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Shareef, R. (1998). A midterm case study assessment of skill-based pay in the Virginia Department of Transportation.

Review
of Public Personnel Administration, 18(1), 5-22.

Abstract:
Interest in skill-based pay by public administration theorists and practitioners is increasing as this innovative pay system is
viewed as a viable means of enhancing employee skills and work motivation. Pioneered in private organizations, Ledford and
others have suggested that skill-based pay design and implementation determinants are now fairly settled. A case study
compares the outcomes of a skill-based pay intervention in a public agency with several of the determinants that are
predicted to ensure successful implementation and diffusion. The results of the study indicate that all 5 of the "principals"
measured were utilized in this fairly successful skill-based pay intervention. However, the results also indicate that
skill-based pay is only congruent with a participative work culture, and that this is probably the strongest variable in
determining skill-based pay success.

Interest in skilled-based pay by public administration theorists and practitioners is increasing as this innovative pay system is
viewed as a viable means of enhancing employee skills and work motivation. Pioneered in private organizations, Ledford
(1995) and others have suggested that skill-based pay design and implementation determinants are now fairly settled. This case
study compares the outcomes of a skill-based pay intervention in a public agency with several of the determinants that are
predicted to ensure successful implementation and diffusion. The results of the study indicate all five of the "principles"
measured were utilized in this fairly successful skill-based pay intervention. However, the results also indicate that skill-based
pay is only congruent with a participative work culture, and that this is probably the strongest variable in determining skill-
based pay success.

The issue of skill-based pay is a growing one in public administration. Perry and Kraemer (1993), in their background
paper for the Winter Commission, advocate using skill-based pay as an incentive to encourage employees to learn new
skills for the emerging, highly technological public workplace. Roberts (1994) calls for using this innovative pay system in
the "reinventing government" process. Shareef's (1994a) article offers a comprehensive overview of the motivational
bases, design, and implementation of skill-based pay in two public organizations. At the agency level, the state of
Virginia's Department of Transportation (VDOT) recently implemented a skill-based pay pilot program.

Skill-based pay's popularity in the private sector has increased significantly in recent years.1 Consequently, Ledford
(1995) suggests that specific design choices for implementing skill-based pay are now more easily identifiable.2 This
raises two important questions for public administration theorists and practitioners interested in this "new pay" concept3:
(a) what are these specific design issues, and (b) can these design issues be exported from the private sector for
implementation in public organizations?

The identification of these design issues is especially important since innovative change concepts that originate in the
private sector frequently receive harsh criticism from critically inclined public administration theorists. Terry, for example,
suggests that some of these innovations imported from the private sector undermine the "distinctive competence" of public
organizations (1990) and "encourage the abandonment of traditions" (1996). Likewise, Wamsley, Goodsell, Rohr,
Stivers, White, and Wolf (1987) have called some of these "importations" a "corrosive influence" on public sector
institutional life.

However, others (e.g., Shareef, 1994b) have concluded that underlying system problems encountered during
implementation, rather than the theoretical construct itself, contribute to the frequent failure of innovative change
techniques in public organizations. In a strategy designed to avoid these dysfunctions, Golembiewski (1989) has
suggested (in the area of participative management) that employee participation be implemented incrementally to reduce
substantially policy maker resistance.

The purpose of this article is twofold. First, several design principles for implementing skill-based pay in the public sector
are offered and discussed. These principles have been distilled from the theoretical and empirical literature on this pay
concept. Relatedly, a case study analysis of the design and implementation of skill-based pay in a public organization is
presented. This evaluation permits an opportunity to compare the findings in an actual public sector case against the
proposed design principles. Yin (1984) calls this type of inquiry an explanation-building case study. The outcomes of this
study can lead to recommendations for both policy actions and theory-building concerning skill-based pay design and
implementation.

This article is divided into four sections. First, an overview of skill-based pay is provided. Next, five design and
implementation principles are outlined. Third, a case study analysis of the implementation and diffusion of skill-based pay
in a public agency is presented. Finally, conclusions from the case study evaluation, and their implications for public
agencies considering this pay plan, are discussed.
What is Skill-Based Pay?
Typically, pay systems are based on the principle that people should be paid according to the worth of the jobs they do.
This means that traditional pay systems are based on an analysis and evaluation of the job the person does. As Lawler
and Ledford (1984, p. 12) state: "The job evaluation allows organizations to decide how much a particular job is worth
and, therefore, to decide the range of pay that an individual can receive for performing the job. This approach to pay is
so common and so well accepted that it is rarely challenged."

Ledford (1989, p. 1) defines skill-based pay by stating: "In skill-based pay systems, employees receive compensation for
the range, depth, and types of skills they possess. They are paid for the skills they are capable of using, not for the job
they are performing at a particular point in time. This is a fundamental departure from traditional job-based pay plans,
which pay employees for the jobs they hold." skillbased pay can be used in conjunction with pay-for-performance
schemes [e.g., merit pay, gainsharing, etc.] (Shafritz, Riccucci, Rosenbloom & Hyde, 1992) but does not include or
exclude the idea of paying for performance (Lawler, 1992).

Luthans and Fox (1989) identify several technical differences between different types of skill-based compensation plans.
One type of multi-skilled pay system utilizes self-managed teams. Here, a new employee is paid a starting rate when
hired and receives pay increases as he or she learns skills needed by the team. Another skillbased pay approach pays a
starting rate to new employees and increases occur for each new skill or job they learn. Conversely, knowledge-based
plans reward employees for acquiring additional knowledge within the same job category.

A skill-based pay plan usually begins with the identification of tasks and the skills needed to perform those tasks in the
organization. Employees volunteer to undergo the requisite training to learn the skill(s). Workers are paid only for those
skills which are needed by the organization and which they currently are willing to perform (Lawler and Ledford, 1984).

Motivational Bases
Shareef (1994a) identifies expectancy (Vroom,1964), equity (Adams,1965), and participation (McGregor, 1960; Likert,
1967) theories as the primary skill-based pay motivational bases. Schuster and Zingheim (1992, p. 107) summarize the
motivational bases of skill-based pay thusly: "Once the employee learns the skills, rewards are available because the
employee is more valuable to the organization and demonstrates the flexibility necessary to help the organization
prosper."

Advantages and Disadvantages


Employee flexibility is one of the most prominent features of skill-based pay since it allows employees to be moved
throughout the organization as needs arise. This flexibility permits the organization to use employees in a wide variety of
tasks without the burden of tightly written job descriptions that limit this flexibility. Because the nature of jobs and work
have dramatically changed, it is impossible to have written rules that anticipate the wide range of situations likely to arise.
Roberts (1994, p. 5) writes that: "Most public employees are professionals who must exercise judgment and discretion.
With more decentralized authority, those on the front lines, with the best knowledge, can solve their own problems; the
focus of accountability can shift from rule-following to performance and results."

Lawler (1995) found that employee flexibility tends to lead to lower staffing levels because employers often discover that
some jobs can be eliminated because two workers employed flexibly can do the work of three with fixed assignments.
Flexibility also tends to lead to less absenteeism and turnover because employees enjoy having the opportunity to be paid
for, and utilize, a wide range of skills.

Another advantage of skill-based pay is that it separates pay levels from levels in the hierarchy. When employees learn
both horizontal and vertical skills, new career tracks are developed that are not dependent on upward mobility. As public
organizations flatten their hierarchies (e.g., USPS), this feature of skill-based pay becomes particularly important since it
provides a "nonlinear" way for people to grow and succeed in their careers (Lawler, 1992).

Skill-based pay, as a participatory structure, meets public service normative standards. Many participative or
empowerment mechanisms introduced into public organizations are viewed as manipulative by employees (Peters, 1994).
However, a skillbased pay program implemented in a high involvement culture is clearly nonmanipulative since
involvement is strictly voluntary and employees explicitly define the exchange framework between pay, enhanced skills,
and performance.

Disadvantages attributable to skill-based pay include costs of employee training and productivity declines during the
training process. Roberts (1994) acknowledges that if skill-based pay is successfully implemented in public agencies,
employee training and education budgets have to be increased dramatically. This, of course, appears problematic in an
era of government retrenchment. Yet, Roberts (1994, p. 5) makes a compelling argument for an enlarged training budget:

Because governments are labor-intensive, their biggest asset is potential in human capital. This means investing in training
and development, as well as giving employees the incentives and rewards to challenge them to higher achievement. State
governments spend only a pittance on training, far below what businesses dedicate to human resource development. The
Winter Commission recommends a stable learning budget of at least 3 percent of total personnel costs.

Administrative costs increase because of skill certification and recertification procedures. Employee motivation can be
affected negatively by workers who "top out"-that is, who learn all the skills required and are no longer eligible for further
pay increases (Lawler, 1992). Luthans and Fox (1989) outlined several other concerns associated with employees
learning skills in one organization, leaving that organization, and utilizing the learned skills elsewhere.4

Private Sector Applications


Skill-based pay has been utilized primarily by private organizations, including firms such as General Electric, General
Motors, American Honda, and American Nissan (Lawler, 1992). In a study of Fortune 1000 companies, 53 percent
reported they planned to increase their use of skill-based pay while 45 percent replied they will continue their use at the
current rate (Lawler, Morhman & Ledford, 1992). Ledford's (1992) research focused on the attitudinal effects of
skill-based pay. He found that: (a) a majority of employees who had been involved with skill-based pay for at least a
year endorsed the concept and had favorable views of its administration and fairness, and (b) skill-based pay leads to
greater pay satisfaction and pay equity.

Jenkins, Ledford, Gupta, and Doty (1992) reported that:


1. Skill-based pay had been implemented primarily in manufacturing organizations where employees perform routine,
high-volume service jobs.
2. Three-fourths of the respondents in their study said the plan increased worker productivity, motivation, flexibility to
adapt to changing production needs, and work team effectiveness.
3. Enhanced recruitment and retention occurred while reducing labor costs. Recent research by Ledford, Lawler, and
Morhman (1995) found that skill-based pay was used more extensively in organizations that had made changes in
management philosophy and organization decision-making structures. For example, the use of skillbased pay is much
higher in firms that use self-managing teams than in nonusers (70% vs. 30%). This outcome illustrates the relationship
between skill-based pay and a power sharing practice such as self-managing work teams.

Public Sector Applications


Perry and Kraemer (1993, p. 241) suggest that, because of the changing technological nature of public work, skill-based
pay should be utilized "to reward the acquisition, modification, and development of individual competencies." They
contend that skill-based pay will motivate workers to acquire new skills and facilitate job redesign. Roberts (1994)
argues that skill-based pay is an essential tool in the "reinventing government" process at both the state and national level.
From her perspective, skillbased pay provides the monetary incentive for public employees to learn the skills necessary
for more efficient governmental administration. She also believes that skillbased pay enhances the development of
"learning" and high-performance public organizations. Shareef (1994a) outlines a detailed plan for implementing
skill-based pay in Gifted and Talented Educational Programs (public schools) and communitybased policing programs.
He also suggests that skill-based pay may actually be a trigger (instead of a lag) variable in cultural change processes.

Given the empirical outcomes associated with skill-based pay in private organizations, and given numerous calls for its
utilization by public administration theorists, it appears that this pay innovation is worthy of careful study. It appears that
skill-based pay can be used in public agencies where institutions can build "compensable skill blocks around the skills
needed to produce tangible products or deliver specific services" (Ledford, 1995, p. 55).

Determinants of Skill-Based Pay Implementation: Five Principles


Several fundamental principles form the basis for skill-based pay implementation in public organizations. These principles
are listed and described below.

Principle 1: Skill-based pay "fits" with participative, high involvement cultures, but not with bureaucratic cultures. The
concept of "fit" or congruency among various subsystems is an important one in the organizational design literature.
Galbraith (1973) and Nadler and Tushman (1980) have developed generic congruency models. Shareef's (1993,1994b)
subsystem congruence change process has specific implications for public organizations. Congruence models of
organizational change are concerned with "the system of elements that ultimately produce behavior patterns and, in turn,
organization performance" (Nadler & Tushman, 1980, p. 39). From this perspective, organizational subsystems
(including reward systems) must be aligned to "fit" with the desired future state of the enterprise.

Ledford (1989) argues that only organizations that either have, or are moving toward, a participative culture should adopt
skill-based pay. He states that the "cost of skill-based pay for all employees is justifiable only if it is an integral part of a
high involvement management system, which has the potential to offset the cost of increased wages per employee with
greater productivity and other performance advantages" (Ledford,1989, p. 7). Lawler (1986, 1990, 1992) agrees that
skill-based pay should be implemented only in participative cultures for this same reason. He writes that "much of the
flexibility inherent in skill-based pay behavior can be gained by simply having a significant number of individuals
cross-trained, as in the utility worker concept. Thus, often the advantages of skill-based pay must extend beyond simple
flexibility if it is going to offer a significant advantage over a traditional job-based approach to pay. When combined with
a high involvement approach to management and work teams, skill-based pay can produce benefits other than those that
stem from a flexible workforce" (Lawler, 1992, pp. 162163). A participative work culture also forms the basis for
Shareef's (1994a) call for skill-based pay implementation in law enforcement agencies (community policing) and public
school systems (site-based management) that are moving toward high involvement environments.

When properly implemented, employees are involved with every aspect of skill-based pay design and implementation.
This involvement gives greater understanding of the change and allows better understanding of the enterprise's desired
future state (Ledford, 1989). This type of employee participation is incongruent with bureaucratic cultures. Lawler
(1992) and Ledford (1989) found that skill-based pay reinforces the participative culture by fostering employee
self-management. Self-management also makes significant savings possible through a reduction in management levels and
support personnel. Additionally, worker input into the totality of the skillbased pay plan further reinforces the reality of a
shift from bureaucratic to high involvement work cultures.

Since much of the leadership literature suggests that leaders are the driving force for organizational change (Schein, 1983,
1985), it follows that leaders who are facilitating a cultural shift would be more receptive to skill-based pay. For instance,
Shareef (1994c) wrote that government institutions in the state of Virginia were not attuned with skill-based pay since
Governor George Allen is not committed to organizational cultural transformation. Conversely, skill-based pay is more
likely to succeed in federal agencies because of the Clinton administration's commitment to employee involvement (Gore,
1993).

Principle 2: Skill-based pay must be congruent with norm-based and affective public service motivations. Perry and Wise
(1990) found that public service motivation was predicated on norm-based and affective factors. Norm-based motives
are reflected in values such as sense of civic duty and devotion to the public interest. Affective motives are emotional
triggers exhibited by behavior responses such as compassion and proclivity toward self-sacrifice (Perry,1994). Perry
(1994) advocates the creation of a team-based compensation system that compliments these public service motivations.
In particular, he favors the gainsharing concept wherein groups of employees share in revenue increases or budget
savings resulting from group efforts. Shafritz, Riccucci, Rosenbloom, and Hyde (1992) and Gore (1993) are also
proponents of gainsharing for public workers.

Skill-based pay can be utilized in a team concept (Lawler,1986) . As previously mentioned, Ledford, Lawler and
Mohrman (1995) concluded that skill-based pay is the reward innovation, to a much greater extent than gainsharing, that
facilitates the successful development of self-managing work teams. Luthans and Fox (1989) reached similar conclusions
concerning skill-based pay and multi-skilled team development. General Motors, American Honda, and American
Nissan all used skillbased pay in the development of multiskilled teams (Lawler,1992). Schuster and Zingheim (1992, p.
96) state: "The team leader, rather than the first-line supervisor, is often associated with the team concept and skill-based
pay. Leaders are often chosen by team members and may be paid at a higher rate than their skill-based pay level while
filling this role."

Shareef (1993) proposes a skill-based pay plan to compensate community policing teams who are responsible for crime
prevention in highcrime areas. Likewise, Perry and Kraemer (1993) link skill-based pay and team development in their
discussion of public sector technology training.5 To preserve recognized and established public service motivations,
skill-based pay should be implemented in public organizations that are creating multi-skilled work teams.

Principle 3: The need for broadbanding job classifications. According to a 1991 report by the National Academy of
Public Administration, position classification systems have two major objectives-namely, fair and equitable compensation
for public employees, and the promotion of effective and efficient agency performance (National Academy of Public
Administration, 1991). In the same study, a survey of federal managers revealed that current classification systems
tended to be seen as burdensome, inflexible, and obsolete in relation to changes in technology and work processes. One
of the surprising recommendations from these managers called for a classification system that featured skill-based pay
differentials. Perry and Kraemer (1993) also propose broader job classifications to provide incentives for on-the-job
learning.

Shareef (1994a) contends that the current federal classification system is not congruent with skill-based pay. A
classification system that would meet with these reform suggestions is known as "broadbanding classes." Nigro and Nigro
(1994, p. 152) described this classification system thusly: Broadbanding classes, in contrast, incorporate a wide range of
tasks and responsibilities that a qualified worker with a general background can be trained to perform. Such broadband
classification structures and related pay scales make it easier for managers to design and interrelate positions around
work processes. They also facilitate recruitment on the basis of occupations and career planning, make moving people
from job to job in the organization much less complicated, and support efforts to administer pay in ways intended to
reward performance meaningfully and recognize differences in skills and abilities.

VDOT's skill-based pay program offers an excellent example of the type of broadbanding classifications that Perry and
Kraemer (1993) and Nigro and Nigro (1994) advocate. This long salary band consists of 32 steps, with approximately a
2.25% difference between steps. The salary band has been assigned skill points, and the point value for the maximum
salary step is 250 points. There is an average difference of 7.8 points between steps. The salary for Step 1 is $14,688
and the salary for Step 32 is $25,297.

Skill-based pay fits with concepts such as broadbanding classification systems, but not with rigid structures such as those
established by the federal Classification Act of 1949. Unless an agency is allowed to restructure its classification system
along broadbanding lines, skill-based pay would not be an appropriate system to introduce.

Principle 4: Skill-based pay can co-exist in a compensation system with pay-for-performance, or exist solely as the
institution's reward system. Pay-for-performance schemes, especially merit pay, have not had an outstanding track
record in the public sector (Perry,1991; Perry,1986; Agim,1994). The fundamental problems have been linking pay with
performance (Perry, 1991; Agim, 1994), the negative impact on intrinsic motivation (Deci, 1975), and the lack of "at
risk" funds needed to actually motivate (Nigro &Nigro, 1994; Agim, 1994). All of these factors, for example,
undermined the development of self-managed teams in the state of Oregon's Department of Transportation. A failed
pay-for-performance scheme was originally devised to reward members of high-performing teams (Oregon Department
of Transportation-Self Directed Highway Maintenance Teams, 1995).

Skill-based pay is neutral on the topic of pay-for-performance (Lawler, 1992). That is, skill-based pay is only concerned
with whether an individual or group possesses the skills to perform a job; in contrast, payfor-performance plans focus on
how well a job is performed over a period of time. skillbased pay does, however, specifically address two of the
problems that have plagued performance pay processes in the public sector. For instance, the problem of linking pay
with desired organizational outcomes is eliminated in skill-based pay plans. Lawler (1992, p. 171) states: "I think
skillbased pay is the best way to motivate employees to improve their skills and knowledge because the system directly
rewards employees for learning." Likewise, Schuster and Zingheim (1992, p. 106) write that "skill-based pay offers
employees the opportunity to earn financial rewards for demonstrating skills within their specific career field without being
forced to compete internally for assets and people to add value." This direct linkage between pay and employee capacity
for contribution to agency goals is not possible with many pay-for-performance plans, especially merit pay.

Because of employee involvement in the design and implementation of skill-based pay, this pay plan does not sacrifice
intrinsic outcomes for extrinsic rewards. This has been a major concern of pay-for-performance plans in the public sector
(Perry,1991; Deci,1975). Rather, skill-based pay employee involvement leads to what human relations theorists (e.g.,
McGregor, 1960; Likert, 1967) call higher order needs-self expression, respect, independence, and equality. Skill-based
pay seems to encourage both extrinsic and intrinsic motivations by satisfying in a genuine way both employee needs and
organizational requirements for growth and development (Shareef, 1994a).

However, as with pay-for-performance concepts, skill-based pay requires enough money to be "at risk" in order to
motivate employees to develop new skills (Lawler, 1992). Schuster and Zinheim (1992) advocate pricing skills based on
their market value. Yet, because only employees will know how much money is necessary to motivate them, external
market conditions may only serve as a base. Irrespective, skillbased pay demands that enough money be available to
motivate employees to learn the desired skills.

Principle 5: There must be congruency between skill-based pay and the institution's strategic plan. Zingheim, Ledford,
and Schuster (1996, pp. 4-5) contend the following: "A strong reason for changing pay processes and systems is to
encourage development of behaviors and skills that reflect business strategy and organization design. Values, processes,
and pay structures may vary from organization to organization and influence how pay gets the message across. However,
strategic alignment is the goal. Pay systems designed to communicate messages of strategy and direction are necessary to
generate organizational performance.

Skill-based pay can be viewed as a skillbased interpretation of the organization's business needs. Ledford (1995) defined
these competencies as the knowledge and skills that enable performance. This definition suggests that skills add value by
communicating what is needed for both the employee and organization to succeed. Consequently, skill-based pay can be
seen as a necessary component in linking rewards to business strategy and direction.

When a skill competency model supports new organizational direction, the trigger for these competencies may include
either strategy, structure, and culture considerations and/or the best practice(s) of market leaders (Zingheim, Ledford &
Schuster, 1996). Based on the four principles discussed earlier, skill-based pay is in alignment with an agency's strategic
plan if the goal is: (a) reinforcement of a participative culture, (b) cultural change is being sought, (c) development of a
multi-skilled workforce is desirable, and/or (d) development of multi-skilled, self-managing work teams is a desirable
objective.

Virginia Department of Transportation's Skill-based Pay Program: A Case Study


One of the more comprehensive skillbased pay public sector applications is a pilot program implemented by VDOT This
program was implemented under demonstration authority granted by the Virginia General Assembly which, in 1992,
recommended that state agencies review different compensation systems for possible utilization. VDOT found skill-based
pay potentially attractive since it was losing highly skilled workers through the Workforce Transition Act (an early
retirement buyout). The agency also found itself contracting out more work because it lacked the skilled workers needed.
The stated goal of this program is "to provide a means for developing a more multi-skilled workforce which will
contribute to management and employee empowerment and the delivery of a high quality product" (Virginia Department
of Transportation-Pay for Skills Broadbanding, 1995, p. 3). Another stated goal is to provide a more flexible
compensation system than that offered by the state's classification system.

This pilot program can be characterized in the following manner:


1. Only maintenance crew members are currently involved in the program.
2. The salary band has 32 steps. The minimum step is equal to step 1 of the classification system's Grade 4, while the
maximum step is equal to Step 20 of the classification system's Grade 7.
3. Supervisors and employees meet at the beginning of the performance cycle to identify, in an MBO-style process, skills
which the crew member will train toward acquiring throughout the year. They also meet quarterly to discuss the employee's
training process.
4. The program employs a point system which reflects skill values and demonstrates the crew member's salary and annual skill
base increases.
5. A crew member's salary is determined by the point value of his or her skills profile.
6. Progression through the band occurs as a result of acquiring and maintaining new skills. The amount of salary increase
is dependent upon the point value of the new skills. Additionally, crew members have an opportunity to receive a skill
increase of up to three steps a year. Crew members also receive an annual performance evaluation and are compensated
by a lump sum bonus payment for their productivity outcomes.

No empirical study has been conducted to assess the program's results. In-house surveys do suggest, however, that the
agency is pleased with the 18-month-old pilot program's impact on pay equity, job satisfaction, and the evolution of a
multi-skilled workforce. VDOT recently announced it was expanding the program to eight additional residencies in the
state, and the agency plans to have skill-based pay fully implemented in all 44 residencies by November 1997.

VDOT's skill-based pay mission statement states that it seeks the following: "A compensation system that supports
cultural change, contributes to the agency meeting its business needs, and bases employee pay on the skills they possess
and utilize in their work" (Virginia Department of Transportation-Pay for Skills Broadbanding, 1996, p. 1). Moreover,
the skill-based pay mission supports the agency's mission by: (a) building a multi-skilled workforce, (b) fostering a flatter
organizational structure, (c) removing barriers to teamwork resulting from narrowly defined jobs, and (d) contributing to
the quality and responsiveness of the incentive program.

Case Study
Yin (1984) states that this research strategy is appropriate for answering "how" and "why" questions about contemporary
events over which the investigator has little control. He also notes that the case study methodology is often used to assess
organizational change. The particular type of case study used in this assessment is called explanation-building. Yin (1984,
p. 107) writes that: "To explain a phenomenon is to stipulate a set of causal links about it .... In most existing case studies,
explanationbuilding has occurred in narrative form. Because such narratives cannot be precise, the better case studies are
the ones in which the explanations have reflected some theoretically significant propositions."

As mentioned earlier, the theoretical propositions (i.e., Five Principles) will be compared against the design and
implementation outcomes associated with the Virginia DOT's skill-based pay plan. The explanation building approach is
an iterative process where the case study evidence is examined, theoretical propositions reviewed, and the evidence once
again examined in a new light.
Data Collection
Several primary and secondary data sources were utilized for this case study. One primary method of data collection
consisted of open-ended interviews with: (a) ranking administrators associated with the change effort, (b) employees in
residencies where skill-based pay had (and had not) been implemented, and (c) pertinent state legislators. Other primary
sources of information included official agency documents (i.e., policy and implementation manuals, employee survey
data, etc.) related to the skill-based pay program.

A secondary data source was available in the form of personnel managers in several agencies, including state universities,
who provided both official and unofficial commentary about the VDOT's skill-based pay implementation and diffusion
process. Field visits to several case study sites provided the other secondary source of data. These visits allowed the
investigator to observe multi-skilled teams in action, and also allowed him to conduct a number of informal interviews.

Outcome Assessment
Principle 1: Skill-based pay "fits" with participative/high involvement cultures, but not bureaucratic cultures. Through
Phase I of implementation, employee participation in skill-based pay was voluntary; workers could either remain in the
traditional classification pay system or transfer into the broadbanding/skill-based pay system. Inhouse climate surveys that
evaluated numerous workplace management, salary, and teamwork issues during Phase I were overwhelmingly favorable
on these and the voluntary participation issue. Because of these favorable outcomes, skill-based pay was implemented in
an additional eight residencies in December 1995. This development brought the pilot population to 509 employees, or
18% of the total number of VDOT maintenance employees.

However, a VDOT manager revealed that midway through Phase II participation in skill-based pay became mandatory.
It is likely that the costs of administering dual pay systems became prohibitive. High administrative costs have been
identified as one of the primary disadvantages of skillbased pay (e.g., Luthans and Fox, 1989; Lawler, 1992).

The lack of employee involvement in the discussion concerning participation, coupled with a top-down mandate to
eliminate dual compensation systems, has severely threatened the future success of the program. Both VDOT officials
and several state legislators revealed, for example, that because of forced participation an employee telephone "hot line"
to various state lawmakers had to be established to handle worker complaints and concerns.

Another outcome of the mandatory participation decision has been a deepening mistrust between VDOT's workers and
the agency. A VDOT official stated that "many workers now believe that skill-based pay is an agency scheme designed
to raise salaries so high that work will be contracted out (at lower cost) to private companies." Based on the fallout from
the elimination of the classification pay option, this informant stated that "the program is going through serious and difficult
growing pains." The consensus of workers interviewed also confirmed the belief that mandatory involvement in the
skill-based pay program would lead to the outsourcing of jobs because of higher wages.

Another VDOT informant reported that upper-level managers were becoming more disgruntled with the program
because they feel "they are losing control over the workers." These feelings are indicative that VDOT managers retain an
autocratic management perspective in their work roles.

Principle 2: Skill-based pay must be congruent with the norm-based and affective public service motivations. VDOT
officials report that teamwork and increased flexibility have greatly enhanced organization efficiency. One informant was
concerned, however, that a continuing autocratic work culture will undermine development of self managing work teams.

Principle 3: The need for broadbanding job classifications. Roberts (1994, p. 5), in citing the Winter Commission
recommendations, calls for a revolution in the human resources equation that (a) creates a skills package for all
employees, and (b) bases pay increases on skills, not time in position. This skills package and compensation process is
designed to provide employees the incentives and rewards that challenge them to higher achievement (Roberts, 1994).
This equation has worked well at VDOT Employees acknowledge earning higher wages than under the old classification
system. In some cases, they are even earning higher wages than their private sector counterparts.

Principle 4: Skill-based pay can co-exist in a compensation system with pay-for-performance or exist solely as the
institution's reward system. The skill-based pay program at VDOT has always been complimented by
performance-based bonuses. These annual, lump-sum payments can constitute a maximum of 2% of an employee's total
yearly income. Based on skill-based pay increases and the performance bonus, employees report high levels of reward
satisfaction and reward equity.

The only monetary concern voiced by a VDOT manager focused on the in-house assessment of the program. The
agency initially used climate evaluation forms devised by one consulting firm. Between Phase I and Phase II, the agency
received a lower bid from another consulting firm to administer these climate evaluation forms. While preferring the initial
forms, the agency evaluators were forced to accept the different assessment forms. Regarding this situation, the manager
stated, "You know how it goes, in government you have to accept the lowest bid even if it creates chaos and confusion."

Principle 5: There must be congruency between skill-based pay and the institution's strategic plan. Skill-based pay has
been congruent with a number of VDOT's strategic plan goals: (a) development of a multiskilled workforce, (b) removing
barriers to teamwork resulting from narrowly defined jobs, (c) flattening the organizational structure, and (d) contributing
to the quality and responsiveness of the agency's road maintenance. In fact, skill-based pay appears to be a "trigger"
variable, as opposed to a "lag" variable, in this organizational change process (see Shareef, 1994a).

Analysis
Principle 1. There is concern among many theorists (e.g., Ledford,1989; Lawler, 1992; Robert, 1994; Shareef, 1994a;
Perry & Kraemer, 1993) that skill-based pay should only be implemented in high involvement work cultures. The
top-down decision to eliminate dual compensation systems (in the middle of agency-wide diffusion) has created serious
dissatisfaction with the skill-based pay change program. In actuality, it has reinforced the perception of a bureaucratic
culture in VDOT.

The high cost of administering dual compensation systems was, in all likelihood, the catalyst for eliminating the
classification system in VDOT This administrative "high cost" raises an interesting paradox. The cost of skill-based pay
implementation and diffusion can only be offset by multi-skilled workers operating in high involvement cultures (Ledford,
1994). VDOT was apparently achieving these higher efficiencies well into Phase II (beginning November 1995) of the
program when the decision was made to unilaterally eliminate the classification pay system as an option.

The dissatisfaction over diminished intrinsic and influence satisfactions should not be surprising since skill-based pay is a
reinforcer of participative, not bureaucratic, cultural values. Lawler (1992, p. 164) argues that:

...skill-based pay is a way that organizations can back up their commitment to participative management and to such
statements as "people are our most important resource." It delivers a tangible reward in return for the employees doing
just what the organization says it believes they can do: grow, learn, and develop. Therefore, organizations that use a
skill-based pay system typically have cultures that are seen as valuing human development and are optimistic about the
capability and potential of the people who work in the organization.

The issue of managers feeling they are "losing control" is another indicator that a bureaucratic culture remains intact at
VDOT Klein (1984), Walton and Schlesinger (1979) and others have long maintained that middle managers are the
primary resisters to organizational cultural change. Because of their resistance, Mohrman and Lawler (1988) have
advocated making managerial behavior the target variable in any organization change process. Targeting managerial
behaviors is an ongoing process that orients the manager to his or her new roles in a participative culture. Changes in
compensation practices also have to be established that reward the desired managerial behaviors (e.g., Shareef, 1993,
1994b).

Virginia Governor George Allen is clearly a political leader who believes that private sector management ideas can be
implemented successfully in public agencies. One of his first acts in office was to create a strike force to improve state
government performance. This strike force consisted of 60 members drawn primarily from the private sector (Roberts,
1994).

Yet, borrowing innovative ideas does not automatically translate into high involvement organizations. Kanter's (1983)
work comparing segmentalist and participative private organizations is illustrative of this point. Indeed, Roberts (1994, p.
7) cautioned against this assumption when she wrote:

When bringing in respected and talented people from the private sector, the governor should also give them partners in
government with whom to work . . . State employees live daily with bureaucratic nonsense and inefficiency. The governor
should set up formal processes and informal ways to get their opinions and ideas for improvement.
However, these participative processes and structures were not forthcoming from the governor or his strike force.
Because of this lack of commitment to participative management, Shareef (1994c) predicted that skill-based pay would
be incongruent with the existing work culture in Virginia's state agencies. The bureaucratic decision to eliminate the
classification pay system option for VDOT's workers, and the resulting dissatisfaction with that decision from the
agency's workers, provides empirical support for that assertion.

Principle 2. Perry (1994) contends that team-based compensation systems compliment norm-based and affective public
service motivations. The VDOT's use of skillbased pay to develop teams has followed an approach outlined by Luthans
and Fox (1989, p. 28): "Jobs can be learned in any sequence, and the pay increase for learning a job often remains the
same regardless of that job's specific duties. Once employees have learned all the jobs, they continue to rotate among
them, possibly receiving cost-of-living or merit adjustments. Team development is facilitated through individual
skill-competency attainment." This team development approach has worked well for VDOT.

Luthans and Fox (1989) voiced concern about the effectiveness of skill-based pay plans that contained more than eight
skills. The VDOT plan contains 32 steps, with individual skills grouped into four categories-developmental, journey,
technical, and leadership; this constitutes approximately 170 skills. Contrary to the findings of Luthans and Fox (1989),
excessive skills do not appear to have been detrimental at VDOT

Principle 3. According to internal surveys, VDOT workers view the broadband classification system as fair and
equitable. Broadbanding has, in some cases, allowed VDOT workers to earn wages greater than their private sector
counterparts. Unfortunately, because of the continuing autocratic management culture this has led to concern that this
agency will be downsized and that numerous jobs will be outsourced.

Principle 4. Skill-based pay, along with a performance-based incentive bonus, has worked too: both increase wages for
those who desire higher wages and motivate workers to attain desired efficiency objectives. The one-time lump sum
bonus uses a 3tier scale of (a) 0% does not meet expectations, (b) 1% meets expectations, and (c) 2% exceeds
expectations. The bonus pay is a percentage of the current year's salary, prior to any skills increase. Thus, 98% of the
wages paid at VDOT are based on skillbased pay. One could argue that, for all practical purposes, compensation at
VDOT is based on skill-based pay. On the other hand, the performance-based bonus shows one method in which these
two unique pay incentive plans can be integrated in a public organization's compensation system.

Principle 5. While skill-based pay has been congruent with four of VDOT's five strategic business needs, it has not
facilitated organizational cultural change in the institution. In a holistic or global sense, a high involvement culture appears
to be the contingency that allows the institution's other strategic needs to be met. It is interesting to note that all of the
informants' and respondents' concerns about the success of the program only occurred after the dual compensation
system was terminated. Previous conversations with managers and workers throughout Phase I, and based on Phase I
evaluations, pointed to a successful implementation and diffusion of skill-based pay. Congruency theories of change
(Lawler, 1992; Shareef, 1993,1994b) argue that workers and administrators should have input in all relevant aspects of
the change process. This involvement reinforces the reality of a high involvement culture. This type of reinforcement is
clearly missing for both workers and administrators at VDOT Much of the concern over the program's future success
centers around the lack of a participative culture.

Conclusions
A comparison of the five skill-based pay principles with outcomes from VDOT show support for the theoretical
propositions (i.e., principles) on all five of the design issues. The outcomes of this case study lend support to Ledford's
(1995) contention that most design issues concerning skill-based pay are fairly settled. For Ledford, these issues are
resolved to the extent that they form the basis for a competency-based pay model-paying professionals and managers for
their knowledge. He writes, "Indeed, it would be peculiar if organizations permanently restricted such pay plans to
employees whose jobs require far more limited skills than those of managers, engineers, accountants, and other
professionals (Ledford, 1995, p. 55).

The study's outcomes also support Shareef (1994b) and Golembiewski's (1989) notion that dysfunctions during
implementation undermine innovative change processes in public organizations. The elimination of the dual compensation
system, without any input from the employees affected, is representative of the type of dysfunction identified by these
writers. Based on the informants' and respondents' comments, this unilateral management decision has had an overall
negative impact on what was a successful implementation process.

Ledford's skill-based pay and competency pay models presuppose a high involvement work culture. Empirical research
shows that high involvement cultures are an integral part of the successful implementation and diffusion of skill-based pay.
This "new pay" concept, in conjunction with participative management, has been shown to facilitate development of
self-managing work teams, increase worker productivity and organizational efficiency, and enhance reward satisfaction.
Research (e.g., Ledford 1989; Lawler, 1992) indicates that these factors can more than offset the costs of administering
skill-based pay when it is properly implemented.

This analysis does not bode well for the future success of skill-based pay at VDOT The agency's culture remains
autocratic. There is incongruency between vital institutional processes-leadership, managerial behavior, and participative
decision-making- and a high involvement culture. Furthermore, the autocratic decision to eliminate dual compensation
systems is a likely prelude to more top-down decisions concerning skill-based pay. Mohrman and Lawler (1983) report
that because of the interdependency of organizational subsystems, attempts to change one subsystem and not others
frequently sets up a troublesome organizational incongruity. These authors found that this incongruity in time will likely
cause the innovative system to revert to its previous state. This is apparently what has happened to the strategic goal of
creating a participative culture through skill-based pay at VDOT This assessment takes place at the midpoint of
skill-based pay implementation in this agency. Based on the conclusions of this midstream assessment, unless Principle 1
is (re)established and fully developed, the program's other successes will likely unravel. An assessment after full
implementation will either confirm or reject this speculation.
Notes
1 Ledford, Lawler, and Mohrman (1995) report that the number of Fortune 1000 firms using skill-based pay increased from 40% to 60% between the years
of 1987 and 1993.
2 Ledford (1995) argues that the success of skill-based pay design efforts forms the basis for an evolutionary step to the competency pay model-namely,
compensating managers and professionals for their knowledge.
3 The "new pay" concept suggests these pay innovations are permanent rather than a passing fad. For more discussion on this issue, see Schuster and
Zingheim (1992, p. XI).
4 Roberts (1994) and Thurow (1996) do not see the occurrence of an employee learning skills in one organization and using them in another enterprise as
a liability. Roberts (1994, p. 5) wrote that "Government employment used to promise job security (dependent safety). In the future, that promise ought to be
enhanced employability (independent capability), so even if the government job disappears, the employee has skills attractive to other employers." Thurow
calls this investment the "new social contract" between employee and work organizations. In this context, he suggests that in the global economy, lifetime
employment must be replaced with lifetime employability.
5 Vice-President Gore (1993) devotes much of Chapter 3 to the issue of training and multiskilled work teams.

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