Compversation #20: Are We Ready for Skills-Based Pay?

Skills-based compensation: myth or reality?

Should we really be organising work according to job descriptions — or is the whole idea of a ‘job’ no longer fit for purpose? 

There is a fairer and more efficient way to distribute tasks within a company: by focusing on skills. Or at least, that’s what the growing number of articles on ‘skills-based organisations’ would have us believe. In these companies, employees are assessed and valued for what they can do, rather than their job title alone.

This trend has only been accelerated by the rise of AI. It’s now easier than ever to map out the skills that are available within your organisation and identify the ones you’ll need in the near future. A number of skills management tools, including Gloat, Oracle, and SAP, promise to equip companies for this coming ‘skills revolution’. 

And this revolution is set to impact every area of HR, from recruitment to training… and, of course, compensation. At the last two HR conferences I attended (Unleash and HR Technologies), I couldn’t help but notice an explosion of companies working on skills and AI. Meanwhile, compensation management tools remain relatively scarce, despite the looming challenge of pay transparency. 

That’s why I wanted to focus on skills in this edition of my newsletter mini-series about the criteria behind pay decisions. Alongside classic considerations like performance and potential, these days, I’m hearing more and more about skills-based compensation.

Not long ago, I was speaking with a compensation and benefits manager who had been tasked with aligning pay and skills as part of an HR transformation project. She asked me for advice on how to make it work while still meeting transparency requirements — in other words, how to make skills-based compensation objective, equitable and fair. But is that even possible?

A fairer, more effective model? 

There are some concepts in compensation and benefits that seem simple on paper, but turn into real headaches when you put them into practice. One example is variable pay, which we’ll talk about in another issue. For me, skills-based compensation falls into the same category. 

The idea sounds great in theory: managers evaluate employees in terms of their skills, and then identify the skills that they might need on their teams in the near future. From there, employers try to source these missing skills either externally or internally — and base pay decisions on this analysis. 

This approach has a clear advantage: it frees employees from the constraints of rigid job descriptions and highlights potential internal mobility or career paths that might otherwise be overlooked. For example, you might spot overlapping skills between sales and recruitment teams, or customer service and internal communications. 

HR expert Josh Bersin gives the example of American Express. By taking a skills-based approach, the company identified an opportunity to strengthen its customer service and sales teams by hiring from the hospitality sector. This enabled them to put a strong focus on the client experience, acting more like a luxury hotel than a financial services company. 

It’s easy to see the advantages that this system could have for employees: more visibility on career paths, the chance to develop new skills and boost pay, and a stronger sense of fairness and equity. In fact, according to Deloitte, 73% of employees believe a skills-based approach would improve their work experience, and 66% say they’d be more likely to join a company that adopted this system. 

The skills framework headache

That all sounds good in theory. But in practice, I’ve never seen this enticing promise live up to expectations. In fact, after seeing company after company run into trouble, I’ve come to see skills management as just another shiny HR system that’s never used effectively by managers or employees in the field. 

Worse: it can even damage HR’s reputation by reinforcing the cliché that all we do is build heavy, impractical methodologies that feel disconnected from reality and add no real value to the organisation. 

The problems start right at the beginning of the process: building the skills framework itself. In large enterprises, this is typically a three- or four-year project that involves running workshops to help each team define the skills in each role. Then, there are endless rounds of cross-referencing and checking to build a reliable base. By the time it’s finished, it’s already outdated. The result? An unwieldy and complex tool that no one really uses. 

Whenever I speak with companies that have implemented skills frameworks, I always ask: ‘Do managers actually use it effectively?’. The answer is never yes. And that’s without even considering the question of how we define skills themselves. In the effort to make them broad enough to apply across roles, they often become way too abstract. For example, ‘communication’ doesn’t mean the same thing in customer service as it does in internal comms — so treating this as the same skill makes it practically meaningless.

Josh Bersin also highlights this problem: skills are highly context-dependent and rely on alignment between employees and their organisation. They don’t exist in a vacuum. 

And this gap between the tool and the reality it’s meant to represent is particularly important when it comes to compensation. 

I’ve said it again and again: in the transparency era, every pay decision must be based on objective, reliable, and fair criteria. This isn’t just an ethical question — it will soon be a legal requirement. European countries have until June 2026 to transpose the EU Pay Transparency Directive into national law. A vague skills framework simply can’t provide a solid enough foundation for pay decisions in this legal context. 

This is why I’ve never really believed in skills-based compensation. The process has always seemed too cumbersome, and it rarely delivers on its promises of fairness and equity. 

But of course, that was all before AI. These days, we have the means to build a solid skills framework with minimal effort. But is it possible to use this as part of a robust and effective pay system? Personally, I’m still not convinced…

How AI could transform skills evaluation 

You might think I’m too cynical. In fact, please feel free to reply to this newsletter if you do — I'm always happy to debate! 

It’s true that AI could speed up the process of defining and assessing skills. At least, that’s the promise of the many skills-based management tools on the market. Maybe one day, it will be able to provide us with a more granular and precise evaluation framework so that we can accurately pay people according to their skills rather than their job title.

But I don’t think we’re there yet. I don’t see a clear way to turn this idea into reality, and to move from a job-centred compensation system to one based on skills — even when we have a clear, precise skills framework in place. 

Because even if we manage to accurately assess each employee’s skills, translating them into monetary sums remains a problem. Should each skill have a specific value attached to it? Should each employee’s pay package be defined by the sum total of these skills? Will a salary end up as nothing more than a weighted average of each skill, multiplied by the employee’s competence level? 

Even in theory, this approach seems extremely complex. And once you factor in the rigidity of employment law, it becomes practically impossible. The only practical application that I can see working is something like granting an annual bonus for mastering a key skill — like AI, for example. Or, placing employees with certain skills higher within their salary ranges — with those salary ranges still defined by job titles. 

In short, skills may be experiencing a resurgence thanks to AI, but I don’t yet see a clear link to compensation. 

Of course, if you’ve managed to implement a successful skills-based pay system or if you have a better idea than I do of what it could look like in practice, please get in touch — I’d love to hear about it! 

To continue the conversation 

Here’s some reading to keep the conversation ongoing on this topic. If you’ve come across any interesting reads, feel free to send them my way!

The skills-based organization: A new operating model for work and the workforce — Sue Cantrell, Robin Jones, Michael Griffiths, Julie Hiipakka,  Deloitte

A very comprehensive (and optimistic!) article from Deloitte on the evolution of organisations toward a skills-based management system, drawing on data from over 1,000 professionals worldwide.

Building A Skills-Based Organization: The Exciting But Sober Reality — Josh Bersin

An interesting reflection by Josh Bersin on the promise of the skills-based organisation, exploring both its misleading claims and real-world challenges.