Skills-Based Pay: Models, Evidence and How to Move From Role-Based Pay

Skills-based pay is a compensation approach in which part of what an employee earns depends on the verified skills they have and use, not only on their job title or grade. Instead of one salary range per role, employees move up in pay as they certify new skill blocks, or receive a defined premium on top of their job band for skills the business needs.

It is not a new idea: skill-based pay plans have been used and studied in manufacturing plants for decades. What is new is the pressure behind it: fast-changing skills (AI above all), employers dropping degree requirements, and the EU Pay Transparency Directive, which asks employers to justify pay with objective, gender-neutral criteria, skills among them. This guide explains role-based vs skills-based pay, the three models used in practice, what peer-reviewed research shows, TalentUp data from about 31,000 job ads in 17 countries, and how to implement skills-based pay ranges without losing control of cost or fairness.

What Is Skills-Based Pay?

In a role-based (or job-based) pay system, the job is the unit of value. Roles are evaluated, grouped into levels and given a salary range, and an employee’s pay moves within that range or jumps when they are promoted. It is simple to run and easy to benchmark, because most market data is organised by job title and level.

In a skills-based system, the person’s verified capabilities are the unit of value. The organisation defines which skills matter, how proficiency is assessed and what each skill or skill block is worth. Pay rises when an employee demonstrates a new skill, not when they change title. Older literature also calls it knowledge-based pay or pay-for-knowledge; competency-based pay is a close cousin that tends to reward broader behaviours rather than certifiable technical skills.

The two are not opposites. Even a pure skills-based plan needs a role or job family as a starting point, and a good role-based structure already uses skills as one of its job evaluation factors.

Three Models of Skills-Based Compensation

In practice, skills-based compensation takes one of three forms. Many organisations combine them across different populations.

Skill Blocks: the Classic Plant Model

The classic skill-based pay plan comes from manufacturing. Employees start at a base rate and earn a pay step each time they are trained and certified on an additional machine, process or quality task. The plant gains a flexible workforce that can cover absences and change lines without hiring. The approach works best where skills can be broken into clear, testable blocks that change slowly.

Skill Premiums: the Knowledge-Work Model

For knowledge workers, the more common model is a premium on top of an existing band. A software engineer, for example, stays in the software engineer band but receives a defined premium for verified AI or machine learning skills. This keeps the job architecture intact and makes the premium easy to review or remove when the market changes. We discuss this option for AI talent in our guide to the AI pay premium.

Hybrid: Skills-Based Pay Ranges

In a hybrid, the band still comes from the job and level, but position in the band follows a documented skills profile: an engineer who has demonstrated three of five advanced skills for the level sits higher than one who has demonstrated one. Promotion to the next level is triggered by proving the skills of that level. For most European employers this is the most realistic path, because it keeps market benchmarking and pay transparency reporting simple.

What the Evidence Says About Skills-Based Pay

Much of what is written about skills-based pay comes from vendors and surveys of unclear origin. The peer-reviewed evidence is smaller, older and more nuanced:

• It can improve plant performance. A study of one manufacturing plant over 37 months found that, after introducing skill-based pay, the plant had 58% higher productivity, 16% lower labour cost per part and 82% more favourable scrap rates than a comparison facility (Murray and Gerhart, 1998). It is one plant, so it shows what is possible, not what is typical.
• Design and support decide whether plans survive. A longitudinal study of 97 facilities found that certain design features and support were linked to greater workforce flexibility and plan survival, with supervisor support particularly important. Plans were more successful and durable in manufacturing than in service facilities, and less likely to survive in facilities pursuing a technical innovation strategy, where skill definitions constantly change (Shaw et al., 2005).
• It outperforms traditional plans on some outcomes. Survey data from 214 organisations linked skill-based pay to higher workforce flexibility and better employee attitudes than job-based or market-based pay, with flexibility explaining its link to productivity. The fit between the plan and the organisation’s culture also mattered (Mitra, Gupta and Shaw, 2011).

The more recent evidence comes from hiring, not pay. A study of over 10 million UK job vacancies from 2018 to 2024 found that AI skills carried a 23% wage premium, more than a master’s degree (13%), and that the share of AI roles requiring a degree fell from 36% to 31% (Bone, Ehlinger and Stephany, 2025). But announcing skills-based practices is not the same as applying them: a Harvard Business School and Burning Glass Institute report found that only 37% of firms that removed degree requirements made sustained changes in who they hired, and that the shift affected not even 1 in 700 hires in the year studied (Sigelman, Fuller and Martin, 2024).

The lesson for pay is the same: skills-based approaches deliver when skills are clearly defined, assessed and supported by managers, and disappoint when they are a label on top of the old system.

TalentUp Data: How Skills-Led Are Job Ads in 2026?

To see how far employers have moved from credentials to skills, we analysed a random sample of about 31,000 job ads published worldwide between January and September 2026 in 17 countries, and checked whether each ad states explicit skill requirements, mentions a university degree, or makes the degree optional.

Source: TalentUp job postings database, January–September 2026, about 31,000 ads in 17 countries (unweighted country average).

Skills-led and degree shares do not add up to 100%: a minority of ads state neither.

Three patterns stand out:

• Anglo-Saxon markets outside the US are the most skills-led. In the UK and Australia, three in four ads list skills without asking for a degree. The US is more credential-heavy than its reputation suggests: 36.4% of ads mention a degree, although in more than a third of those it can be replaced by equivalent experience.
• Degree requirements remain strong in the Netherlands, Italy, Singapore and Mexico, where more than a third of ads make a degree (or, in the Netherlands, a higher-education “working and thinking level”) a hard requirement.
• Role families differ more than countries. Across the sample, 60.6% of sales ads (n = 2,580) and 58.8% of software and IT ads (n = 3,570) are skills-led, against 46.7% in finance and accounting (n = 1,710), 39.4% in data and analytics (n = 310) and 33.0% in non-software engineering (n = 520), where degrees and professional titles still act as gatekeepers.

What Specific Skills Are Worth Within the Same Role

The second question for skills-based pay ranges is how much the market pays for a skill inside the same job. In our analysis of salaried 2026 job ads (published in full in our guide on how to increase your salary), we compared ads for the same role, country and title level with and without a given skill or certification:

The size of a premium depends on how strictly the skill is defined. Counting only ads that make AI skills an explicit requirement, US software engineer ads offered +6.3% (see our AI pay premium analysis). Either way, the message for pay design is consistent: a handful of scarce skills earn a single-digit to low-double-digit premium within a role; many badges earn nothing.

How to Implement Skills-Based Pay Ranges

Moving from role-based to skills-based pay is a multi-year change. These are the steps that matter most.

1. Start with the business case and the population. Choose where skills drive value and change at a manageable pace: plant operators, engineers, IT, specialist finance roles. Research suggests technical-innovation settings where skills change monthly are the hardest place to start (Shaw et al., 2005).
2. Keep (or build) a job architecture. Skills-based pay needs a frame: job families, levels and salary bands. If you do not have them yet, follow our guide to building salary bands in 7 steps first.
3. Build a short skills taxonomy. For each job family, define a limited set of business-critical skills with two or three proficiency levels and observable evidence for each. Ten well-defined skills beat a library of two hundred.
4. Decide how skills are verified. Use external certification where it exists (for example CPA, PMP, cloud certifications), work-sample tests or panel assessments where it does not. Avoid relying on self-assessment or a single manager’s judgement.
5. Price skills with market data. Benchmark the role first, then the premium for the skill within the role, by country and level. For new skills with thin data, anchor to the closest established role, as described in our guide to pay ranges for emerging roles.
6. Choose the delivery model. Pay steps for skill blocks, a premium or allowance for specific skills, or band positioning in a hybrid. Decide whether premiums are permanent, reviewed annually or paid only while the skill is used.
7. Set governance and a budget. Cap the total skill premium pool, fund it separately from merit, define who approves certifications, and review the premium list every year. Pay compression between new hires with premiums and long-serving staff needs monitoring too (see pay compression in 2026).
8. Pilot, communicate and measure. Pilot in one population for a full cycle, explain the rules to employees and managers before launch, and track cost, skill coverage, internal mobility, retention and pay gaps by gender.

Risks of Skills-Based Pay and How to Control Them

Skill premiums can also widen the gender pay gap if the skills you choose to pay for are concentrated in male-dominated roles, as is often the case with technical and AI skills. Check the impact before approving any premium, not after.

Skills-Based Pay and the EU Pay Transparency Directive

The EU Pay Transparency Directive (Directive (EU) 2023/970) does not require skills-based pay, but it makes the logic behind it more important. Member states had to transpose it by 7 June 2026, and its obligations apply through national laws once transposed, so check the rules in each country where you employ people.

• Skills are one of the four criteria for work of equal value. Article 4 requires pay structures that allow employers to assess whether workers are in a comparable situation on objective, gender-neutral criteria, which include skills, effort, responsibility and working conditions. The Directive also says relevant soft skills must not be undervalued.
• Pay progression criteria must be accessible. Article 6 requires employers to make the criteria used to determine pay, pay levels and pay progression easily accessible to workers. A documented skills framework is a natural way to do it.
• Differences must be explainable. Employers with 250 or more workers report their gender pay gap yearly and those with 150–249 every three years, both from 7 June 2027; employers with 100–149 workers report every three years from 7 June 2031. If an unexplained gap of 5% or more in a category of workers is not remedied within six months, a joint pay assessment is required, and in pay discrimination claims the burden of proof shifts to the employer.

A well-designed skill premium is easy to defend: it is tied to a defined, verified skill, paid to everyone who has it and documented. A poorly designed one, such as premiums granted at managers’ discretion or skills that only some employees can access, is exactly the kind of unexplained difference the Directive targets. Our compensation philosophy guide and pay equity audit guide show how to document the criteria, and our complete guide to the Directive covers every obligation.

Is Skills-Based Pay Right for Your Organisation?

Skills-based pay is not “the future of work” for every role. It pays off when:

• skills drive measurable value (flexibility, quality, productivity, revenue) and can be clearly defined and tested;
• the market prices those skills separately from the job, which you can check with benchmark data;
• managers support it and the organisation can fund training and premiums from a controlled pool;
• you can document and monitor the impact on pay equity.

It is a poor fit for roles where skills are hard to verify, change faster than you can re-define them, or where a clear job-based structure already rewards growth through promotion. In those cases, a strong role-based structure with skills as a job evaluation factor and a small set of reviewed skill premiums is usually enough.

Whatever the model, the decision starts with understanding why you pay what you pay, the question at the heart of why compensation strategy matters. For market data to anchor both roles and skills, see the TalentUp methodology and our European Salary Benchmark Report.

Sources

• TalentUp. (2026). TalentUp job postings database: skills and degree requirements in a random sample of about 31,000 job ads in 17 countries, January–September 2026 [Data set; analysis by TalentUp, October 2026]. See the methodology above and our methodology.
• TalentUp. (2026). Skill and certification premiums in salaried job ads, January–September 2026. In How to Increase Your Salary: 8 Career Levers and What Each One Pays and AI Pay Premium 2027.
• Bone, M., Ehlinger, E., & Stephany, F. (2025). Skills or degree? The rise of skill-based hiring for AI and green jobs. Technological Forecasting and Social Change. https://www.sciencedirect.com/science/article/pii/S0040162525000733. Summary: Oxford Internet Institute, https://www.oii.ox.ac.uk/practical-expertise-drives-salary-premiums-in-the-ai-sector-finds-new-oxford-study/
• European Parliament & Council of the European Union. (2023). Directive (EU) 2023/970 to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms, Articles 4, 6, 9 and 10. https://eur-lex.europa.eu/eli/dir/2023/970/oj
• Mitra, A., Gupta, N., & Shaw, J. D. (2011). A comparative examination of traditional and skill-based pay plans. Journal of Managerial Psychology, 26(4), 278–296. https://doi.org/10.1108/02683941111124827
• Murray, B., & Gerhart, B. (1998). An empirical analysis of a skill-based pay program and plant performance outcomes. Academy of Management Journal, 41(1).
• Shaw, J. D., Gupta, N., Mitra, A., & Ledford, G. E. (2005). Success and survival of skill-based pay plans. Journal of Management, 31(1), 28–49. https://doi.org/10.1177/0149206304271376
• Sigelman, M., Fuller, J., & Martin, A. (2024). Skills-Based Hiring: The Long Road from Pronouncements to Practice. Burning Glass Institute and Harvard Business School Project on Managing the Future of Work. https://burningglassinstitute.org/research/skills-based-hiring-2024