This is the eighth in a ten-part series on Skills-based talent.
Today’s blog explores the implications and challenges of implementing a skills-based talent strategy on Compensation, Rewards, and Leadership Development.
Skills-based Compensation
Skills-based pay structures are a type of compensation system in which employees are rewarded and
compensated based on their skills, knowledge, and competencies, rather than on their job title or
tenure. Few companies have implemented comprehensive skills-based pay strategies across their
entire enterprise. However, elements of skills-based compensation may exist in a variety of
formats within pockets of the organization.
Implications of Skills-based pay
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Skill-Based Pay, Pay Bands, or Bonuses: Compensation may be linked to an employee’s level of
skill proficiency or degree that they actively engage in continuous learning activities. As employees
gain and demonstrate mastery in specific skills, they may receive higher compensation, reflecting
their increased value to the organization. The organization may create pay bands or salary ranges
based on different skill levels or competencies. Alternatively, bonuses and incentives can be tied
to skill acquisition and utilization. In some cases, advancement to certain job levels or pay tiers
may be dependent on achieving certain skills-based certifications.
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Skills Premiums: Employees with rare or high-demand skills may receive skill premiums or bonuses
for possessing expertise that is critical to the organization’s success. The value of such skills
may be driven by the market for such skills in an open talent market.
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Skills-Related Benefits: The organization may offer additional benefits or perks related to
skill development, such as sponsoring relevant courses, providing access to specialized training
resources, or covering certification costs.
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Project-Based or Task-Based Pay: In some cases, workers can be paid based on the specific
tasks or projects they complete, with the compensation level determined by the complexity and the
skills required for each task. Such might be the case when contractors secure projects or tasks in
a talent marketplace. The contractor’s rate of pay may be determined by the complexity, supply, or
market value of the task or skill being performed.
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Market Value Adjustments: Compensation and rewards are regularly reviewed to align with market
rates for specific skills. This ensures that employees are fairly compensated relative to the broader
job market.
Challenges of Skills-based pay
Implementing skills-based pay structures can skills-based pay can be complex and require careful planning
and evaluation. It can create some unique challenges if not administered properly.
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Skills-based Pay Valuation: Determining how to value different skills in a way that is
market-driven and fair, but also in a scalable and executable fashion that supports both business
operations and talent management.
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Transparency: Skills-based pay can provide greater transparency in compensation decisions,
making it clear to employees why they are being paid a certain rate and what they need to do to
earn more
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Skill Upgradation Costs: Implementing skills-based compensation may require providing
training and development opportunities to employees to acquire new skills or improve existing
ones. These costs can add up, particularly if the organization has a large workforce or if the
skills needed are rapidly changing due to technological advancements.
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Pay Equality and Fairness: There is a risk that some employees may feel undervalued or
unfairly compensated if they possess skills that are not explicitly rewarded within the skills-based
pay structure. Ensuring pay equity and fairness can be challenging when skills are diverse and
continuously evolving.
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Performance & Career Management: Performance feedback may become more frequent and granular
(skills-focused). At the same time, traditional supervisory relationships and career mentorship may
become decentralized as market forces replace traditional hierarchical ownership of resources.
New structures for mentorship may need to be developed.
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Resistance to Change: Introducing a skills-based compensation system is a big change and
requires buy-in from employees and management. Resistance to change from both parties can hinder
successful implementation.
Skills-based Leadership Development
Developing skills-based leadership development programs are not, in principle, different from other forms
of learning and development. However, upskilling and reskilling programs tend to focus on more granular
skills and often employ more bit-sized and on-demand learning techniques, whereas leadership development
programs more often tend to be competency-based and experience-driven. Leadership programs often emphasize
skills like strategic thinking, decision-making, communication, conflict resolution, or emotional
intelligence – and are more likely to include developmental staffing; like rotational, stretch or
shadow assignments, or development through strategic relationships like coaching, mentoring, or
apprenticeship programs.
Implications of Skills-based Leadership Development
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Competency-Based Leadership Frameworks: Leadership Development program often rely on
competency-based leadership frameworks that outline the specific skills, behaviors, and attributes
required for effective leadership at different levels. These frameworks often serve as a foundation
for leadership development programs, evaluation, and succession planning.
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Leadership Development Pipelines: Organizations often invest in leadership skills at all
levels to ensure a strong talent pipeline of current and future leaders, ensuring they maintain
relevant skills and adapt to changing business demands.
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Talent Reviews/Succession Planning: Skills-based leadership potential is continuously
assessed based on demonstrated skills and competencies rather than just past experiences or
job titles. Regular talent reviews and assessments help identify individuals with strong
leadership skills, regardless of their current roles. This informs succession planning
decisions and ensures a steady pipeline of qualified candidates. Succession plans are
regularly adjusted based on the organization’s evolving needs and skill requirements.
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Development Pathways for Succession Candidates: Succession candidates are provided with
clear development pathways that include targeted skill development, stretch assignments, and
leadership experiences to prepare them for higher-level roles. Internal talent mobility is
promoted for leadership positions, allowing skilled individuals from within the organization
to advance to higher levels, fostering loyalty and employee growth.
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Mentorship and Coaching: A skills-based organization emphasizes mentorship and coaching to
support the development of leadership skills. Experienced leaders’ mentor and guide potential
successors, helping them grow and prepare for future leadership roles.
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Talent Pool Diversification: A skills-based approach to leadership development and
succession planning encourages diversification of the leadership talent pool. The organization
considers candidates from various backgrounds and disciplines, promoting a diverse and inclusive
leadership team.
Challenges of Skills-based Leadership Development
Implementing a skills-based leadership development program is likely to encounter some unique challenges.
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Identifying Relevant Skills: Developing the most relevant and essential leadership skills can
be challenging. The effectiveness of the leadership development program depends on accurately
identifying the skills that will have the most significant impact on leadership performance.
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Application of Skills: Simply acquiring leadership skills does not guarantee their effective
application in real-world leadership situations. Leadership development requires continuous
reinforcement and practice. Applying skills in complex and dynamic organizational contexts can
be challenging and requires additional support beyond just skills training to foster long-term
leadership growth and sustainability.
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Developing Skills vs. Leadership Behaviors: Developing skills is about acquiring expertise
and knowledge in a specific area, while leadership behaviors are about demonstrating qualities and
actions that inspire and guide others. Ideally, effective leaders possess a combination of both
strong skills and leadership behaviors, enabling them to lead their teams or organizations to success.
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Cultural Change: Identifying and developing leaders based on demonstrated skills and
competencies rather than just past experience or job titles can significantly change a critical
group. Investing time and effort in communicating with key stakeholders and leaders to bring them
along the skills journey can be key, as well as developing measurable outcomes to demonstrate value.
Stay tuned for our next blog on the Implications of a Skills-based Talent Strategy – on Workforce Planning.