Designing a new (and successful!) compensation plan requires careful consideration. In this blog post, learn three tips for structuring a winning skills-based pay strategy.

Advances in technology and societal changes inevitably lead to job functions shifting, expanding, or even morphing into entirely new roles. Social media community managers and AI prompt engineers weren’t common roles twenty years ago, but many organizations now require these positions to stay relevant. Employees recognize this, and they’re responding by growing their skills to better position themselves for the demands of the market.

The problem is that many organizations have been slow to adjust their compensation strategies to better align with current workforce trends. Traditional compensation methods aren’t designed to account for agile and rapid professional growth and skills development. Skills-based pay strategies can help your organization more closely align compensation practices with your workforce strengths, but this manner of rewards planning is still largely unexplored territory. Business leaders might recognize the importance of connecting employee compensation with skills, but a whopping 83% of organizations have yet to implement skills-based rewards strategies.

Despite the relatively small number of businesses spearheading this method, a skills-based pay strategy could prove to be the key to bolstering your organization’s productivity, promoting a culture of continuous improvement, and building more trust between your employees and your company. To reap the rewards of this innovative approach to compensation planning, it’s critical that you take the time to understand which skills your organization needs while carefully designing a strategy that will bring both your employees and your business continued success. Below are three tips to help you design a skills-based approach to compensation.

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1) Assess Which Skills Are the Most Valuable to Your Organization

Before implementing a skills-based compensation strategy, you need to determine which skills and competencies are needed to achieve your business objectives. This requires some forward thinking about your organization’s long-term goals and the actions your workforce must take to reach them. Be as specific as possible when defining your goals. Broad goals like “improve productivity” or “increase revenue” won’t help you identify your most in-demand skills. Greater specificity will make it easier for you to design a plan for success and outline the hard and soft skills your organization needs the most.

After you identify your most critical skills, the next step is to conduct a skills gap analysis. This gives you a baseline understanding of the skills that already exist within your organization and which departments and individuals possess specific competencies. Consider the goals you want to achieve and the skills you need your employees to have to meet your objectives. Then measure and document your talent’s existing skills. Assess current skill levels by interviewing and surveying your employees. You can also leverage your talent management software to review performance appraisal data. This will allow you to see where your employees stand and how they’ve improved their skills.

Once you have your baseline data, it’s time to start looking at your current compensation ranges. Compare them to the skillsets that your organization has deemed critical or high-value. Look for discrepancies in compensation, and ask yourself the following:

• Are we underpaying employees who already have the essential skills we’re looking for?
• Are we overpaying employees who lack those critical skills?
• Are factors like years of experience, university degrees, or professional credentials contributing to pay discrepancies between employees with the same job title?

With the answers to these questions in hand, you can start to define your skills-based pay ranges and make adjustments for employees who already meet the skills criteria for compensation increases. If you’re overpaying employees who don’t have the skills they need, then you’ll need to put measures in place to help those employees improve.

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2) Offer Employee Upskilling and Reskilling Opportunities

Tying compensation to employee skills can be a great motivator for your workforce to pursue professional growth opportunities. Help them reach their goals (and build your organization’s overall skills) by offering learning and development opportunities that they can complete in the flow of work. Collaborate with your L&D team to give your workforce access to a learning management system that tracks their progress.

Choosing an LMS that can seamlessly integrate with your compensation solution will make it easier for your managers to encourage their direct reports and ensure that they’re making strides toward closing any skills gaps. As your employees earn credentials and badges, use your learning platform to document employee achievements that will serve as later evidence of their upskilling and reskilling efforts.

Make sure employees have a clear understanding of exactly how their upskilling and reskilling will translate to compensation increases. Prioritize communication so everyone knows the steps they’ll need to take and what skills they’ll need to improve to be eligible for future wage adjustments. Leverage career pathing tools in your talent management software to connect employee learning and skills development to career goals so your workforce can easily see how to receive increases and eventually move into more senior positions.

Remember to create a budget dedicated to workforce training and development that aligns with your compensation strategy. Your chief financial officer, chief learning officer, and chief human resources officer should work together to ensure that the compensation and learning budgets are in sync with your organization’s overall goals and objectives. Your senior leadership team also needs to ensure that support is in place for employees so they have time to dedicate to building their skills while still completing their other essential tasks.

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3) Be Transparent With Compensation Information

With only 53% of workers reporting that they trust their employers, organizations need to work harder than ever to reassure their employees. Overhauling your pay strategy can leave your people feeling weary, especially if they don’t understand the reasons for making changes. It’s critical to be transparent with your workforce to maintain their trust.

When structuring your compensation strategy, have a plan for how you’ll communicate the updates. Be prepared to discuss how people were previously compensated, your organization’s new system for valuing skills, and the steps everyone can take to increase their wages. Consider giving employees a forum to voice their concerns, such as an email survey or live webinar with a question-and-answer session. Effective change management can be the difference between a successful strategy and a compensation disaster.

There’s many ways to design your skills-based rewards strategy, but following these tips will help you enhance your compensation methods to better reflect your business needs and recognize the value your talent brings to your organization.