Pay scales have traditionally been defined by the qualifications, experience and knowledge required to perform job duties at a certain level. In other words, pay is centered on the job, not the person. Skill-based pay, also referred to as knowledge-based pay, is person-focused. Workers are compensated for each new skill that allows them to perform new tasks on the job. As workers gain each additional skill, their pay rate goes up. Some companies believe that learning a certain sets of skills leads to higher productivity and, therefore, embrace the idea of skill-based pay.
Skill-based pay rewards a person for what he is worth based on his set of skills, rather than what the job itself is worth. There is a base rate of pay for minimum skills, but pay progression is directly tied to skills acquisition. Skill-based pay increases are typically tied to four skills types: horizontal (range of tasks across several jobs), vertical (acquiring skills of a higher level within a single job), depth (higher level of skills in specialized areas relating to the same job) and basic (developing expertise in basic skill areas). Job-based pay increases are tied to company budgets, market trends for the job title, periodic performance reviews and promotion to a higher-level job title.
Because skill-based pay encourages and rewards a broad range of skills, the employee becomes multiskilled and, therefore, more flexible and valuable. This flexibility is increased by the performance of multiple tasks and using a job rotation to fill in temporary gaps in the workforce (for example, leaves of absence). This differs from job-based pay jobs, which do not emphasize the need for employees to become cross-trained in as many different skills/jobs and, therefore, do not facilitate as much flexibility.
Skill-based pay emphasizes and supports skill development much more than job-based pay. It reduces the need for employees to look at periodic performance reviews and promotions as the only means to increase their earnings. Additionally, it better facilitates the planning of an employee's career path by providing stepping-stones and ways to expand one's skills.
Employers that use a skill-based pay structure must provide continuing opportunities for employees to gain more skills and training. This allows a company to reduce employee turnover and encourage professional growth. Employers who use a job-based pay structure may offer opportunities for employee development, but it is not specifically used as a platform for employee growth and wage increases.