The Rise of Skills-Based Rewards, and What You Must Do About It

Recent reports show that half of HR leaders see skills shortages as a top corporate threat in the coming year, and experts predict 70% of the skills used in most jobs will change by 2030. Will organizations be ready to address any potential skills gaps? A survey of 1,100 talent, rewards and HR global leaders generally reflects optimism toward accomplishing this.

Mercer’s new Skills Snapshot Survey found:

23% of organizations now have some form of skills-based rewards program in place, a notable increase from 17% in 2023.
45% of HR leaders are rewarding skill acquisition, making it a top strategy for filling critical skills gaps.

In addition, the survey found skills-based promotions are on the rise — from 30% of organizations utilizing the practice in 2023 to 41% in 2024 — yet only 27% of executives currently believe their workforce models are agile enough to pivot talent effectively.

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This presents an opportunity for employers to not only upskill current workers, but to reward them for acquiring new skills.

“Pay-for-skills programs can reward skill acquisition or skill demonstration, but they require a reliable skills database and governance to manage processes,” said Kenia Covey, a principal consultant at Mercer. “This approach helps organizations remain competitive and fosters the development of a strong talent pipeline.”

Behind the Skills Gap

Technology is evolving rapidly — faster than the workforce or the education system can keep up, said Sue Holloway, a compensation content director at WorldatWork.

“The speed of adoption of technological advances like automation, digital transformation and artificial intelligence [AI] are changing the nature of work and jobs, and outpacing the current workforce’s capabilities,” Holloway said. “New jobs are evolving faster than employees can be retrained, and traditional education and training systems often lag behind market demands.”

As a result, there is a mismatch between capabilities of those in shrinking occupations and skills required in new jobs, she said.

How to Level Up Employees

Employers are increasingly eliminating degree requirements, and instead, they are focusing on hiring for demonstrated skills, Holloway said. Most significantly, employers are exploring ways to grow their own talent by investing in upskilling and reskilling their current workforces, she said.

According to Holloway, total rewards (TR) professionals can design reward programs that reinforce and accelerate skills development through both monetary and non-monetary strategies. Examples include:

A salary adjustment or lump-sum bonus awarded for earning a certification.
A skill-based pay differential or premium tied directly to specific, market-relevant skills (e.g., proficiency in a programming language or a particular expertise in AI).
Career path incentives through structured pay progression tied to skill acquisition (e.g., tiered pay bands for technical roles in healthcare or manufacturing).

Organizations also can subsidize training costs for certifications or provide paid time off for completing skill-building programs, said Laurie Bienstock, a managing director and global leader for knowledge architecture at WTW.

“Recognition initiatives, such as spotlight awards for achieving skill milestones, further reinforce a culture of continuous learning,” she said.

Building a Skills-Based Rewards System

To administer a pay-for-skill approach, an organization should first identify why, when and how they want to pay for skills, said Molly Leeds, a senior principal at Mercer.

For instance, determining when to pay for a skill (upon hire, during an annual review cycle or in an ad-hoc fashion) and how to pay for that skill (within base pay, through incentives or as a one-off bonus) will jumpstart a pay-for-skill approach, she said.

Bienstock noted skills-based rewards encourage continuous learning and development, fostering a more dynamic and adaptable workforce.

These programs also can improve talent attraction, retention and engagement when workers see a clear link between learning and rewards, Holloway said, adding that paying for skills can translate to fairer compensation by reducing bias and reliance on subjective performance assessments.

But be aware — building such programs can be complex.

“Defining and mapping pay to skills levels requires robust frameworks for identifying and measuring employee skills,” Holloway said. “Programs require continuous monitoring and updates to ensure they’re fair, effective and aligned with business needs, especially in fast-moving industries.”

In addition, external compensation benchmarking for niche or emerging skills can be inconsistent or unavailable, Holloway said, and leaders will likely need to invest in training HR leaders and managers to secure buy-in and support.

“The traditional compensation model, which often hinges on job titles and seniority, can be rigid and fail to recognize the true value employees bring with their unique skill sets,” Bienstock said. “Pay programs that integrate a skills-based approach to pay aligns compensation more closely with the actual contributions and expertise of employees.”

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