CHAPTER SIX
PERSON-BASED STRUCTURES
Overview
This is the final chapter of Part Two: Internal Alignment: Determining the Structure. This
section of the book examined pay structures within an organization. The premise underlying
internal alignment is that internal pay structures need to be aligned with the organization’s
business strategy and objectives, the design of the work flow, a concern for the fair treatment of
employees, and the intent of motivating employees. The work relationships within a single
organization are an important part of internal alignment.
Chapter Six describes the processes, techniques, and methods used to evaluate jobs to build a
person-based internal pay structure. In today’s “new work culture,” employees are told that they
must go beyond the tasks specified in their job descriptions. Pay systems that support continuous
learning and improvement, flexibility, participation, and partnership are claimed to be essential
for achieving competitive advantage in the global environment. Person-based structures provide
promise; the logic supporting these approaches is that structures based on differences in people’s
skills or competencies will be more flexible and will encourage agility.
Two approaches to building a person-based structure are discussed:
Skill-based
Competency-based
No matter the basis for the structure, the major decisions focus on the ways to
Collect and summarize information about work
Determine what is of value to the organization
Quantify that value
Translate that value into an internal structure
Similarities in the logic underlying job-based versus people-based approaches are highlighted.
The chapter concludes with a discussion on the usefulness of the various approaches—job- and
person- based—for determining internal structures.
Learning Objectives:
Understand the similarities and differences between skill plans and competencies in
person-based structures.
Define skill-based structures; identify the purpose of the skill-based structures; the
process for determining a skill-based structure, and outcomes of skill-based pay plans.
Define competencies; the purpose of a competency-based structure; understand the basic
decisions in creating a competency-based structure and the resulting structure.
Discuss administering and evaluating the plan, including identifying possible bias in
internal structures.
Lecture Outline: Overview of Major Topics
I. Person-Based Structures: Skill Plans
II. “How-to”: Skill Analysis
III. Person-Based Structures: Competencies
IV. “How-to”: Competency Analysis
V. One More Time: Internal Alignment Reflected in Structures
VI. Administering and Evaluating the Plan
VII. Bias in Internal Structures
VIII. The Perfect Structure
IX. Your Turn: Climb the Legal Ladder
Lecture Outline: Summary of Key Chapter Points
The logic underlying job-based pay structures flows from scientific management, championed by
Frederick Taylor in the early 20th century. Work was broken into a series of steps and analyzed
so that the “one best way,” the most efficient way to perform every element of the job, could be
specified. Strategically, Taylor’s approach fit with mass production technologies that were
beginning to revolutionize the way work was done.
Taylorism still pervades our lives. In today’s organizations, the work is also analyzed with an eye
toward increasing competitiveness and success. Routine work (transactional work) is separated
from more complex work (tacit work).
Once fragmented, work processes can be rebundled into new, different jobs. Pay structures based
on each person’s skills/knowledge/experience offer flexibility to align talent with continuously
redesigned workplaces.
More complex work requires pay systems that support continuous learning, improvement, and
flexibility. Person-based structures hold out that promise.
Exhibit 6.1 points out the similarities in the logic underlying job-based versus people-based
approaches. No matter the basis for the structure, a way is needed to:
1. Collect and summarize information about the work
2. Determine what is of value to the organization
3. Quantify that value
4. Translate that value into an internal structure
I. Person-Based Structures: Skill Plans
The majority of applications of skill-based pay have been in manufacturing,
where the work often involves teams, multiskills, and flexibility.
An advantage of a skill-based plan is that people can be deployed in a way that
better matches the flow of work, thus avoiding bottlenecks as well as idle hands.
Definition: Skill-based structures link pay to the depth or breadth of the skills,
abilities, and knowledge a person acquires that are relevant to the work. Structures
based on skill pay individuals for all the skills, for which they have been certified,
regardless of whether the work they are doing requires all or just a few of those
particular skills. The wage attaches to the person. In contrast, a job-based plan pays
employees for the job to which they are assigned, regardless of the skills they possess.
A. Types of Skill Plans
Skill plans can focus on depth and/or breadth.
oSpecialist: Depth—pay is based on the knowledge of the individual doing
the job rather than on job content or output.
oGeneralist/Multiskill Based: Breadth—Employees in a multiskill system
earn pay increases by acquiring new knowledge, but the knowledge is specific
to a range of related jobs.
Pay increases come with certification of new skills, rather than with job
assignments.
Employees can then be assigned to any of the jobs for which they are
certified, based on the flow of work.
oResponsibilities assigned to an employee in a multiskill system can change
drastically over a short period of time, whereas the basic responsibilities of
specialists do not vary on a day-to-day basis.
B. Purpose of the Skill-Based Structure
Supports the Strategy and Objectives
oThe skills on which to base a structure need to be directly related to the
organization’s objectives and strategies.
Supports Work Flow
oOne of the main advantages of skill-based plans is that it facilitates
matching people to a changing workflow.
Is Fair to Employees
oEmployees like the potential of higher pay that comes with learning.
oBy encouraging employees to take charge of their own development,
skill-based plans may give them more control over their work lives.
oHowever, favoritism and bias may play a role in determining who gets
first crack at the training necessary to become certified at higher-paying skill
levels.
oAdditionally, the courts have not yet been asked to rule on the legality of
having two people do the same tasks but for different (skill-based) pay.
Motivates Behavior Toward Organization Objectives
oPerson-based plans have the potential to clarify new standards and
behavioral expectations.
oThe fluid work assignments that skill-based plans permit encourage
employees to take responsibility for the complete work process and its results,
with less direction from supervisors.
oIf less direction from supervisors is needed, then fewer supervisors may
likewise be needed.
oHaving fewer supervisors can result in substantial labor cost savings, but,
of course, supervisors can see this potential consequence as well, which can
certainly dampen their enthusiasm for skill-based pay and the often related
practice of using teams and moving some decision responsibility from
supervisors to workers.
II. “How to”: Skill Analysis
Exhibit 6.3 depicts the process for determining a skill-based structure. It begins
with an analysis of skills, which is similar to the task statements in a job analysis.
Related skills can be grouped into a skill block; skill blocks can be arranged by levels
into a skill structure.
Exhibit 6.3 also identifies the major skill analysis decisions that are exactly the
same decisions as in job analysis:
1. What is the objective of the plan?
2. What information should be collected?
3. What methods should be used?
4. Who should be involved?
5. How useful are the results for pay purposes?
Definition: Skill analysis is a systematic process of identifying and collecting
information about skills required to perform work in an organization.
A. What Information to Collect?
There is far less uniformity in the use of terms in person-based plans than
there is in job-based plans.
Skill-based plans have very specific information on every aspect of the
production process. This makes the plans particularly suited for continuous-flow
technologies where employees work in teams.
B. Whom to Involve?
Employee involvement is almost built into skill-based plans.
Employees and managers are the source of information on defining the
skills, arranging them into a hierarchy, bundling them into skill blocks, and
certifying whether a person actually possesses the skills.
C. Establish Certification Methods
Organizations may use peer review, on-the-job demonstrations, or tests to
certify that employees possess skills and are able to apply them.
Newer skill-based applications appear to be moving away from an
on-demand review and toward scheduling fixed review points in the year.
Scheduling makes it easier to budget and control payroll increases.
Other changes include ongoing recertification, which replaces the
traditional one-time certification process and helps ensure skills are kept fresh,
and removal of certification (and accompanying pay) when a particular skill is
deemed obsolete.
D. Outcomes of Skill-Based Pay Plans: Guidance from Research and Experience
Skill-based plans are generally well accepted by employees because it is
easy to see the connection between the plan, the work, and the size of the
paycheck. Consequently, the plans provide strong motivation for individuals to
increase their skills. “Learn to earn” is a popular slogan used with these plans.
Skill-based plans become increasingly expensive as the majority of
employees become certified at the highest pay levels.
oAs a result, the employer may have an average wage higher than
competitors who are not using skill-based plans.
oUnless the increased flexibility permits leaner staffing, the employer may
experience higher labor costs. Some employers are combating this by
requiring that employees stay at a rate a certain amount of time before they
can take the training to move to a higher rate. Motorola abandoned its
skill-based plan because at the end of three years, everyone had topped out
(by accumulating the necessary skill blocks).
oIn a firm with labor-intensive products, the increased labor costs under
skill-based plans may become a source of competitive disadvantage.
Early researchers on skill-based plans found that about 60 percent of the
companies in their original sample were still using skill-based plans seven years
later.
oOne of the key factors that determined a plan’s success was how well it was
aligned with organization’s strategy.
oPlans were more viable in organizations that follow a cost-cutter strategy—
doing more with less.
It has also been argued that the higher labor costs under skill-based pay
(estimated as between 10 and 15 percent) mean that it may be a better fit to
companies in industries where labor costs are a small share of total costs, such
as paper and forest products, chemicals, and food processing.
An important question is whether a multiskilled “jack-of-all-trades” might
really be the master of none.
oSome research suggests that the greatest impact on results occurs
immediately after just a small amount of increased flexibility. Greater
increments in flexibility achieve fewer improvements.
oThere may be an optimal number of skills for any individual to possess.
Beyond that number, productivity returns are less than the pay increases.
oAdditionally, some employees may not be interested in giving up the job
they are doing. Such a “camper” creates a bottleneck for rotating other
employees into that position to acquire those skills.
The bottom-line is that skill-based approaches may be only short-term
initiatives for specific settings.
III. Person-Based Structures: Competencies
As with job evaluation, there are several perspectives on what competencies are
and what they are supposed to accomplish.
oAre they a skill that can be learned and developed, or, are they a trait that includes
attitudes and motives?
oDo competencies focus on the minimum requirements that the organization needs to
stay in business, or do they focus on outstanding performance?
oAre they characteristics of the organization or of the employee?
Unfortunately, the answer to all of these questions is “yes.” A lack of consensus
means that competencies can be a number of things; consequently, they stand in danger
of becoming nothing.
The top part of Exhibit 6.6 shows the process of using competencies to address
the need for internal alignment by creating a competency-based structure.
All approaches to creating a structure begin by looking at the work performed in
the organization.
While skill- and job-based systems hone in on information about specific tasks,
competencies take the opposite approach.
oThey try to abstract the underlying, broadly applicable knowledge, skills, and
behaviors that form the foundation for success at any level or job in the
organization. These are the core competencies.
oCore competencies are often linked to mission statements that express an
organization’s philosophy, values, business strategies, and plans.
Competency sets translate each core competency into action. For example, for the
core competency of business awareness, competency sets might be related to
organizational understanding, cost management, third-party relations, and ability to
identify business opportunities.
Competency indicators are the observable behaviors that indicate the level of
competency within each set. These indicators may be used for staffing and evaluation
as well as for pay purposes.
oThey anchor the degree of a competency required at each level of complexity of the
work.
oExhibit 6.8 shows five levels of competency indicators for the competency impact
and influence. These behavioral anchors make the competency more concrete.
oSometimes the behavioral anchors might include scales of the intensity of action,
the degree of impact of the action, its complexity, and/or the amount of effort
expended. Scaled competency indicators are similar to job analysis questionnaires
and degrees of compensable factors.
A. Defining Competencies
Early conceptions of competencies focused on five areas:
1. Skills (demonstration of expertise)
2. Knowledge (accumulated information)
3. Self-concepts (attitudes, values, self-image)
4. Traits (general disposition to behave in a certain way)
5. Motives (recurrent thoughts that drive behaviors)
As experience with competencies has grown, organizations seem to be
moving away from the vagueness of self-concepts, traits, and motives. Instead,
they are placing greater emphasis on business-related descriptions of behaviors
“that excellent performers exhibit much more consistently than average
performers.”
Competencies are becoming “a collection of observable behaviors (not a
single behavior) that require no inference, assumption or interpretation.”
B. Purpose of the Competency-Based Structure
Organization Strategy
oThe main appeal of competencies is the direct link to the organization’s
strategy.
oThe process of identifying competencies starts with the company leadership
deciding what will spell success for the company. The text explains this
concept using the example of Frito Lay.
Work Flow
oAs you can judge from reading the previous exhibits, competencies are
chosen to ensure that all the critical needs of the organization are met.
oWhile the skills-based plans are tightly coupled to today’s work,
competencies more loosely apply to work requiring more tacit knowledge
such as in managerial and professional work.
Fair to Employees
oAdvocates of competencies say that they can empower employees to take
charge of their own development.
oBy focusing on optimum performance rather than average performance,
competencies can help employees maintain their marketability.
oHowever, critics of competencies worry that the field is going back to the
middle of the last century, when basing pay on personal characteristics was
standard practice. Trying to justify pay differences based on inferred
competencies create risks that need to be managed.
Motivate Behavior toward Organization Objectives
oCompetencies in effect provide guidelines for behavior and keep people
focused.
oThey can also provide a common basis for communicating and working
together. This latter possibility has become increasingly important as
organizations go global, and as employees with widely differing viewpoints
and experiences fill leadership positions in these global organizations.