Your employees have lots of different skills and talents. But which ones do you need to pay a premium for? Which ones aren’t worth paying for? To determine the right pay for each position, you need a framework to understand how to evaluate different skills and factor these skills into a salary benchmark. In this piece, we’ll provide a useful framework for how to factor skills into job prices.
What is a pay differential?
Most compensation professionals understand that location is an important factor in determining pay. For example, an HR generalist in New York City should command a higher pay than an HR generalist in Des Moines, Iowa, because New York City is a higher cost-of-living area than Des Moines. Additionally, compensation professionals understand that skill differences and difference in the levels of those skills should be reflected in the compensation for a position.
Many compensation professionals use factors such as location and skills to determine salary level. Too often, however, this information is used in a reactive, putting-out-a-fire kind of way (employee comes to HR and says, “Hey, I just learned my friend gets paid more because they have this skill, how come you are not paying me for it?”). There’s an opportunity to use skills differential information in a more strategic way.
What exactly is a skill differential? Here’s one way to define it:
Holding comparable factors constant, the skill differential evaluates the impact a skill alone would have on compensation.
So how does one measure the value of a skill?
One useful way to determine how much a skill is worth is to put it into one of four categories:
- Essential for the role
- Useful for the role
- Assumed for the role
- Irrelevant to the role
Essential for the Role
Additionally, a skill may be considered essential for one role but not for another role. For example, you may require a data engineer to know how to program in Python to do his job, but you wouldn’t require a data analyst to be proficient in Python.
Useful But Not Essential
These are skills that could potentially make you better at your job, but it’s still possible to manage without. For example, while a data analyst must have a working knowledge of statistics and fluency in Excel to do the job, Python may be considered a “nice-to-have” skill for someone in this role. Knowing Python allow the data analyst to do his job faster, but he can get by without knowing Python.
These skills are so ubiquitous, you wouldn’t even advertise for it. These basic skills would not be something that sets an employee apart from others. An example would be Microsoft Word for a marketing manager. Or, a nurse must be trained and receive her nursing license in order to practice.
These are skills that potentially could very well be useful in a role, but are irrelevant for the job someone is hired to do. These would be things like notary public certification for a software engineer or Autocad for an accountant.
How Much to Pay for Different Skills
All skills have a value. However, the degree of that value can vary. Factors such as the particular needs of the business and circumstances of the role can come into play.
The four buckets of skills we described above can be broken down into two categories: skills you don’t compensate for and skills you do compensate for.
Don’t Compensate For Assumed or Unrelated Skills
We don’t compensate for assumed skills because these skills are basic skills everyone in the job should have. So, there wouldn’t be a premium for these skills. Similarly, with unrelated skills, there’s no reason to compensate for them. For example, if a developer got a certificate in social work, the certificate would add no value to the role.
Do Compensate For Essential or Useful Skills
On the other hand, we do compensate for the two remaining categories. However, how we compensate for them differs. Depending on the type of skill you’re looking at, you’ll either be moving the entire range, or simply the individual employee’s position on that range.
Essential skills are the skills needed to do the job. These skills help define the role and thus should be included in your benchmark. So, when we’re looking at the range, that differential moves the entire range for that position.
For example, a data analyst needs to be able to analyze data and work in Excel at a high level. Those are skills that are simply required for the job. Similarly, knowledge of statistics is also essential and would move the range when you’re pricing data analyst roles.
For skills that are useful/nice-to-have (e.g. would enable someone to do their job more easily), they should have no impact on the range for a position. However, it makes sense to move employees who have the skill further into the range.
Soft Skills vs Hard Skills
Soft skills include communication, critical thinking and leadership. Hard skills include software expertise, public speaking and writing proficiency. Hard skills tend to be top of mind when evaluating job value. Nonetheless, soft skills are indeed valuable and worth paying for, even if they’re harder to measure.
In recent years, we’ve seen a focus on STEM education as a path to lucrative careers. However, it’s important to strike a balance. Even the most proficient mathematicians and engineers need to be able to work collaboratively with colleagues.
A PayScale study on workforce-skills preparedness revealed that 46 percent of managers feel that new college graduates lack effective communication skills. Yet only 19 percent of managers felt new grads were lacking in coding/computer programming skills. Clearly, there is a need for soft (as well as hard) skills in the workplace.
Scarcity and Hotness
Scarcity and hotness are additional factors that can affect the value assigned to skills.
Scarcity often happens when a new skill/piece of software emerges in the market. As technology develops, programmers will create new software to meet ever-changing needs. In these early stages of software launch, there are so few people with that skill, so naturally a market-driven forces of supply and demand create a scarcity. Those with that skill will be in higher demand.
What is a hot job? A hot job is a job whose pay has moved 3 percent quarter over quarter. A job because “hot” when employers have recognized there is a scarcity of applicants with an in-demand skill and they start to bake this knowledge into the salary range of the role. In other words, the cost has gone up because the demand has gone up.
How Skills Work in the PayScale Model
Data for location and skills differentials comes from the PayScale crowdsourced data set. Skills data is collected through the PayScale Salary Survey on a rolling basis. A portion of the 10 million monthly visitors to our website take the PayScale salary survey each month. About 200 thousand profiles are validated and included in our datasets. These data points are matched to your company’s positions in our compensation management solution, which then allows you to more accurately price your jobs using the data provided.
If you want more details on how to ensure competitive pay and accurate benchmarks, get in touch with us and we’d be happy to provide tailored guidance.