What’s the deal with skills-based pay?

January 13, 2020

Paying premiums for in-demand skill sets may seem like a novel concept, but is “skills-based pay” simply a new term to describe what’s been happening in the market all along?

Countless lists of the highest-paid jobs and fastest-growing positions — or “hot jobs” — are published each year.

Why is the pay for these positions so high?

The answer is because the demand for a particular skill set outweighs the supply of qualified people in the labor market.

When this happens, employers compete for talent by paying a premium.

The “hot jobs” cycle

Of course, what’s “hot” today isn’t guaranteed to stay that way tomorrow.

Sometimes, a highly sought after skill set can become irrelevant a few years later.

Skills that were once viewed as “special” are often assimilated into standard roles. Or they’re replaced entirely by a whole other set of new-and-improved skills.

It happens all the time. Do you remember some of these “hot jobs” of the past?

  • Switchboard operators who connected our calls
  • The COBOL programmers who saved us from Y2K
  • Medical professionals with a knowledge of the Epic EHR software

As illustrated in the image below, each of these jobs was once an emerging role born out of a market disruption — often a new product, platform, or change in regulations.

what is the deal with skills based pay

When a market disruption takes place, the need for new skills — or the evolution of current skills — is created.

Given the scarcity, the demand for these new skills is naturally higher than the existing supply in the labor force. This leads to the pay premium.

But over time, more and more people recognize the increased compensation associated with the desired skill sets, and as a result, the skills become less scarce.

Eventually, enough people acquire the desired skills to balance out supply and demand, meaning the premium is no longer necessary.

That is, until the next disruptor occurs.

How to identify in-demand skill sets

Perhaps the most significant hurdle companies face in adopting skills-based pay is determining how to identify and track the in-demand skills that require pay premiums.

Some skill sets are certified externally, making them easier to identify. These could be certifications like:

  • Project Management Professional (PMP).
  • The ISO 9001 Certification.
  • SHRM Certified Professional (SHRM-CP).

Others are more subjective, like client relations and communication skills.

Breadth vs. depth of skills is another important consideration in a skills-based pay system. Let’s take a look at an example of each.

Does your once back-office accountant need to be client-facing? This puts new demands on the position, so it’s clearly a case of expanding the breadth of your employee’s skills.

On the other hand, expanding skills inside a pre-existing area of knowledge would be considered an increase in your employee’s depth of skills.

Perhaps an employee has a basic understanding of Microsoft Excel, but now you would like them to become more advanced in their knowledge of the software. This is a clear example of expanding depth of skills.

Why does it all matter?

Putting in the time to better understand your current employee talent pool could potentially save you the cost of recruiting and retaining new talent.

Figuring out a method to identify, track, and train your workforce in the skills that are most relevant to your bottom line could be enormously beneficial.

The benefits gained from the time and effort in identifying and tracking skills is that when a market disruption occurs down the road, you’re ready to make the necessary adjustments.

Change is inevitable — the next disruptor is right around the corner.

Fortunately, you have a wealth of data, trends, and expertise available through Mercer’s Benchmark Database, New and Fast Moving Job Survey, and the entire suite of surveys that allow you to gain insight on what disruptions may lie ahead.