Skills Inching Out Job Titles As the Way to Establish Wages

You may not have noticed it on your pay stub yet, but the way companies determine wages has begun to change.

The salaries of American workers will increasingly be based on their skills, not their job titles, according to a survey by Towers Perrin, a benefits consulting firm.

Moreover, variable pay, tied more to the achievement of company goals, is on the rise as a supplement to base pay.

At a Corning Inc. ceramics plant in Blacksburg, Va., for example, employees have been getting payouts each year since 1990 for meeting cost and quality goals. Each year this "goalsharing" pay has added 8 to 13 percent to their base pay. The company has gained, too, with dramatic performance improvements.

There's a downside of these trends: Many workers are having to say goodbye to the tradition of seeing their pay rise automatically with seniority or inflation.

Currently Corning is among a minority of US firms relying heavily on incentives or skill-based pay. But some experts say a shift toward these types of compensation is almost inevitable.

"The world of pay is based on the world of work," says Sandra O'Neal, who heads Towers Perrin's employee pay practice in St. Louis. Through most of the postwar era, work has been organized as a hierarchy. Now technology and new management styles are causing many companies to take on a flatter, leaner structure.

"There's going to be an explosion [of skill-based pay], in the next four or five years," predicts Marc Wallace, a pay expert at the Center for Workforce Effectiveness in Northbrook, Ill.

Although only about 8 percent of the 750 companies surveyed now have competency-based pay, more than two-thirds of respondents said they plan to move in that direction. The survey covered a cross-section of large and mid-size companies.

The shift, when and if it occurs, could reinforce the concept, espoused by some in business and academia, that a "new contract" is being forged between employers and workers: Job security is all but gone, but workers can expect to gain skills that will help them stay employed - albeit with job and career changes - and to climb upward in pay.

Many workers will excel in this environment, but its Darwinian undertones may mean tough times for those who fail to develop skills.

"We're going to have a huge spike of workers who can't read or write" entering the labor force, says Ms. O'Neal. "That's a very scary social issue that we're going to have to deal with at some point."

New pay schemes are "going to exacerbate the difference between skilled and unskilled" workers, agrees David Larker, a professor of accounting at the University of Pennsylvania's Wharton School in Philadelphia. So far, those firms that have embraced the most innovative pay practices have also adopted other sweeping changes, such as work teams, job rotation, and total-quality management, he says.

Mr. Larker agrees that the new pay schemes are being closely watched by many companies now. Many employers may choose to adopt these changes partially, or not at all. The question, he says, is how much and how quickly will they spread?

For many companies, the mere desire to change is just the first step; new systems must win approval at the bargaining table with unions. And many innovators have stumbled. Skill-based compensation is "about the most expensive way to pay people," Mr. Wallace says. Companies expend resources on training and on measuring the value of specific skills to their operations.

Almost 4 in 10 firms that try competency-based pay fail to gain from the switch, according to research by the Center for Workforce Effectiveness.

But if skill-based pay is implemented properly, Wallace says "the payoff should be great." He suggests that employers focus on job-specific skills; too often, firms end up paying too much for routine math or communication skills.

Another recent survey, by Buck Consultants in New York, found only about half the interest in competency-based pay that the Towers Perrin study found.

Still, the Buck study concludes: "Alternative pay strategies continue to grow in popularity. Almost 60 percent of the Fortune 1,000 companies responding to this survey are either using or implementing strategies such as broadbanding [more flexible pay grades], gainsharing, group incentives, or competency-based and team-based pay."