Posted: 26 Jul. 2022 9 min. read

Breaking from tradition with skill based rewards

Reshaping your organization using a skill based reward structure

By Jason Flynn, Renzo Tognocchi, and Greg Stoskopf

The last few years have posed unprecedented challenges globally and the speed with which humanity has adapted to these changes has been nothing short of awe inspiring. The adaptations to the challenges have resulted in fundamental shifts in a number of aspects and nowhere is this truer than the work environment.

We have witnessed the adaptation to fully remote work from a century old operating model of fully office-bound work. This shift brought with it its own challenges and the emerging adaption is the rise of hybrid location models, that attempt to balance the benefits and drawbacks of each of the predecessor models.

Additionally, the remote working environment brought its own challenges and highlighted the significance of employee well-being (both mental and physical). Organizations have adapted to this challenge through tremendous improvement in the efforts and funding being committed to help ensure the well being of employees is the priority.

International and global disruptions, as well as the ongoing challenges of the great resignation and shortages of crucial skills, are forcing organizations to further adapt, in order to remain competitive in an ever-constrained environment. At the forefront of these adaptions is the emergence of the Skills Based Organization (SBO). 1SBO’s shift from understanding the unit of work in terms of fixed, static jobs, to reimaging it in terms of a dynamic landscape of skills that can be nimbly deployed to work as it continuously evolves. This new operating model places skills and human capabilities at the heart of operational design, fueling a wide range of talent and business decisions, creating continual adaptiveness, and unlocking the full potential of the workforce.

With this, organizations should consider reimaging their reward frameworks to enable the SBO. Traditional reward frameworks are not setup to incentivize the workforce to meet the growing demand of reskilling or upskilling; thus, Skills-Based Rewards (SBRs) is crucial to the successful entrenchment of an SBO operating model.

Breaking from Tradition

In a traditional reward framework (see Figure 1), a worker’s job title drives their base pay while company and individual performance primarily drive incentive pay.  To achieve an increase in base pay, workers must meet the job, skills, and competency criteria for the next level job in their career path and typically receive that pay increase after an annual performance cycle. As greater focus is placed on skills as the center point of talent management, this traditional framework will no longer be reflective of and responsive to the way workers will be expected to gain and demonstrate skills.

(Figure 1)

As a stopgap, organizations are now making additional exception-based adjustments to address critical skill gaps. Many organizations are paying ad hoc skills premiums to incoming talent with “hot skills,” but lack a structured approach outside of the annual performance cycles to reward their current workforce for acquiring critical skills.

The SBR model

In a SBR model (see Figure 2), a worker’s base pay is composed of both a core salary, which all workers of the same level earn, and a skills salary defined by a worker’s demonstrated proficiency in each skill. Workers may receive adjustments to their salaries throughout the year as their demonstrated skill proficiencies change. As workers acquire and demonstrate skills that are needed within their organization, the skills salary portion of their compensation will change based on the value the organization places on that skill set. Additionally, skills bonuses can be used as an interim measure of rewarding skill acquisition and deployment. This option adds the flexibility of effectively rewarding skills without the risk of building the cost into core salary, where uncertainty exists around the longevity of a particular skill.

(Figure 2)

However, the SBR model requires not only changes to compensation structures, but also changes to other reward elements. Providing workers with learning and development rewards like paid time off to develop and acquire skills, funding and support for external conferences or training to build in-demand skills, or more opportunities for project-based work where new skills can be applied help to drive upskilling and individual career development which benefits both workers and the organization.  While compensation is the most visible way a SBR model impacts workers, leading organizations will use these other reward programs to differentiate themselves with the workforce while supporting key organizational talent needs.

The path forward for SBR

A fundamental shift toward SBOs and SBR will not happen overnight.  It will require organizations to:

  • Accurately unpack jobs and projects into constituent activities to which particular skills sets would be deployed;
  • Develop a skills framework inclusive of taxonomies and consistent terminology;
  • Select appropriate skill evaluations in order to define the current baseline skill inventory;
  • Understand future skill needs as linked to the organizational strategy;
  • Establish SBR quantum’s to associate with each skill;
  • Pilot SBR in select areas before transitioning away from traditional reward programs in order to shift mindsets and change ingrained ways of working.

A short-term inhibitor to the implementation of SBR will be the lack of accurate market pricing for each distinct skill. Traditional compensation survey sources do not collect information at this granular level of individual skills. We anticipate this will change as pioneer organizations are likely to price set these individual skills, forcing the market to start individual reporting and recording of skill prices. 

Lastly, the shifting focus to skills will not only require changes to reward structures. Practices addressing performance management, succession planning, learning and development, etc., will all need to be adapted in order to accommodate the focus on skills. Once introduced, SBOs will provide workers with increased mobility, greater incentives for developing the right skills at the right time, and greater ability to influence their own career path as they take on new roles within their preferred areas of interest.




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