Abstract
Organizations must decide the basis upon which they compensate workers. Rewards may be based on results, the capabilities the person brings to the organization, or the job held. The nature of the work performed and what is required to motivate the person to perform the work still have an impact on how rewards are determined. Sales personnel are most often rewarded for making sales, professional/technical personnel are rewarded based on their knowledge and trades, and production personnel are most often compensated for possessing specific, work-related skills. Although all employees may be assigned roles/jobs, what they are paid for will be a function of the nature of the work and of the contribution its completion makes to the organization’s performance. Rewards management strategies should fit the work and the organizational context.
Introduction
How base pay rates are administered can vary across different occupations. Direct sales personnel are most often paid for producing tangible results in the form of sales. Research scientists and other professionals are typically paid for the qualifications and capabilities they bring to the organization, as well as the type and level of work they are able to do. But the majority of employees are paid based on the job they hold and how well they do it. Since different occupations are expected to make different kinds of contributions (make sales, utilize competence, and perform job duties), it is prudent to tie the way they are paid to the type of contribution they make. This article will first describe the different approaches to base pay management. It will then discuss the implications for overall human resource management strategy.
Paying for the Job
Most organizations utilize base pay systems that tie rewards to the roles (jobs) employees hold. The CEO job is paid more than other jobs within the management hierarchy. The senior level job is paid more than the entry level job within job families. The “pay the job” approach requires establishing pay structures that reflect both the relative internal value of the job and the market value. Jobs are placed into grades within a pay structure in a manner reflecting relative internal value. Pay ranges are assigned to each grade, based on the competitive pay rates prevailing in the relevant labor markets. These pay ranges establish the pay potential for incumbents of jobs within each of the ranges. Finally, individual pay rates are administered according to a strategy that can be to pay for longevity, pay for mastery, pay for performance, or a combination of these determinants.
Paying for the Person
In contexts where people do not have well-defined duties and/or who change roles rapidly, it is difficult to tie individuals to specific jobs. For example, an engineer who works on a new product design project may have a specified role with defined objectives (design a circuit that has the characteristics required). That same person may, after six months, still be working on that circuit design, but may also assume a project leadership role for another project, which may span eighteen months. Or (s)he may play a “fire fighter” role on a continuous basis, responding to production problems as they arise. This type of context is increasingly common and poses challenges when attempting to use defined jobs as the metric for administering pay.
Basing pay on what a person offers to an organization that is valuable is often regrettably termed “skill-based pay.” The dictionary definitions of skill vary, with two being common: “the ability to do something well” or “the ability to use one’s knowledge and skills to do something well.” The problem with these is that knowledge, skill, and ability are three different things. Knowledge is understanding the principles of electronic circuits; skill is being capable of using that knowledge to design or maintain circuits; and ability is having the native intellectual capacity to learn the principles of circuits. By lumping these measures together under the heading “skill,” an organization loses the ability to select, evaluate, and reward employees based on the appropriate criteria. A better label for approaches basing pay on what the individual offers is “capability-based pay.” Technically, it could also be termed “person-based pay” but that can result in individual characteristics being considered. What someone looks like, how likable he or she is, the person’s heritage or their beliefs are among the characteristics a person may have that legally and morally should not influence their pay.
General intelligence (G) is something that can be measured objectively (albeit imperfectly) and can enable an employer to predict whether a candidate has the native ability to learn to do something. This factor would be most important when selecting someone who will be expected to learn via training or educational programs. Rarely would pay be tied directly to ability.
Knowledge is something someone possesses, and it can be measured using tests or simulations. A new engineering graduate is presumed to possess a body of knowledge, based on the degree held, the school attended, the curriculum of the program, and the person’s performance (GPA). The pay offered may reflect the nature and level of knowledge, as well as its value to the organization. When an entrant is classified into an occupational career structure, a BS degree may result in being assigned to the first level, an MS into the second level, and a PhD into the third level, assuming the value of the person’s knowledge is deemed to enable him or her to perform the work required for incumbents of each level. The pay range assigned to a level establishes the pay potential for incumbents. What an individual is paid within the range assigned to each level should be then administered based on the level of competence relative to requirements and the level of performance relative to standards sustained over time.
It is up to the organization to utilize the KSAs in a manner that justifies what the person must be paid. If a Senior Design Engineer is placed in a job that requires a much lower level of competence, the organization will still have to compensate the person for what they are capable of doing, rather than what they are doing. Otherwise they make take capabilities elsewhere. An example of the “capable of versus currently doing” dilemma is a Software Engineer who spends a significant amount of time documenting a system (s)he designed. This may be operationally expedient, even though this seems an underutilization of that person’s capabilities, since it may take the designer longer to explain the system to a documentation specialist than it would for the designer to do the documenting personally. But when this assignment is viewed from the outside, it appears that a highly paid person is performing work that could be done by someone at a much lower pay rate.
Skill-based pay systems fall under the heading of “person-based pay.” They can compensate employees by measuring the breadth and/or depth of skills they possess. Pay increases are earned when an employee demonstrates a greater level of mastery in a skill or developing a broader variety of skills. There may be provisions in skill-based plans for adjusting pay if an employee’s competence in specific skills atrophies or when skills are no longer needed, but this is a difficult thing for employees to accept. As a result, the system often falls apart if the skills needed change frequently and there are not new skills to be learned to replace the old ones, allowing current base pay rates to be justified. Another danger of using skill-based pay systems is that it can encourage employees to become full-time students, spending effort to learn new skills that will result in more pay, rather than doing the work.
Some roles require specific licenses or other forms of accreditation. This type of requirement only limits entry and continued occupation of the role and is unlikely to impact pay. However, some organizations treat additional or higher-level licenses as if they were skills and may increase base pay or provide a bonus for acquiring them. An example can be found in water and wastewater utility plants where employees are required to possess different levels of license based on the work they are allowed to do. Providing a monetary incentive to an employee for attaining a higher-level license even when it is not currently required may be justified if the organization is ensuring qualified candidates are available when vacancies at the higher classification levels occur.
Paying for the Results
Sales personnel are most often measured and rewarded based on tangible results. Production employees may also be paid at least partially based on their physical output if they are in control of that output. The rewards for results are most often in the form of variable pay and this approach may result in base pay levels that are set at relatively low levels. A sales representative may technically have no base pay, with all of their direct compensation based on results, but production workers typically are assigned base pay rates that are competitive and that provide a reasonable level of income when output is impacted by conditions outside of their control.
Management personnel are normally valued based on both their role and the results produced. They generally have a significant part of the current cash compensation in the form of variable pay or equity-based programs and senior-level people may also have long-term plans in place. This portion of their direct compensation is most often tied to some measure of financial results, although meeting specified operational objectives may be considered as well. But base pay rates are generally administered based on the internal and external values of the job/role. The result is a total direct compensation package based on a combination of job-based pay and results-based pay.
One Approach or Many?
The increasing importance of project management also raises the issue of whether to pay for what the person could do or what they are doing. Given the complexity, scope, and duration of some projects, the person managing the project must be a highly skilled project manager. For example, when a project manager completes a long-term, large complex project, the organization might not have another project of that magnitude to assign the project manager to. The NASA entities are mission-based and NASA often faces this dilemma. If the person is assigned to manage a smaller, less critical project than they have managed in the past, the organization has several alternatives: (1) keep the person’s pay range and pay rate the same, (2) reclassify the person to the grade/range for the level in the project management career ladder warranted by the new assignment, or (3) let the incumbent seek other opportunities warranting the level of skill. The practice of letting employees leave with a commitment to stay in touch and welcome them back when the need arises is common in places like Silicon Valley. It keeps people challenged and pays them in a manner fitting their contribution.
There is increased usage of the career ladder approach for staff professionals (HR, Legal, IT, Accounting/Finance, Procurement, etc.). They often function in a “fire station” mode… the staff responds to needs as they arise, rather than routinely performing a list of tasks. In addition to their fire-fighting duties, many staff personnel participate in a series of overlapping projects… install a new HRIS, revise the compensation system, and ensure compliance with a new law/regulation. This is why it is often difficult to write a “job description” for employees functioning in an “as needed” environment. And when the head of a staff function organizes and staffs a unit, there is a need to fit the workforce mix to the probable work mix. An HR function in a complex, dynamic organization may be called upon to support not only recurring transactions but to staff multiple projects of varying levels of complexity, difficulty, and duration. This creates the need to project the optimal mix of skill/knowledge depth and breadth and to select and develop HR employees so they collectively can meet the challenges that are most likely to be encountered.
Administering base pay rates for people operating in this type of environment is challenging. A number of policy questions need to be resolved: (1) Does a person working at a competence level that is below the level into which they are classified retain their base pay rate? (2) Are increases given on the same basis as those working at the same competence level? (3) How long can a person be paid above the level warranted by what they are doing?
During the economic downturn beginning in 2008, many organizations were forced to reduce staffing levels to align people costs with revenues. They had to decide whether to keep highly skilled/highly paid people so they were prepared for the return of prosperity… or to keep the less skilled/lower paid people and achieve greater cost savings. If organizations had done an assessment of their workforce skill mix compared to the work mix, this might have presented an opportunity to intelligently decide how to better align the two. The pandemic decimated revenue streams for many organizations and choices were necessary as to what level of payroll could be supported. Reducing payroll can be accomplished by reducing headcount or reducing pay, and the latter rarely works out well. As the pandemic subsides, decisions must be made about re-instituting pay levels if they were reduced for some employees. Since base pay tends to be a fixed-cost resistant to reduction, some organizations would be wise to consider the use of variable pay programs to enable compensation costs to be aligned with revenues.
Conclusion
The most fundamental question about how to pay people is what they will be paid for. Results? Qualifications? Doing a specific job? The right answer is often complex to discover and all three approaches can fit different occupations, roles, and organizational designs.
Rewards practitioners have been using all of these approaches and the technology for designing and administering the various types of base pay management systems is well known. It can appear to be simpler to pay everyone using the same approach, even though the actual administration of pay rates can vary to fit the situation.
But the lure of “one system fits all” often results in adopting a strategy that does not fit many occupations and roles. The “default” position in the public sector has been to classify employees based on the job they hold and to pay individuals based on longevity. The weakness of this approach has been made apparent by the experience of the U.S. federal government GS system. This system mandates that “fire-fighting professionals” be considered as having a stable job that can be evaluated and placed into grades using a point factor job evaluation system. It also pays individuals for longevity rather than performance when a time-based progression step system is used. This approach is likely to be viewed as inappropriate by the best performers. The inadequacies of this approach have resulted in the removal by individual agencies of at least half of the federal workforce from the GS system. Whether it is the requirement to classify employees using a job-based approach or the requirement to pay for longevity that has prompted this exodus to “excepted service” systems, it is clear that it does not work for a significant percentage of employees.
“What works is what fits” should be the guiding principle in determining how base pay rates are administered. If this means paying some employees for the job they hold, others for their capabilities, and yet others for the results they produce, it may result in a more complex system. But it is likely to produce a better result.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.