Future Look |

Skills Will Be the New Measure of Base Pay

As organizations continue to navigate the COVID-19 pandemic, many are unconsciously stumbling on their future work and rewards models.


Some version of the phrase “accelerated timeline” has been uttered numerous times the past eight weeks at WorldatWork’s “Total Resilience Virtual Conference and Exhibition.” On Wednesday, Mercer’s Mary Ann Sardone, partner, U.S. talent solutions leader, and Gregg Passin, CECP, senior partner and U.S. executive solutions leader, delved into the various future rewards implications that have emerged during the pandemic.

Skills will play a critical role in shaping the future of work, Sardone said. An example of how is through career development. Whereas the traditional work model builds careers within a job function with limited opportunities to work on other areas of the business, Sardone foresees organizations evolving to enable more cross-functional work where people and skills are matched up to what needs to be performed anywhere in the organization.  

“In the future we think the permanent idea of a job will be replaced by assignments,” Sardone said. “Once we get the skills defined and we know the work that needs to be done, work becomes more of a dynamic concept.”

Sardone said COVID-19 somewhat illuminated this model to many companies, because it required an inordinate amount of collaboration and agility

“We had work that needed to get done and we had cross-functional teams with different skill sets and levels of people and we got it done, despite the job we were in,” Sardone said. “That level of agility was unprecedented and really will accelerate this model.”

Skill-Based Pay

The other shift Sardone said she expected to see is skills replacing performance and experience in setting base pay for employees. This will require businesses to get better at identifying, assessing and creating formal ways of establishing skill-based pay.

“We’re going to start to evolve and quantify discreet skills,” Sardone said. “Ultimately, I think job gets replaced by cluster of skills. Those clusters of skills get put on assignments. I think the survey databases will start to follow and enable that.”

Sardone clarified that this doesn’t mean skills will outweigh performance when it comes to other forms of compensation. Base pay, she said, will be set based on skills, but the application of those skills and the success to the business is what will be rewarded in pay for performance.

“We don’t think pay for performance is going away — it’s just going to be delivered in a different way,” Sardone said. “The reason for that is we’ve examined pay and how it’s kept pace with the external market inside an organization. Promotional increases and merit increases haven’t kept up with the outside market. So, paying for performance through other means, like incentives and career advancement, which is the biggest way in which pay rises is career movement, we think is really the future for pay for performance. I think skills as a mechanism to drive more pay for performance by enabling people to be more agile and mobile in their careers really does support pay for performance.”

Incentives and Goal Setting

The economic fallout from COVID-19 has presented organizations with a challenge in how to design incentive plans and how to go about rewarding both employee and executive performance. 

Sardone said she expects this to translate into companies focusing more on the collective than the individual when rewarding performance.

“We won’t abandon the individual performance measurements, but the collective will emerge as an important measurement gauge,” she said.

As it relates to executive compensation, Passin said Mercer has noticed a rise in relative metrics being used for long- and short-term incentive plans. Given how difficult goal setting is in the current environment, execs can be rewarded based on how the company performed relative to other companies in that industry. 

Generally, long-term incentive plans are three years, but given the overall uncertainty at the moment, some organizations are taking the approach of three one-year periods for LTIs. The payout still wouldn’t occur until the end of the third year, but segmenting it allows for a more pragmatic approach. This, Passin said, is likely an interim solution.

“I don’t think we’ll see a whole-sale movement to just time-based LTIs. I don’t think shareholders will be in favor of that,” Passin said. “There’s great pragmatism among shareholders and advisors understanding that some changes need to be made based on the way that we’ve typically structured executive compensation. Less performance weighting and perhaps these one-year periods. I think as much as anything else, we’re looking for the balance here.”

Organizations are mostly holding steady with payouts, as a quick poll conducted by WorldatWork the first week of the conference found that 64% of 179 organizations surveyed will not be altering their incentive plan payout schedules. 

Passin said organizations are also increasingly cognizant of the importance of factoring environmental, social and governance (ESG) metrics into their executive compensation plans. Additionally, the pandemic and various racial injustice incidents over the summer has emphasized the importance of incorporating diversity, equity and inclusion (DEI) metrics into the business.

 This, Passin said, runs counter to the idea of “meeting quotas” and figures to be an important variable for businesses moving forward. 

“A quota is an arbitrary number that organizations used maybe not for the most positive purposes. The purpose of DEI isn’t to set arbitrary quotas that are meaningless, it’s to make the organization reflect the greater population where you work in,” Passin said. “We think that’s very important not only for your diverse employees, but important for all of your employees and it’s important for the organization itself to reflect your customer base, places you work and the greater population to really make all opportunity available no matter what their race, ethnicity or gender might be.”

About the Author

Brett Christie Bio Image

Brett Christie is the managing editor of Workspan Daily.

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