Aschooldistrictmayidentifyspecificcompetencyblocksit
wantsteacherstoacquire.Examplesincludetechnologyusage,analysisofstudent
performancedataandcurriculumunitdesign.Teacherselecttocompletetheblocks
andhavetheirmasteryoftheblocksassessed.Typicaldollarawardsformasteringthe
skillblockrangefrom$300to$3,000.

CompetencyBasedTeacherEvaluation:Competencybasedteacherevaluation

replacesthetypicalcasualteacherperformanceevaluationwithrigorousassessmentof
teachersclassroomperformancecompetencies.Assessmentresultsthenserveasa
basisfordeterminingpayraises,aswellasprogressionthroughsuccessivelyhigher
competencylevels.
Thefoundationoftheprogramisacompetencymodelusedforteacher
assessment.ApopularmodelistheFrameworkforTeaching,whichdefinesfour
teachingperformancedomains(planningandpreparation,classroommanagement,
instruction,andprofessionalresponsibilities).Eachdomainincludesnumerousspecific
performancecomponents,suchascommunicatingclearlyandaccuratelyforthe
instructiondomain.Eachcomponenthasmorespecifictaskelements,suchas
directionsandproceduresforthecommunicatingclearlyandaccurately

component.Inturn,eachelementhasfourlevelsofperformance(unsatisfactory,basic,
proficient,distinguished),eachofwhichisdescribedwithbehavioralexamplesor
rubrics.Asanexample,theproficientlevelfordirectionsandproceduresisdefinedas
teacherdirectionsandproceduresarecleartostudentsandcontainanappropriate
levelofdetail.
Theactualassessmentprocessinvolvescollectionofperformancesamplesfrom
multiplesources,suchasclassroomobservationandinstructionalplanninglogs.There
aremultipleevaluators,suchasprincipalsandpeers.Evaluatorsreceivespecialtraining
inthecompetencymodel,performancesamplesandratingsofperformance.
Apayscheduleisdevelopedtoshowtherelationshipbetweencompetency
ratingsandpayraisesineitherdollarorpercentageterms.Thepayschedulemayalso
reflectotherperformancecomponents,suchasgrowthinstudentachievementtest
results.Finally,thepayschedulemayshowcareerpaylevels(e.g.,entry,novice,career,
advanced,accomplished)andprogressionbasedoncompetencyassessmentresults.
NationalBoardforProfessionalTeachingStandards:TheNBPTSdeveloped
andadministersavoluntarycertificationassessmenttorecognizeeffectiveand
accomplishedteachers.Therearespecifichighstandardsofwhatteachersmustknow
andbeabletodoin25certificateareas.Assessmentsarebasedonteacherprepared
portfoliosofclassroominstructionvideosandexamplesofstudentwork,and
performanceonseveralonlineassessmentcenterexercises.Multipletrainedassessors
evaluateeachteachercandidateforcertification.Thecertificationisgoodfor10years.
Statesandschooldistrictsprovideincentivesforcertificationof$2,000to$10,000
annuallyforfiveto10years.

FurtherReadings
Boyett,J.H.,&Boyett,J.T.(2004).TheSkillsBasedPayDesignManual.LincolnNE:
ASJAPress.

Canavan,J.(2008).Overcomingthechallengeofaligningskillbasedpaylevelstothe
externalmarket.WorldatWorkJournal,17(1),1825.

CongressionalBudgetOffice.(2007,June).EvaluatingMilitaryCompensation.
HenemanIII,H.G.,Milanowski,A.,Kimball,S.M.,&Odden,A.(2006).StandardsBased
TeacherEvaluationastheFoundationforKnowledgeandSkillBasedPay.
ConsortiumforPolicyResearchinEducation(SchoolofEducation,Universityof
Pennsylvania,BriefRB45).

Jenkins,G.D.Jr.,G.E.Ledford,Jr.,Gupta,N.,&Doty.D.H.(1992.)Skillbasedpay:
Practices,payoffs,pitfalls,andprospects.Scottsdale,AZ:American
CompensationAssociation(WorldatWork).

Lawler,E.E.III,Ledford,G.E.Jr.,&Chang,L.(1993).Whousesskillbasedpay,andwhy
theyuseit.CompensationandBenefitsReview,25(2),2226.

Lawler,E.E.III,Mohrman,S.A.,&Ledford,G.E.Jr.(1998.)StrategiesforHigh
PerformanceOrganizations.SanFrancisco:JosseyBass.

Ledford,G.(2008).FactorsAffectingtheLongtermSuccessofSkillbasedPay.
WorldatWorkJournal,17(1),617.

Ledford,G.,Heneman,R.L.,&Salimki,A.(2008).Skill,knowledge,andcompetency
pay.InL.A.BergerandD.R.Berger(Eds.),TheCompensationHandbook(5thed.).
NewYork:McGrawHill.

Milkovich,G.T.,Newman,J.M.,&Gerhart,B.(2010).Compensation,10e.Boston:
McGrawHill/Irwin.

Mulvey,P.,&Ledford,G.(2002).Implementingcompensationsystems.InJ.W.Hedge
andE.D.Pulakos(Eds.),ImplementingOrganizationalInterventions.SanFrancisco:
JosseyBass.
Odden,A.,Kelley,C.,HenemanIII,H.G.,&Milanowski,A.(2001).EnhancingTeacher
QualityThroughKnowledgeandSkillBasedPay.ConsortiumforPolicyResearch
inEducation(SchoolofEducation,UniversityofPennsylvania,BriefRB34).

Shaw,J.D.,Gupta,N.,Mitra,A.,&Ledford,G.E.Jr.(2005).Successandsurvivalofskill
basedpayplans.JournalofManagement,31(10),122.

Zingheim,P.K.,&Schuster,J.R.(2009).Competenciesreplacejobsasthe
compensation/hrfoundation.WorldatWorkJournal,18(3),620.

DosandDonts

1.Docarefullycraftthedesignoftheplantothespecificneedsoftheorganization.
Itisalmostimpossibletoborrowanyotherorganizationsdesign.Fortheplantohavea
solidROI,itmustfitthespecificorganizationalneedsandconditionsoftheadopting
organization.

2.Dontforgetimplementationitismoreimportantthandesign.
Goodimplementation(communication,training,renewalsystems,etc.)cansavea
mediocredesign,butaperfectdesignwillhaveapoorROIifimplementationis
inadequate.

3.Dothinkcarefullyabouthowtopricethesystemtothelabormarket.

AppropriatepricingisimportantforROIbecauseitisthekeytolaborcosts,employee
attractionandretention.

4.Dontexpecttheplantolastforever.
Researchindicatesthatevensuccessfulplansmustberevisedeveryfewyearstoadjust
totheevolvingneedsoftheorganization.

5.Doleaveenoughtimetodoitright.
Skillbasedpayisamajorchangebecauseitinvolvescompensationwhichall
employeescareaboutdeeplyandbecauseitaffectssomanyotherorganizational
systems.Planonacycleofsixto12monthsfordesignandimplementation.

FrequentlyAskedQuestions

1.Howdowedecidewhetherskillbasedpayisrightforus?

Thekeyquestioniswhetherthelikelyadvantagesoftheplangreaterflexibility,lower
managementandemployeestaffing,andreinforcementofhighinvolvementand/or
leansystemsoffsethigheraveragewageratesforthoseemployeeswhoremain,as
wellashighertrainingandadministrativecosts.DeterminingifSBPistherightpay
systemrequirescarefulanalysisforanyspecificorganization.

2.Whatorganizationalconditionsindicatethatskillbasedpayisnotforus?

SBPsystemsusuallyareineffectiveiftheworkislowskillthereisnotenoughROIto
justifythecostsofSBP.Unstablemanagement,organizationalstructure,ortechnology
isveryunfavorablebecauseitisdifficulttoprojectthespecificSBPdesignthatwill
meetorganizationalneeds.Aswithanymajorchange,topmanagementunderstanding
andsupportiscritical.Aworkforcethatisveryoldonaveragemayhavelittlechanceof
earningSBPincreasesbeforeretirement.Finally,aworkforcethatislowingrowth
needsisunlikelytowantSBP.

3.WhatarethemostfavorableconditionsforSBP?

Themostbasicconditionforsuccessisthatthereisawiderange(indepthandor
breadth)ofskills,knowledge,orcompetencyforemployeestoacquireanduseintheir
jobs.SBPpayplanstendtobemoreeffectiveinsettingssuchasmanufacturing,where
theskills,knowledge,andcompetenciesarerelativelyconcreteandeasytoassess.
Capitalintensivetechnologies(usuallyprocesstechnologies,suchaschemicals,paper
andfoodprocessing)arefavorablebecausethecostofdesignerrorsmattersless
employeepayusuallyisasmallpartoftotalcosts.Theuseofahighinvolvementoran
advancedleanorganizationdesignisfavorablebecauseeitherdesignrequiresahigh
levelofemployeeskillandflexibility,leadingtoapositiveROIforSBP.

4.Whatarethecriticalissuesinunionsettings?

Compensationisacollectivebargainingissueinunionsettings,sotheunionmust
partnerinthedesignprocess.TherearemanySBPexamplesinunionsettings,andSBP
designsdonotlooksignificantlydifferentfromthoseinnonunionsettings.Union
memberstendtopreferthehigheraveragepayratesofSBP.Traditionalunion
concernsaboutorganizationaljusticetendtoleadtoastrongfocusonfairnessin
assessmentofemployeeskills,providingtrainingandjobrotationopportunities,andso
on.Thisfocuscanbepositiveforthesuccessofthesystem.

5.Howdowegetemployeeacceptanceofthesystem?

AcceptanceofSBPisabasicchangemanagementissue.Clearly,employeesneedto
understandhowtheycanmakemoremoneyunderthesystem,andneedarealistic
ideaofhowlongitwilltaketoadvance.Notallemployeeswillpreferanypaysystem
design.Eachpaysystemhaswinnersandlosers,andloserstendtobevocalaboutpay.
Thekeyismakingsurethattheemployeeswhoarehappywiththesystemrepresent
theonesthatbestfitSBPthatis,thosewiththeskillsandorientationtheorganization
needstosucceedandthatthosewhoareunhappyarelessvaluabletothe
organization.