December 2019

Why More Companies are Turning to Skill-Based

Compensation Programs
Transforming your business to compete in the digital age may require rethinking your rewards
system. Many tech firms are implementing programs that reward employees for acquiring hot skills.

Traditional rewards models are under pressure due to the disruptive nature of technology. Employees with hot
skills are in high demand as companies plan for current and future skills gaps in their organization. One way to
ensure your workforce has the skills it needs today and into the future is to adopt a skill-based compensation
program, which encourages employees to acquire new training for specialized skills by offering temporary
bonuses.

Manufacturing companies are no stranger to skill-based compensation programs, having utilized them to help
advance employees’ skills throughout various sections of a factory. Now, skill-based compensation systems are
grabbing the attention from technology companies that want to evolve their workforce to meet rapid
advancements in technology. Many of these organizations need to expand headcount to fuel their growth strategy
and acquire employees with knowledge and mastery of the latest technological advances. By adopting a skill-
based compensation program, businesses are better able to upskill their current workforce rather than rely
exclusively on hiring new talent with desired skills.

Skill-Based Compensation vs. Traditional Rewards Models

Broadly speaking, compensation is primarily set by benchmarking pay against comparable jobs among a custom
peer group. Recruiters are often given a pay range, and along predetermined ranges, employees are being hired.
Where someone lands on that range often has to do with their experience as well as their ability to negotiate.
Once an employee has started with a company, the process of determining pay and matching the current skill
level is less clear. It is not uncommon to have very well-paid, longstanding employees whose current skill levels
and pay seem to be out of sync.

Currently, the vast majority of companies go through an annual performance process that often consists of a merit
increase, bonus review and a talent review. For most employees, the performance process ends with a modest
pay increase (it has stayed around 3% in the United States for decades) and a bonus that may, or may not, meet
the individual’s expectations. For a few employees, the annual processes may come with a promotion and a
significant higher base pay or higher overall salary package.

Obtaining additional education, training and certification is not always compensated in the annual review process.
Generally, additional training has a small impact on an individual’s career advancement, unless it’s a university
degree or major certification that is required after multiple years of study.
For an employee, a promotion is probably the best opportunity to receive a substantial salary increase. Not
surprisingly, a lot of employees are more concerned about advancing along the career ladder than improving their
skills if the company’s compensation system isn’t set up in a way to recognize and reward for upskilling behaviors.
Sometimes, companies believe promoting a very talented technical individual contributor is the only way to
substantially boost the individual’s pay and keep them with the company. However, not all employees have the
desire or skills to manage a team. That’s why it’s important for companies to have a compensation system that
rewards employees that acquire new skills to encourage their personal development and to ensure the company
has talent that is keeping pace with changing technology. We should note that companies also need to maintain a
job architecture that enables lateral career moves instead of only moving

Six Steps to Prepare for a Skill-Based Compensation Program

Before moving to a skill-based compensation model, a few steps need to be observed.

1. Identify the skill profiles you have in your company. We differentiate between three different skill profiles
as outlined below:

 Breadth: Being able to perform in different work settings and environments and have transferable skills
that can be used in an agile work environment. In the past, this was oftentimes associated with a
unionized environment where skills to work across different machinery were rewarded. In today’s digital
world, this may be comparable to a full stack developer — someone with broad technical skills that can
work across multiple platforms. This could also be a software architect who understands how different
aspects of an application interconnect.

 Depth: Becoming a deep expert in a subject matter. An example today would be a software engineer who
develops deep understanding of one programming language but also is able to write a code that is non-
repetitive, efficient, maintainable and dependable.

 Self-management and management of others: Optimizing self-management or management of others; for

example, software development teams that organize themselves effectively and efficiently. In an agile
software development environment, the developers’ teams not only ensure information flow between
themselves but also to the outside world (e.g., the client or the business sponsor). This can also mean the
team is able to absorb new business requirements that may impact various aspects of the development
process.

2. Identify the specific skills your company needs. As a first step, the business needs to assess their skill
requirements and measure their current skill base against their internal benchmark. This can be done
internally or with outside help. Figure 1 shows the skills that our technology survey clients identify as hard to
attract and retain by career level. Not surprisingly, it’s the “specialist” career level where most of these skills
are in highest demand.

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Figure 1
Hot Skills That Are Difficult to Attract and Retain by Career Level
Junior/Entry Career Specialist World Class Expert

Artificial Intelligence 2.4% 17.9% 55.4% 24.4%

Business Analytics 1.4% 26.8% 55.1% 16.7%

Cloud Engineering 1.0% 19.8% 57.8% 21.4%

Cybersecurity 0.7% 18.8% 60.9% 19.6%

Data Sciences 2.4% 17.9% 60.8% 18.9%

Digital Marketing 2.9% 30.0% 48.6% 18.6%

Information Security 0.0% 15.5% 63.1% 21.4%

IT Architecture 0.0% 21.3% 55.1% 23.6%

IT Security 0.0% 20.0% 57.9% 22.1%

Operations

Machine Learning 0.7% 15.5% 60.8% 23.0%

Specific Software 0.7% 25.7% 56.4% 17.1%

Languages

Threat Intelligence 0.0% 8.8% 64.7% 26.5%

UX Design 0.0% 32.1% 46.4% 21.4%

Source: Radford Global Technology Survey Quarterly Workforce Trends Hot Topics, Q3 2019

These hot skills require a substantial amount of training in many cases. However, it’s not realistic to expect many
employees to embark on a multi-year rigorous training schedule for skills that are outside of their core job duties.
Therefore, employees with adjacent skills that complement desired new skills will have an easier time acquiring
new knowledge. For example, it may be possible to train a statistician in the concepts of machine learning
algorithms and programming languages as the statistician was surely exposed to some of the programming
languages in their university training. A certification program can build on these skills.

3. Assess your current workforce. Once you take time to evaluate the current skills among your workforce,
you’ll be able to identify and map out skills gaps. When considering a skill-based compensation model, it may
make sense to look outside your organization to determine how readily available talent with the skills you
need are and what it will cost to bring them into the organization vs. upskilling and retraining your current
workforce. If there’s a need for hiring new talent, there a few things to be considered:

 How much will the talent cost to the company?

 Will there be compression issues to hire new talent with the skills you need?
 What is the risk of losing new talent in the next two years?

Why More Companies are Turning to Skill-Based Compensation Programs 3

  How much will it cost the company to train employees with adjacent skills to get up to speed instead of
hiring new talent?

4. Establish a skill-based bonus system with internal and external certification. Training and certifying
employees are key to a skill-based compensation model. This can be done through your own training
departments or with the help of external online certification centers or universities. Traditional manufacturing
companies that used skill-based compensation models had an easier time identifying the training employees
needed as they were often geared around a process and machinery. In the digital world, determining the
necessary training requires an in depth understanding of your business goals in the future and what skills are
needed to meet these demands.

5. Determine which path of skill-based compensation to follow. When moving to a skill-based

compensation program, a company can choose between a more traditional path or a progressive one. The
traditional approach, as illustrated in Figure 2, combines your pay band methodology with skill-based
compensation by allowing employees a better positioning within the pay band. However, in a traditional pay
band, there are usually two pay bands that overlap. This means that salary points in the upper quartile of the
lower pay band overlap with the lower quartile with the higher pay band.

The basic pay approach as shown in Figure 2, is a more progressive version of the traditional approach.
Everyone gets the same basic pay and any movement on the pay band is due to someone’s skill level and the
deployment of these skills. Someone with many valuable skills and the deployment of these skills can reach
the basic pay level of someone on a pay band several grades above. In a changing work environment with
more highly skilled specialist and fewer managers, this approach can make sense with specialists able to
advance themselves financially by acquiring and deploying critical skills. This will prevent employees from
seeing promotion as the only way of significantly improving their earning potential.

Figure 2
Traditional Approach to Skill-Based Compensation

Why More Companies are Turning to Skill-Based Compensation Programs 4

 Figure 3
Progressive Approach to Skill-Based Compensation

6. Establish a monitoring system. Establishing a monitoring system for a skill-based compensation program is
essential to ensuring that digital skills move along with the development of the technology. This means that
re-certification does not simply ensure there is a skill upkeep but that skills move along with the technology. In
some instances, technology may become obsolete and the skill may not be worth anything to the company.
This also means that the company should stop paying a bonus to employees with this skill. Alternatives can
be offered that may require a different certification.

Why More Companies are Turning to Skill-Based Compensation Programs 5

 How We Helped Implement Skill-Based Compensation at a Medical Services Firm
We recently worked with a medical services company that was moving from partial analog to fully digital. In
that transition, the business wanted to strengthen their career paths for experts in the organization.

Aon was retained to help leadership and HR determine what skills they would need now and in the future. The
skills could either be trained on the job or gained through internal or external training. Next, we benchmarked
functions to the market.

The business decided they would have a pay freeze for a couple years to let base pay move below the
market median and labeled it as basic pay going forward. To compensate for a lower basic pay, the firm
determined how valuable different skills were to the company and what skill pay value factor should be
assigned to each skill. From that, a point system was established where each point was equivalent to Euro
value. The more critical skills received more points and deployment of these skills got additional points. Then,
we looked at where the most skilled people would land and ensured that these individuals would land
significant above the market median.

As a last step, we established a training schedule, including the positions that qualified. Each certification
would be valued for two years, at which time it can be taken away or alternatives could be offered.

While the program is still new at the organization the client has already seen a difference in how it motivates
certain employees and helps manage pay for those who may not have the same financial or career
aspirations as others.

Next Steps
Skill-based compensation is designed to drive digital skills into an organization, strengthen the individual
contributor role and allow companies to adapt to technology changes. It also takes pressure off employees that
feel the only way for them to advance in the organization is to seek higher management roles, thus allowing some
specialists to focus on developing technology, products and services that their customers want.

However, companies shouldn’t implement a skill-based compensation program without being prepared to invest
time and resources into training managers and HR leaders properly and communicating the program to
employees. Without laying the proper foundation, the new compensation model won’t be effective or receive buy-
in from employees and managers.

In the era of rapidly evolving technology, companies can benefit from adopting a skill-based compensation
program as way to ensure they are maintaining current and cutting-edge skills in their organization and upskilling
current employees instead of constantly replacing the workforce in a competitive hiring environment. However,
adopting a skill-based compensation program requires constant upkeep. Given the prediction that in 15 years
40% of jobs may be replaced by artificial intelligence, new compensation models that are linked to innovation may
lead the way.

To learn more about how to implement a skill-based compensation program, please write to rewards-
solutions@aon.com.

Why More Companies are Turning to Skill-Based Compensation Programs 6

Author Contact Information
Ian D. Karcher
Director, Central Europe, Rewards Solutions
Aon
+49 176 1266 4870
ian.karcher@aon.com

About Rewards Solutions

The Rewards Solutions practice at Aon empowers business leaders to reimagine their approach to rewards in the
digital age through a powerful mix of data, analytics and advisory capabilities. Our colleagues support clients
across a full spectrum of needs, including compensation benchmarking, pay and workforce modeling, and expert
insights on rewards strategy and plan design. To learn more, visit: rewards.aon.com.

About Aon
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and
health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and
analytics to deliver insights that reduce volatility and improve performance. For further information, please visit
aon.com.

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