Most organizations focus on how much to pay people. However, there are more provocative questions that reframe compensation as a lever for building adaptability, innovation and performance: What exactly are we rewarding for? How does it relate to where we need to go? How should it best apply to skills?
A compelling response to each of these questions is found in skill-informed pay. Think of paying for skills as a rebalancing act. It disrupts the longstanding symmetry of role and rate, and it challenges us to instead consider value as something fluid, something applied. This rebalancing invites us to reconsider our assumptions about talent — not just what people know, but how consistently, contextually and creatively employees can apply what they know to the work they do.
Small design choices like a bonus tied to a critical skill or a transparent range that highlights a career pathway can create ripple effects in trust, ambition and collaboration. Paying for skills invites us to shift our lens from fixed roles and historic benchmarks to dynamic contributions and evolving potential. Paying for skills also challenges us to design compensation not just to reward performance, but to shape work person-by-person, outcome-by-outcome.
Compensation philosophy refers to a set of guiding principles that an organization uses to design and manage its compensation programs. Traditionally, those principles focused on:
To keep these guiding principles relevant as work evolves, compensation philosophies now must account for the fact that jobs are powered by skills, as confirmed in our latest research on skills.
Because jobs remain foundational, organizations increasingly depend on talent that can grow, adapt and apply skills across a variety of evolving business needs. As business models shift and skill requirements quickly change, compensation philosophies also must expand. Under a skills-informed compensation philosophy, traditional guiding principles remain as well as stretch to address new priorities and tensions including how:
This evolution builds on foundational principles. A skills-informed compensation philosophy still aims to be fair and competitive but also demands greater intention in how decisions are made, shared and experienced. It pushes organizations to consider contributions in more fluid, forward-looking ways and to design pay systems that reinforce both business outcomes and belonging.
Skills-informed pay is not a one-size-fits-all approach. Its design and deployment vary across industries and organizational models. For example, compensation for skills in manufacturing may follow a tiered structure — often tightly linked to certifications and technical proficiencies and typically laddered with precise increments.
In contrast, corporate and knowledge-based roles often reward skill application more fluidly across multiple pay elements (e.g., base salary, bonuses, long-term incentives) linked to innovation, collaboration or strategic execution. This variation highlights that skills-informed pay is not just about pricing labor differently. It’s about matching pay to how value is created in different business contexts.
Operationalizing skills-informed pay starts by aligning compensation levers to skill-based contributions that are clearly defined, validated and relevant to the business. Each lever serves a specific purpose and should be applied with intention. Importantly, organizations must rely on a clear skills taxonomy as well as understand the difference between prevalent skills and those hard-to-find or emerging skills that support future growth and transformation.
Base salary considerations for prevalent and emerging skills are incorporated into market practice. Internal value with specialized skills and/or base salary premiums are identified each year during the annual compensation planning process.
Base salary is the appropriate vehicle for compensating skills that are essential to the role and consistently applied. In many cases, organizations already do this implicitly. That is, traditional job benchmarks reflect the embedded skills and knowledge that define a role because a job is fundamentally a collection of these components.
Prevalent skills often define why a role commands its value, serving as core differentiators that shape pay positioning. Effective implementation requires formalizing the skill within the job architecture, validating its consistent use through observable performance, and ensuring compensation outcomes reflect both internal leveling and external market alignment. Governance mechanisms should reinforce consistency and ensure base pay remains tied to durable, role-critical capabilities.
Base salary is an appropriate vehicle for compensating an emerging skill as that skill becomes integral to role performance. Begin by anchoring the role using established leveling criteria and identifying proxy benchmarks, adjusting for scarcity and strategic importance as needed.
Adjustments are best informed by just-in-time market intelligence (e.g., web-scraped job postings, vendor-supplied trend data) alongside traditional survey sources. To avoid locking in higher pay before the skill stabilizes, compensation governance should define when and how adjustments apply by using clear eligibility criteria, oversight for expectations and periodic recalibration based on evolving business needs and external trends.
For new hires, base salary should reflect both the job’s level and the candidate’s relevant skills. For prevalent skills, standard benchmarking and salary range placement can be used confidently, as these capabilities are embedded in role expectations and validated through experience.
For emerging skills, offer decisions should consider market scarcity and business impact, applying temporary modifiers or targeted premiums only when capability is clearly demonstrated (e.g., candidate assessment, portfolios). Governance should ensure these expectations are tracked and reviewed, preventing long-term misalignment as skills evolve or become more common.
In addition to base salary, there are other compensation programs that can be leveraged to pay for skills:
Each of these levers plays a unique role in reinforcing different dimensions of contribution. Supported by robust skill infrastructure and governance, these tools help ensure that pay reflects how skills are used — not just whether they are held — and support both agility and equity in a changing workforce.
Critically, organizations must first define what they want to reinforce. Is the goal to reward current impact, incent future capability or highlight cross-functional potential? The best systems balance all three, signaling the organization’s values and creating clear opportunities for employees to grow in meaningful and visible ways.
Skills-informed pay introduces new variability as well as a heightened responsibility to ensure both pay equity and transparency are intentionally designed into the system. Without well-defined guardrails, organizations risk inconsistent application, unequal access to advancement and misaligned perceptions of fairness among employees.
To mitigate these risks and build a system that is both defensible and empowering, leading organizations focus on two outcomes: ensuring equitable pay for current contributions and creating equitable access to future pay opportunities. Skills can be an important variable for the rationale behind differences in pay between jobs in the same salary grade or category of worker.
Communication is essential to the success of skills-informed pay programs. Employees want to understand how their skills are valued, how decisions about pay are made and how to progress toward meaningful compensation growth.
High-performing organizations go beyond messaging and embed transparency into systems, platforms and experiences across the talent lifecycle. They make skill expectations visible within role profiles, show how proficiency is assessed, and explicitly connect skill acquisition and application to career and pay advancement. Tools such as interactive skill libraries, career pathways and compensation range finders help employees self-navigate, while manager enablement ensures these tools are activated in meaningful development conversations.
When employees can see how compensation decisions are tied to objective skill standards — and where opportunities to increase pay potential exist — they are more likely to trust the system. That trust becomes a driver of retention, internal mobility and engagement. And when this is enabled with technology and data science to indicate and show employees career pathing opportunities the benefits are significant.
Communication doesn’t just explain the system; it operationalizes fairness, builds belief in progress and aligns the compensation story with broader use cases like learning, talent marketplaces and workforce planning.
Skills-informed pay is a refinement of traditional compensation, not a rejection. It keeps the best of structured pay models while evolving them to meet the needs of today’s workforce and tomorrow’s strategy.
Skills-informed pay begins with clear principles on skill-based pay aligned with your compensation strategy and it grows through disciplined systems. It also succeeds when grounded in values like fairness, accountability and the belief that people should be rewarded not just for what they know, but for how they grow and contribute to the organization.
