Shareef, R. (1998). A midterm case study assessment of skill-based pay in the Virginia Department of Transportation. Review of Public Personnel Administration, 18(1), 5-22.
Abstract:
Interest in skill-based pay by public administration theorists and practitioners is increasing as this innovative pay system is
viewed as a viable means of enhancing employee skills and work motivation. Pioneered in private organizations, Ledford and
others have suggested that skill-based pay design and implementation determinants are now fairly settled. A case study
compares the outcomes of a skill-based pay intervention in a public agency with several of the determinants that are
predicted to ensure successful implementation and diffusion. The results of the study indicate that all 5 of the "principals"
measured were utilized in this fairly successful skill-based pay intervention. However, the results also indicate that
skill-based pay is only congruent with a participative work culture, and that this is probably the strongest variable in
determining skill-based pay success.
Interest in skilled-based pay by public administration theorists and practitioners is increasing as this innovative pay system is viewed as a viable means of enhancing employee skills and work motivation. Pioneered in private organizations, Ledford (1995) and others have suggested that skill-based pay design and implementation determinants are now fairly settled. This case study compares the outcomes of a skill-based pay intervention in a public agency with several of the determinants that are predicted to ensure successful implementation and diffusion. The results of the study indicate all five of the "principles"
measured were utilized in this fairly successful skill-based pay intervention. However, the results also indicate that skill-based pay is only congruent with a participative work culture, and that this is probably the strongest variable in determining skill-based pay success.
The issue of skill-based pay is a growing one in public administration. Perry and Kraemer (1993), in their background
paper for the Winter Commission, advocate using skill-based pay as an incentive to encourage employees to learn new
skills for the emerging, highly technological public workplace. Roberts (1994) calls for using this innovative pay system in
the "reinventing government" process. Shareef's (1994a) article offers a comprehensive overview of the motivational
bases, design, and implementation of skill-based pay in two public organizations. At the agency level, the state of
Virginia's Department of Transportation (VDOT) recently implemented a skill-based pay pilot program.
Skill-based pay's popularity in the private sector has increased significantly in recent years.1 Consequently, Ledford
(1995) suggests that specific design choices for implementing skill-based pay are now more easily identifiable.2 This
raises two important questions for public administration theorists and practitioners interested in this "new pay" concept3:
(a) what are these specific design issues, and (b) can these design issues be exported from the private sector for
implementation in public organizations?
The identification of these design issues is especially important since innovative change concepts that originate in the
private sector frequently receive harsh criticism from critically inclined public administration theorists. Terry, for example,
suggests that some of these innovations imported from the private sector undermine the "distinctive competence" of public
organizations (1990) and "encourage the abandonment of traditions" (1996). Likewise, Wamsley, Goodsell, Rohr,
Stivers, White, and Wolf (1987) have called some of these "importations" a "corrosive influence" on public sector
institutional life.
However, others (e.g., Shareef, 1994b) have concluded that underlying system problems encountered during
implementation, rather than the theoretical construct itself, contribute to the frequent failure of innovative change
techniques in public organizations. In a strategy designed to avoid these dysfunctions, Golembiewski (1989) has
suggested (in the area of participative management) that employee participation be implemented incrementally to reduce
substantially policy maker resistance.
The purpose of this article is twofold. First, several design principles for implementing skill-based pay in the public sector
are offered and discussed. These principles have been distilled from the theoretical and empirical literature on this pay
concept. Relatedly, a case study analysis of the design and implementation of skill-based pay in a public organization is
presented. This evaluation permits an opportunity to compare the findings in an actual public sector case against the
proposed design principles. Yin (1984) calls this type of inquiry an explanation-building case study. The outcomes of this
study can lead to recommendations for both policy actions and theory-building concerning skill-based pay design and
implementation.
This article is divided into four sections. First, an overview of skill-based pay is provided. Next, five design and
implementation principles are outlined. Third, a case study analysis of the implementation and diffusion of skill-based pay
in a public agency is presented. Finally, conclusions from the case study evaluation, and their implications for public
agencies considering this pay plan, are discussed.
What is Skill-Based Pay?
Typically, pay systems are based on the principle that people should be paid according to the worth of the jobs they do.
This means that traditional pay systems are based on an analysis and evaluation of the job the person does. As Lawler
and Ledford (1984, p. 12) state: "The job evaluation allows organizations to decide how much a particular job is worth
and, therefore, to decide the range of pay that an individual can receive for performing the job. This approach to pay is
so common and so well accepted that it is rarely challenged."
Ledford (1989, p. 1) defines skill-based pay by stating: "In skill-based pay systems, employees receive compensation for
the range, depth, and types of skills they possess. They are paid for the skills they are capable of using, not for the job
they are performing at a particular point in time. This is a fundamental departure from traditional job-based pay plans,
which pay employees for the jobs they hold." skillbased pay can be used in conjunction with pay-for-performance
schemes [e.g., merit pay, gainsharing, etc.] (Shafritz, Riccucci, Rosenbloom & Hyde, 1992) but does not include or
exclude the idea of paying for performance (Lawler, 1992).
Luthans and Fox (1989) identify several technical differences between different types of skill-based compensation plans.
One type of multi-skilled pay system utilizes self-managed teams. Here, a new employee is paid a starting rate when
hired and receives pay increases as he or she learns skills needed by the team. Another skillbased pay approach pays a
starting rate to new employees and increases occur for each new skill or job they learn. Conversely, knowledge-based
plans reward employees for acquiring additional knowledge within the same job category.
A skill-based pay plan usually begins with the identification of tasks and the skills needed to perform those tasks in the
organization. Employees volunteer to undergo the requisite training to learn the skill(s). Workers are paid only for those
skills which are needed by the organization and which they currently are willing to perform (Lawler and Ledford, 1984).
Motivational Bases
Shareef (1994a) identifies expectancy (Vroom,1964), equity (Adams,1965), and participation (McGregor, 1960; Likert,
1967) theories as the primary skill-based pay motivational bases. Schuster and Zingheim (1992, p. 107) summarize the
motivational bases of skill-based pay thusly: "Once the employee learns the skills, rewards are available because the
employee is more valuable to the organization and demonstrates the flexibility necessary to help the organization
prosper."
Advantages and Disadvantages
Employee flexibility is one of the most prominent features of skill-based pay since it allows employees to be moved
throughout the organization as needs arise. This flexibility permits the organization to use employees in a wide variety of
tasks without the burden of tightly written job descriptions that limit this flexibility. Because the nature of jobs and work
have dramatically changed, it is impossible to have written rules that anticipate the wide range of situations likely to arise.
Roberts (1994, p. 5) writes that: "Most public employees are professionals who must exercise judgment and discretion.
With more decentralized authority, those on the front lines, with the best knowledge, can solve their own problems; the
focus of accountability can shift from rule-following to performance and results."
Lawler (1995) found that employee flexibility tends to lead to lower staffing levels because employers often discover that
some jobs can be eliminated because two workers employed flexibly can do the work of three with fixed assignments.
Flexibility also tends to lead to less absenteeism and turnover because employees enjoy having the opportunity to be paid
for, and utilize, a wide range of skills.
Another advantage of skill-based pay is that it separates pay levels from levels in the hierarchy. When employees learn
both horizontal and vertical skills, new career tracks are developed that are not dependent on upward mobility. As public
organizations flatten their hierarchies (e.g., USPS), this feature of skill-based pay becomes particularly important since it
provides a "nonlinear" way for people to grow and succeed in their careers (Lawler, 1992).
Skill-based pay, as a participatory structure, meets public service normative standards. Many participative or
empowerment mechanisms introduced into public organizations are viewed as manipulative by employees (Peters, 1994).
However, a skillbased pay program implemented in a high involvement culture is clearly nonmanipulative since
involvement is strictly voluntary and employees explicitly define the exchange framework between pay, enhanced skills,
and performance.
Disadvantages attributable to skill-based pay include costs of employee training and productivity declines during the
training process. Roberts (1994) acknowledges that if skill-based pay is successfully implemented in public agencies,
employee training and education budgets have to be increased dramatically. This, of course, appears problematic in an
era of government retrenchment. Yet, Roberts (1994, p. 5) makes a compelling argument for an enlarged training budget:
Because governments are labor-intensive, their biggest asset is potential in human capital. This means investing in training
and development, as well as giving employees the incentives and rewards to challenge them to higher achievement. State
governments spend only a pittance on training, far below what businesses dedicate to human resource development. The
Winter Commission recommends a stable learning budget of at least 3 percent of total personnel costs.
Administrative costs increase because of skill certification and recertification procedures. Employee motivation can be
affected negatively by workers who "top out"-that is, who learn all the skills required and are no longer eligible for further
pay increases (Lawler, 1992). Luthans and Fox (1989) outlined several other concerns associated with employees
learning skills in one organization, leaving that organization, and utilizing the learned skills elsewhere.4
Private Sector Applications
Skill-based pay has been utilized primarily by private organizations, including firms such as General Electric, General
Motors, American Honda, and American Nissan (Lawler, 1992). In a study of Fortune 1000 companies, 53 percent
reported they planned to increase their use of skill-based pay while 45 percent replied they will continue their use at the
current rate (Lawler, Morhman & Ledford, 1992). Ledford's (1992) research focused on the attitudinal effects of
skill-based pay. He found that: (a) a majority of employees who had been involved with skill-based pay for at least a
year endorsed the concept and had favorable views of its administration and fairness, and (b) skill-based pay leads to
greater pay satisfaction and pay equity.
Jenkins, Ledford, Gupta, and Doty (1992) reported that:
1. Skill-based pay had been implemented primarily in manufacturing organizations where employees perform routine,
high-volume service jobs.
2. Three-fourths of the respondents in their study said the plan increased worker productivity, motivation, flexibility to
adapt to changing production needs, and work team effectiveness.
3. Enhanced recruitment and retention occurred while reducing labor costs. Recent research by Ledford, Lawler, and
Morhman (1995) found that skill-based pay was used more extensively in organizations that had made changes in
management philosophy and organization decision-making structures. For example, the use of skillbased pay is much
higher in firms that use self-managing teams than in nonusers (70% vs. 30%). This outcome illustrates the relationship
between skill-based pay and a power sharing practice such as self-managing work teams.
Public Sector Applications
Perry and Kraemer (1993, p. 241) suggest that, because of the changing technological nature of public work, skill-based
pay should be utilized "to reward the acquisition, modification, and development of individual competencies." They
contend that skill-based pay will motivate workers to acquire new skills and facilitate job redesign. Roberts (1994)
argues that skill-based pay is an essential tool in the "reinventing government" process at both the state and national level.
From her perspective, skillbased pay provides the monetary incentive for public employees to learn the skills necessary
for more efficient governmental administration. She also believes that skillbased pay enhances the development of
"learning" and high-performance public organizations. Shareef (1994a) outlines a detailed plan for implementing
skill-based pay in Gifted and Talented Educational Programs (public schools) and communitybased policing programs.
He also suggests that skill-based pay may actually be a trigger (instead of a lag) variable in cultural change processes.
Given the empirical outcomes associated with skill-based pay in private organizations, and given numerous calls for its
utilization by public administration theorists, it appears that this pay innovation is worthy of careful study. It appears that
skill-based pay can be used in public agencies where institutions can build "compensable skill blocks around the skills
needed to produce tangible products or deliver specific services" (Ledford, 1995, p. 55).
Determinants of Skill-Based Pay Implementation: Five Principles
Several fundamental principles form the basis for skill-based pay implementation in public organizations. These principles
are listed and described below.
Principle 1: Skill-based pay "fits" with participative, high involvement cultures, but not with bureaucratic cultures. The
concept of "fit" or congruency among various subsystems is an important one in the organizational design literature.
Galbraith (1973) and Nadler and Tushman (1980) have developed generic congruency models. Shareef's (1993,1994b)
subsystem congruence change process has specific implications for public organizations. Congruence models of
organizational change are concerned with "the system of elements that ultimately produce behavior patterns and, in turn,
organization performance" (Nadler & Tushman, 1980, p. 39). From this perspective, organizational subsystems
(including reward systems) must be aligned to "fit" with the desired future state of the enterprise.
Ledford (1989) argues that only organizations that either have, or are moving toward, a participative culture should adopt
skill-based pay. He states that the "cost of skill-based pay for all employees is justifiable only if it is an integral part of a
high involvement management system, which has the potential to offset the cost of increased wages per employee with
greater productivity and other performance advantages" (Ledford,1989, p. 7). Lawler (1986, 1990, 1992) agrees that
skill-based pay should be implemented only in participative cultures for this same reason. He writes that "much of the
flexibility inherent in skill-based pay behavior can be gained by simply having a significant number of individuals
cross-trained, as in the utility worker concept. Thus, often the advantages of skill-based pay must extend beyond simple
flexibility if it is going to offer a significant advantage over a traditional job-based approach to pay. When combined with
a high involvement approach to management and work teams, skill-based pay can produce benefits other than those that
stem from a flexible workforce" (Lawler, 1992, pp. 162163). A participative work culture also forms the basis for
Shareef's (1994a) call for skill-based pay implementation in law enforcement agencies (community policing) and public
school systems (site-based management) that are moving toward high involvement environments.
When properly implemented, employees are involved with every aspect of skill-based pay design and implementation.
This involvement gives greater understanding of the change and allows better understanding of the enterprise's desired
future state (Ledford, 1989). This type of employee participation is incongruent with bureaucratic cultures. Lawler
(1992) and Ledford (1989) found that skill-based pay reinforces the participative culture by fostering employee
self-management. Self-management also makes significant savings possible through a reduction in management levels and
support personnel. Additionally, worker input into the totality of the skillbased pay plan further reinforces the reality of a
shift from bureaucratic to high involvement work cultures.
Since much of the leadership literature suggests that leaders are the driving force for organizational change (Schein, 1983,
1985), it follows that leaders who are facilitating a cultural shift would be more receptive to skill-based pay. For instance,
Shareef (1994c) wrote that government institutions in the state of Virginia were not attuned with skill-based pay since
Governor George Allen is not committed to organizational cultural transformation. Conversely, skill-based pay is more
likely to succeed in federal agencies because of the Clinton administration's commitment to employee involvement (Gore,