As your business grows, so does the need for hiring and retaining talent. With the diverse ways in which we get work done today (remotely, in-person, or a hybrid of the two), and the skills that have become in-demand in recent years—your organization needs near real-time skills and location data to get pay right.
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. Payscale supports its customers with the world’s largest salary database, and customers can add an extra layer of real-time, granular geo and skills data to support your talent and compensation strategies with Employee Reported Data.
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
2. Useful but not essential for the role. 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.
3. Assumed for the role. 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.
4. Irrelevant or unrelated for the role. 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 versus 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.
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.
Payscale data methodology
There’s a method to our market leadership. Optimized for quality and scale, our proven methodology helps make Payscale the trusted leader in compensation data. Payscale’s approach to compensation data and survey data ensures a precise view of salaries through a variety of data methodology and a four-step validation process to ensure accuracy and transparency from the collection and validation of data, to the delivery of insights. Learn more about how Payscale datasets (Employee Reported Data, Peer Data, Survey Publishers) can help your organization price jobs accurately and competitively.