Skills-based pay: progress or pandora’s box?

“Pay the skill, not the role” sounds clever, until someone sues.

In today’s world of agile teams, internal talent marketplaces and AI-generated job specs, skills-based pay (SBP) is making a comeback on the reward agenda.

The idea? Reward people for what they can actually do, not just the box they’re put in. It sounds obvious. It looks modern. It smells… legally combustible.

What is skills-based pay?

Skills-based pay links compensation to the skills an employee demonstrates, not their job title, grade or how many acronyms they’ve squeezed into their LinkedIn profile.

And it’s not just theory:

• Toyota pays factory workers more when they cross-train (and not in the fitness sense).
• Delta Airlines offers uplifts for ground crew who earn safety or tech certifications.
• IBM rewards quantum computing talent before the rest of us even know it’s valuable.
• Even the NHS includes skills-based elements in its pay framework (though try telling that to a junior doctor).

The logic: more skills = more value = more pay. 

The reality: potentially more lawyers.

Why SBP is making a comeback

I remember SBP being a thing when studying reward theory some 25 years ago! 

It's making a comeback because, to quote Judi Dench as M in Skyfall:

“The truth is, the world is changing and we're playing catch-up. The world is arming faster than we can respond.”

Life is tough right now, so it’s no surprise that people are actively looking for ways to catch up, get ahead and accelerate their careers. In today’s fast-moving and fiercely competitive environment, standing still isn’t an option and skills have become the new currency of progress.

Employers, looking for those elusive productivity gains, are also drawn to the idea of SBP. 

It's not hard to see why.  

• Upskilling and retention: Employees stay longer when growth isn’t tied to a vacancy.
• Mobility: You can move talent to where the work is, fast.
• Futureproofing: Easier to spot and close capability gaps before they become a crisis.
• Fairness: Shifts the narrative from tenure to talent - catnip for Gen Z.

But enthusiasm doesn’t excuse due diligence.

The legal tripwires

Equal pay risk

Two people. Same role. Different pay. Why? 

Unless you’ve got clear, evidence-based criteria for what skill triggers what pay rise, you’re wide open to Equal Pay Act challenges.

Indirect discrimination

Skills acquisition is often self-directed. But if some employees can’t access training, because they’re part-time, have caregiving responsibilities or don’t know which login gets them into the learning management system, you risk baking systemic disadvantage into your pay model or reinforcing other inequalities.

Contractual chaos

Most contracts and bonus plans link pay to roles, not capabilities. Introduce SBP without rewriting those, and you may have just drafted the claimant’s statement of case for them.

Job architecture: now quietly screaming

Overlaying SBP onto your grade framework? Expect:

• Pay compression (junior developers earning more than managers)
• Benchmarking confusion
• Existential dread from your Reward team

How to make it work (and not get sued)

SBP is really effective when:

• It’s tied to strategic business skills, not just random certificates.
• You’ve got objective, transparent validation (ideally peer-reviewed, not vibes-based).
• It aligns with contracts, policies and incentive plan rules.
• You’ve done an audit for accessibility, fairness and legal risk.

Final thought

Skills-based pay is a great idea. But if you skip the legal plumbing, you’re not building a reward framework. You’re building a tribunal case study.

So yes, pay for the skill. 

Just read the Equality Act before you implement the pay matrix.