Compversation #21 – Do Skills Really Pay Off?

Skills-based pay: Myth or reality?

What if the very notion of a 'job' were obsolete — if organising work in companies around fixed job descriptions was simply a remnant of another era? 

Instead, a focus on skills might be a fairer and more efficient way to distribute responsibilities within an organisation. An ever-growing number of articles advocating for skills-based work describe how this approach values individuals for what they can do, rather than their job titles. 

This movement has been accelerated by the rise of AI: it’s now easier than ever to map out the skills a company currently has and those it’ll need in the near future. A range of talent-management platforms, such as Gloat, Oracle, or SAP, all promise to equip companies for the coming “skills revolution” that’s set to impact every aspect of HR — from recruitment to learning and development, and of course, compensation. 

At the last two HR conferences I attended, Unleash and HR Technologies, I noticed an exponential increase in companies focused on skills and AI… while compensation-management tools, for now, remain few and far between, despite the looming reality of pay transparency.

That’s why I wanted to explore the topic of skills in this mini-series of newsletters devoted to the criteria used to justify pay. It’s common to think about pay criteria linked to performance or potential. But increasingly, I also hear about skill-based pay. 

Not long ago, I spoke with a Compensation and Benefits Manager tasked by her leadership to align pay with skills, as part of an HR transformation. She asked for advice on how to do this while respecting transparency requirements — namely, in an objective, fair, and equitable way. But is that even possible? 

A fairer and more efficient organisation? 

Some concepts in compensation and benefits look pretty simple on paper but become puzzles in practice. Variable pay is a great example (a topic for a future issue). But to me, skills-based pay is another one of those cases. 

At first glance, the solution looks ideal: managers assess employees based on their skills and identify which they’re likely to need in the near future. Companies assess which skills are more or less valuable. It then bases pay decisions on this framework: employees with a high level of mastery of highly valuable skills will be well compensated, while others will receive less. 

The advantage of this approach is it frees employees from the confines of rigid job descriptions and highlights internal mobility or career paths they might otherwise overlook. For instance, you might identify overlapping skills between sales and recruitment teams, or between customer service and internal communications.

HR expert Josh Bersin gives the example of American Express. It used a skills-based approach to learn it would benefit from recruiting in the hospitality sector for its sales and customer-service teams — treating the customer experience as you would in a luxury hotel.

It’s easy to see how this type of system could benefit employees: greater visibility over their career paths, opportunities to learn new skills and grow their pay, and a stronger sense of fairness. In fact, according to Deloitte, 73% of employees believe a skills-based approach would improve their work experience, and 66% would more likely be attracted to a company that adopted this system.

A convoluted skills framework 

While this all sounds great on paper, I’ve never seen this promise actually work in practice. After watching many companies struggle, I’ve come to see skills-management projects as one of those well-intentioned HR initiatives that are rarely used by managers or employees on the ground.

Worse, they often harm HR’s reputation, reinforcing the cliché of HR teams developing heavy, disconnected methodologies that add no real business value. The problems begin right at the construction stage — building the skills framework itself is a true bureaucratic nightmare.

These projects often last three or four years, with workshops to help teams define the skills for each role, followed by data cross-checks to create a reliable base. And by the time it’s done, it’s already outdated. You end up with an over-engineered tool that the business doesn’t actually use.

When I speak with companies that have implemented skills frameworks, I always ask: “Do managers actually use it?” The answer is nearly never yes. Not to mention that defining the skills themselves is problematic: the more you try to generalise them across roles, the more abstract they become. “Communication,” for instance, doesn’t mean the same thing in customer service as it does in internal communications.

Josh Bersin makes the same point: skills depend heavily on context — on the alignment between employees and their organisation. They don’t exist in isolation.

This disconnect between the tool and the reality it’s meant to describe is especially problematic when it comes to pay.

We’ve said it often enough: in the age of transparency, all pay decisions must be based on objective, reliable, and equitable criteria. This is not only an ethical issue — it’s a legal one. By June 2026, EU countries must implement the European Pay Transparency Directive into national law. An imprecise skills framework can’t provide a sufficiently solid foundation for pay systems that meet these legal requirements.

That’s why I’ve never historically believed in skill-based pay: the projects have always been too heavy, too complex, and rarely lead to concrete results.

But that was before AI. Now we have the tools to build better skills frameworks, could we finally connect them to fair pay systems? Well… I still don’t think so.

The potential of AI to structure skills assessments 

You might argue that I’m too cynical (and you’re welcome to reply to this newsletter — I always enjoy a lively debate!)

It’s true that AI could help speed up the definition and evaluation of skills — at least, that’s what today’s skill-based management tools and matrices promise. Perhaps in the near future, we’ll have access to a more granular and precise evaluation framework that allows us to pay people based on their skills rather than their job titles.

But practically speaking, I think we’re still far from that. I don’t see any obvious way to turn this utopia into reality — to move from a job-based pay system to a skills-based one. Even with a clear, detailed skills framework.

Even if you can accurately assess each person’s skills, you still face the question of how to assign them value. Does each skill have an associated pay level? Is a compensation package the sum of a person’s skills? Is a salary just a weighted average of the value of each skill multiplied by the employee’s proficiency level?

Even in theory, that sounds incredibly complex. In practice, it’s impossible given the rigidity of labour law. The only concrete applications I can imagine are, for example, granting an annual bonus tied to mastery of a key skill — AI, for instance. Or positioning employees with certain skills higher within their existing pay range (which, itself, still depends on the job).

So, while skills are certainly experiencing a new boom thanks to AI, I don’t yet see a clear connection to compensation systems.

Of course, if you’ve managed to implement a skill-based pay system, or if you have a theoretical idea of what that might look like, I’d love to hear from you!

To continue the conversation … 

Here’s a selection of content that reflects further on this topic. Feel free to share any articles you’ve found interesting!

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

A comprehensive (and optimistic!) article from Deloitte about the evolution of organisations towards data-driven, skill-based systems, based on insights from more than 1,000 professionals worldwide.

Building a Skills-Based Organisation: The Exciting But Sober Reality – Josh Bersin 

An insightful piece by Josh Bersin exploring the promise of the skill-based organisation — somewhere between overblown expectations and real-world challenges.

Skills-Based Organisations Aren’t Reaching Their Potential. Here’s How They Can Succeed – Sebastian Ullrich, Jens Baier, Vinciane Beauchene, Suketu Shah, and Fabio Tank — Boston Consulting Group 

A realistic article from BCG charting the difficulties companies have faced in committing to skills-based initiatives over the past decade, and how they can overcome them.