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Image Credit: <www.forbes.com

Image Credit: <www.forbes.com>

Today I want to talk about “skill based” pay structures versus “job based” pay structures.

First things first:

1. A senior executive at the company I work for once lent me this book to read. At the time I wasn’t in the mood, and in keeping with the advice of one of my more memorable professors, I set the book aside (said professor suggested that I never keep reading something I didn’t want to read – essentially, if it was really important to what I wanted to do I’d come back to whatever it was later). Several months later I came back to this book, and now I can’t put it down. The lesson here? You’ve got to have passion for what you do. If you don’t then do something else.In “Compensation1 Milkovich and Newman define the terms as follows:

Skill verus Job Based Pay

So the question here (I suppose) is which of these methodologies is best?

To quote a wise man, I would submit to you that: “It depends.”

First of all, to a certain extent every job is “skill/person based”. While a minority of companies compensate strictly based on the job (basing where an external applicant or existing employee should fall in the pay range based strictly on job content) most companies pay in some part based on what an 2. This is one reason that it’s generally much harder to get a large raise moving up one “level” internally than it is to do so in the external market – if one gets a promotion internally the employer knows what one makes – and hence what one will work for. I view the employer and employee as generally at odds concerning extrinsic reward – employees (almost) always want more and employers (almost) always want to pay as little as possible for talent. Conversely, intrinsic reward is a place where both employer and employee stand to mutually benefit.internal employee and/or external applicant made in their prior job. 2 In this sense employers are paying for the person as opposed to the job, since over time a person’s skills and experiences will (generally speaking) naturally move their pay up as a product of market forces.

Put another way: If a candidate applies to a position with a pay range of $60k-$90k – and she made 100k in her last job – her prior salary will (generally) have an impact on the offer extended by the employer that is disproportionate to the job duties and responsibilities of the role (i.e. she will likely receive an offer near the top of the range even if it isn’t necessary to pay at that level to attract an otherwise adequate talent to do the work). 3

3. This is why you *never* tell an employer your prior salary if seeking an offer externally. Unless you only want a 6%-12% raise, *walk away* before you agree to give this information. If they want you badly enough they’ll make an offer without knowing this information, which is what you want. Trust me on this. It may make you a lot of money one time, and sometimes once is all that you need to hit whatever your comp target is.With that said, I generally answer the question of rather to take a “skill based” or “job based” approach to hiring by answering two questions:

1. Is the company’s pay philosophy to “pay for potential?”

2. If the company doesn’t pay for potential, is the candidate being hired being brought in expressly to take over a bigger job?

If the answer to either of the above questions is “yes”, then a “skill based” (or “person based”) approach is probably best. If not, I’d err on the side of taking a “job based” approach.

Image credit: <keredria.blogspot.com

Saplings can become massive trees one day, but what is the their value before hand? Image credit: <keredria.blogspot.com>

<<< 4. Rhetorical question.Why, you ask? 4

1. The truth of the matter is, while companies generally pay based on experience, their most valuable/coveted employees (over the long run) are those that may or may not be the most experienced, but can learn new skills quickly.

Put another way, if an employer has to choose between a middle manager who is moderately experienced – but has the pedigree to move into an executive level role one day – or a much more experienced middle manager who has already hit his/her ceiling, the company will (generally) value the high potential middle manager much more (or if they don’t they should). To do so is simply good succession planning.

To this point, some companies are fixated on salary compression – they don’t want new/less experienced hires making more than experienced hires.

I don’t think this is generally a bad approach to compensation, but if a company values “potential” then it can’t let salary compression completely dictate the way it pays its HiPos.

Some companies “pay for potential” while others don’t. Those that don’t tend to experience turnover issues over the long run since HiPos 5. I *will* say that some companies have such deep (internally developed) benches and rich succession planning that they don’t need to pay for potential. I could write a (perhaps very boring) novella on succession planning/internal talent management, so I won’t tangent on this too much (post for another day etc.). With that said, I’ll just say that a company doesn’t necessarily have to ignore salary compression when compensating their HiPos if they have exceptionally strong internal talent development.understand their market value (and often go and get it). 5

2. Furthermore, sometimes the job a company hires an employee for isn’t the job the employee is going to end up in “X” months/years later. In these cases, paying an employee based strictly on job content isn’t always practical.

There are some employees that will take this on (low pay in the short term for a long term pay off), but far more often (particularly if it’s an external hire) an employee being groomed for a bigger job expects to see something in his/her compensation to reflect the fact that he or she is being groomed for a larger role.

Anyway, this post has creeped up over 1,000 words so I’m going to wrap it up now. I may revisit this topic at a later date, however, as I have a lot of energy around it.

As always, please share your thoughts below.



If you have questions about something you’ve read here (or simply want to connect) you can reach me at any of the following addresses: 

SomethingDifferentHR@gmail.com OR rorytrotter86@gmail.com