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Skill-Based Pay: An Interview with Ed Lawler

(March 24, 2008)  Bureaucratic inertia has slowed the adoption of skill-based or "people-based" pay in America's companies, but Ed Lawler thinks it's the compensation system of the future. Lawler, professor and director of the Center for Effective Organizations at the University of Southern California's Marshall School of Business, highlights this gradually-emerging trend in his new book, Talent: Making People Your Competitive Advantage. (The book will be available in April from Jossey-Bass.)

It's not easy to make the transition from job-based pay to a structure in which employees are compensated on the basis of the value of their talents. The long habit of paying staff on the basis of defined job descriptions is a hard one to break. Skill-based pay is most often instituted in start-ups and in corporations that are making top-to-bottom transformations. But Lawler looks to the examples of well-known companies that have made the shift, including P & G, Pepsico, and Frito-Lay, as evidence that skill-based pay will prevail over time.

Lawler observes that paying people on the basis of their suite of talents found its most obvious application in manufacturing. The shrinking of America's rust belt is one of the reasons that skill-based pay is not ubiquitous. An irony in Lawler's analysis is that manufacturing industries counted their assets in "tangibles" - dollars and equipment. But Lawler says that as much as 80% of the assets of today's American companies take the form of the knowledge of their workforces. For him, this makes skill-based pay all the more compelling.

"My new book is about the step beyond talent management. It's about the total design of organizations. You can't just insert talent management. Skill-based pay is part of a larger organizational design," he says. "It's a more personal, sensitive system of compensation."

One of the elements of that design is the need for corporate boards to receive something like balance sheets reporting the state of the organization's talent assets. "Corporate information systems are more and more able to track this information," says Lawler, making it easier both to assess and forecast the skills available to the company, and also to make skill-based pay more feasible. "It's not necessarily more work for companies to run a skill-based compensation system. It's just as time-consuming to go through the ongoing process of classifying jobs. If administration is sloppy, upward creep in pay scales is just as big a problem in a job-based structure as it is in skill-based pay."

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