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The Amazing Success of Pay-For-Skill Compensation Plans

 Are Quality Improvements Hype or Fact?

by

Thomas De Paoli Ph.D., C.P.M., SPHR

           Pay-for-skill compensation plans have the highest success rate bar none among management innovation programs.  Is it hype or fact?   A pay-for-skill compensation plan raises the pay of existing employees for acquiring new work skills and knowledge.  Companies develop a continuous learning environment to teach employees more skills.  As they advance up the ladder to each higher skill level rung their pay increases.   A recent Towers Perrin study confirms that these plans not only work but can revolutionize product quality gains.   According to the study average productivity increases exceeded 40% and customer product complaints dropped by over 60%.  My own extensive survey of over 200 pay-for-skill plans revealed that measured product defects were reduced by as much as 50%.  The American Compensation Association reports very similar results. These pay plans are becoming more accepted but remain widely misunderstood.  Despite these solid numbers skeptics still are wary of such plans.  These critics believe much of the so-called gains of these systems have not been closely quantified and the huge start up costs are prohibitive.  They argue that more money should be invested for factory automation.  My survey disproves these reservations. 

 The plans focus on uplifting the knowledge and the intellectual caliber of the workforce.  The plans all have some unique characteristics that lay the foundation for their uncanny achievement record. They are idiosyncratic.  Organizations custom design them for their personal situation.  The companies who reported the greatest success were already devoted to the so called “soft skills” such as employee involvement, empowerment, and participative programs.

          The evidence repeatedly shows that the overwhelming majority of companies are committed and pleased with their pay-for-skill compensation plans.  Of the 200 companies sampled only 2 (1%) stated that they would not implement the system again or were greatly dissatisfied with their plan.  Superior quality, increased job flexibility, improved productivity, better employee growth, and leaner staffing were the most cited benefits.

If all the data points towards solid gains why all the skepticism?  The cultural change to a participatory style and the need for strong top management commitment must come first (85% of the firms strongly agreed with these statements).  This is no easy sacred cow to turn into a sacred steak!  Most survey respondents (70%) reported that establishing trust was the toughest ideal to realize.  Implementation is brutal and requires tremendous time and resources. Many respondents cited an intensive one to two-year implementation plan.  Increased education or training costs ranged from $1000-$7000 per employee.  Numerous firms reported however  that after these initial high training costs the continuous learning costs dropped considerably. Over 60% of the companies reported using innovative and less costly self or programmed learning techniques in the later plan stages.  Initial drops in productivity and output (up to 5-25%) were broadly reported during this “teething” phase which varied from 1 to 6 months.  After two years measured productivity gains ranged from 30% to 90%.  No other management innovation plan requires such a long-term incubation period and such a costly start up curve. This scares many firms away from the attempt and fuels skepticism that such a high-priced plan would ever pan out.

           The burden of increased communication was the most noted bottleneck during the beginning phases (cited by 64% of the respondents).   This road block is not new news. A recent Business Week survey reveals that less than 25% of employees feel that their bosses communicate company goals well to them.

The real heart of the pay system is the continuous learning and training process.  Employees have an opportunity to progress up various skill levels or steps such as Technician1-2-3-4 etc. The more successful plans required employee skills pre-assessment before implementation and mandated universal participation.  Total labor costs (direct and indirect) fell on average 15% of the total cost of goods and services being produced.  Over 50% of the surveyed firms cited staff position reductions as exceeding expectations.

For most companies in the early stage the factory became a skill-university.   At start up (3-12 months in range) as much as 10-15% of total work hours were devoted to learning. This strong investment reassured employees that leadership was sincere about this process and in it for the long term.  Many firms did report that once the plans were established learning times were significantly reduced and innovative techniques more widely used and accepted.

 Since employees and management collaboratively work on the design of the system, joint learning about job content and the nature of the business occurs simultaneously.  Most other corporate innovations do not have such a personal benefit for the employee or a very well-defined path to achieve the end result. Philosophies such as total quality management (TQM) are broader in scope and are usually implemented to improve competitiveness.  Their direct impact on employees is often difficult to define. Overall business effect can be notable with TQM, but employees may view it as another management “program” that like old soldiers will eventually just fade away.

          The real power of pay-for-skill pay plans is that they have an immediate, personal, and nurturing impact on every employee.  Implementation demands that management become beginners again and really understand exactly what employees are doing and what skills should be valued and rewarded with more pay.  Cash or pay does motivate, a lot, no matter what the organizational behaviorists say to the contrary.  Unfortunately, many current management teams are clueless about what is really necessary in order to complete a particular job or task in a company.  This proliferates our cycle of mindless corporate downsizing and the short-sighted outsourcing of employee skills and knowledge.  The total immersion type approach of pay-for-skill plans engenders a much deeper search for better quality than any other program.

My survey revealed great news for companies that have TQM programs or who were ISO 9000 certified.  The quality gains at these firms were statistically much more significant. The defect level dropped as much as 30-50% more than at companies without such prior programs.  These preceding efforts helped kick start the start up stage (20-60% shorter in duration at such firms). Quality endeavors imply a commitment to long term survivability of the company and usually require specific examination of job tasks, work instructions, and inter-department relationships.  In most quality committed firms management already possesses a good working knowledge of what it takes to perform a job or task in the organization.  Pay-for-skill plans further refined this understanding and helped raise the quality level even more that anticipated. (this was cited by over 74 respondents)

          One can not underestimate the power of employee belief in such systems!  With pay-for-skill pay plans many employees are encouraged to not only learn but teach their job design to others. They are usually quickly rewarded for increasing their skills. The immediacy of rewards, constant reinforcement via continuous learning, and the fact that management becomes more knowledgeable about job design and content, and thus more sensitive, explains the almost universal success of pay-for-skill plans.

           The start up phase of a pay-for-skill pay plan is extremely challenging and frustrating for all parties.  My survey uncovered the best start up methods.  The plans require Sisyphean like efforts for implementation.  Nothing worthwhile on the shop floor is easy.  Pay-for-skill plans demand the total indomitable commitment of an organization.

          The survey listed the following start up methods as crucial in order of importance:

1.    Visit other pay-for-skill companies and start slowly with a small pilot plan.

2.    Conduct team building exercises and pre-assess the skills of the workforce.

3.    Plan and execute an intense communication program about the plan.

4.    If a strong quality program is in place use its principles to help re-enforce the pay-for-skill plan.

5.    Have clear and deliverable goals for the compensation plan.     

Pay-for-skill compensation plans are the most successful corporate innovations available. Their outstanding results have been documented repeatedly.  Skeptics need to re-visit their concerns.  Implementation requires good old-fashioned perseverance.  The quality gains can be significant especially if TQM is already in place. The plans emphasize people investment rather than people cutbacks.  By utilizing the above now proven techniques during the tough start up phase, you can guarantee the smooth implementation of this powerful competitive tool and gain quality preeminence.  Now that you are up to the challenge what are you waiting for?