Switch to a skills-based compensation strategy

In a world of work where processes are changing through automation and digitalization, skills are becoming the new currency, prompting employers to rethink how they compensate their employees. As work itself changes, so do skills and their requirements. The need to attract and retain employees with critical skills – especially highly sought-after digital "hot skills" - is motivating companies to move from role-based compensation to a strategy that takes employees' skills into account.

New focus on work and skills

Today's supply and demand for critical talent is driving a new focus on work and skills. In the past, companies met their talent needs mainly by hiring full-time employees from a candidate pool of educated applicants focused on highly structured jobs. Many employees were employed in similar types of jobs that offered limited variety in required tasks and skills. Employees often worked in the same job for their entire working lives or followed a predetermined linear career path. The technology used was largely to support employees in these jobs.

In today's world of work, however, technological progress is accelerating agile ways of working and thus changing how, where and by whom work is done. The direct relationship between employees and jobs is increasingly being replaced by a multi-layered relationship between skills and different ways of working (many-to-many relationship). Technologies such as RPA (Robotic Process Automation) are becoming "work partners", as parts of an activity (e.g., recurring tasks) can be automated. The remaining work can then be done in individual projects or tasks, with employers drawing on a talent pool consisting of both employees and a range of external workers.

The projects to be carried out may require a wide range of constantly changing skills and experience due to the rapid pace of technological innovation. There is a strong demand for specialized digital skills (from data science to blockchain development) and thus a greater likelihood for companies to be confronted with a lack of employee skills. At the same time, more and more employees are making their own decisions about the types of work activities and working relationships they enter into. They strive to develop their own skills portfolio and have their own individual career experiences.

This shift from a fixed job to a more agile approach to work and skills is influencing how companies reward employees and meet their expectations. Increasingly, companies are moving away from the generic, conventional role-based approach to a more forward-looking and skills-based approach with greater flexibility of the compensation package in terms of talent segments or individual levels.

Identify challenges

Companies need to address a number of internal and external challenges to create a foundation for a more flexible, skills-based approach to talent compensation. In doing so, they face two internal challenges: First, it is crucial to understand what skills are currently available in the company. Knowing the skills of your employees, including those that are not currently needed on the job, is essential to promote talent mobility, develop data-driven succession planning models and provide the best possible training opportunities. Furthermore, due to the speed at which demand for new skills changes, it is important to identify skills that may be needed for future business. However, forecasting future skill requirements is not trivial, as there are a potentially considerable number of variables to consider.

A key external challenge for compensation specialists is to determine the market value of specific skills. The following considerations can help companies gauge the scope of this challenge:

• Understanding market compensation data is not always easy for companies that want to compensate skills and labour instead of specific jobs. Most companies claim to pay skills bonuses included in the base salary. However, some companies introduce additional skills bonuses, while others use recruitment/retention bonuses or long-term incentives to attract and retain employees with specific skills.
• Recording skills diversification in the face of more agile jobs can be daunting. As jobs become more elusive and agile, the skills required to do them also become more diverse. Traditional compensation surveys, on the other hand, make it harder to define benchmark jobs and capture the diversity of skills.
• Adding additional skills to a job does not necessarily lead to higher salaries. In some cases, the market value may even decrease when additional skills are added, as there is now less specialization in the core tasks or the additional skills are simply not in high demand.

Last but not least, in a rapidly changing market, compensation data must keep pace with the changing supply and demand situation for different skills. In programming, for example, some skills are now so common that supply has caught up with demand, while for newer or niche programmes, demand continues to outstrip supply. Without an accurate understanding of this supply-demand relationship, employers risk overcompensating for certain skills and undercompensating for others, creating new challenges in attracting and retaining employees.

Roadmap to a skills-based remuneration strategy

Today's skills-driven business environment demands an innovative approach to compensation that leaves behind the familiar role-based compensation framework. The following levers can help your company on your way to a skills-based compensation strategy.

How do employers reward critical skills?

• 75% position employees at the upper end of the salary range
• 64% position job-related basic salary at the upper market percentile
• 45% grant recruitment and/or retention bonuses.
• 35% grant additional equity subsidies
• 30% offer bonuses for sought-after skills in addition to the basic salary

Source: Willis Towers Watson 2019 Artificial Intelligence and Digital

In the face of changing forms of work and constantly new skill requirements HR, and remuneration specialists, are increasingly trying to put role-based concepts for remuneration design to rest. This change requires new approaches that emphasize the skills needed to do the job and adequately reward those skill profiles in the market. Our roadmap will help you chart a new course that takes skills into account in the new remuneration strategy.