Introduction

Up until March 2020, Canada had minimal to no real unemployment. Essentially, it was a seller’s market where anybody looking for work could find it. This reality, which defined and drove compensation priorities and strategies, was especially true for highly skilled and knowledge-intensive employees, and organizations that required their critical competencies to deliver on mandate expectations. Opportunities and challenges were particularly pronounced for unique job families and roles like Cyber-Security and AI Specialists that were short on supply and in high demand.

Over the course of the past 15 months as all industry sectors and employers navigated the devastating impact of the pandemic, and rapidly transitioned to a broad range of digital service and product platforms, the labour market imbalances for highly specialized skill sets became even more pronounced.  Quite simply, the existing supply of technical and knowledge-intensive specialists, and those being produced through apprenticeship, college, university and licensed programs, have not kept up with demand. More specifically, for example, labour markets have not been able been able to source an adequate supply of nurses in healthcare, digital software engineers and technicians in high technology, and environmental scientists in clean energy, to name but a few.  The net result of these pronounced labour market imbalances has been production and service delivery constraints, and ultimately material risk to customer, client and patient quality commitments. Strategically, this contextual reality and now a re-opening economy are forcing employers of all kinds to strategically think through what they can do from an HR and compensation perspective to better attract and retain these mission-critical resources or colloquially, “hot skills”.

Understanding the impact of hot skills on one’s business model and organizational capabilities can be both a challenge and an opportunity and, if not done thoughtfully and carefully, can result in a number of HR and economic risks. Knowing what hot skills are in this day and age, how they should be managed and compensated, and the risks and implications of ineffective choices for both one’s hot skill employees and broader workforce have become a critically important HR strategy issue for many employers.

What are Hot Skills?

Hot Skills are essentially an occupational or job-specific skill or a set of skills that are highly specialized and in high demand and in short supply (SHRM, 2011), and are viewed as being of critical importance to mandate value creation and customer satisfaction. These labour market imbalances can be found across multiple industry sectors and even geographies. In some cases, the skills may only be in high demand for a short period of time (e.g. Y2K conversion in the year 2000), and in other cases, the skills can remain in demand for a prolonged period of time (e.g. an experienced construction engineer).

So how does an organization determine if a skill is hot or not? The first signs are typically recruitment and retention challenges. If an organization is continuously having trouble attracting certain skill sets through external recruitment efforts, it may be because of a poor employee brand, ineffective recruitment efforts, or quite simply because of uncompetitive base and/or variable pay practices. Similarly, if an organization is continually having trouble retaining certain skill sets and the issue is not due to the working environment or organizational culture, but rather because of materially higher rates of pay being offered by marketplace competitors, the organization is likely dealing with a “hot skill” compensation challenge.  And of course, in this high-speed digital age where social media is driving the pace of both content and perception distribution, these hot skill attraction and retention challenges are being shared and perpetuated continuously by external candidates and employees alike.

Compensation for Hot Skills

Once a hot skill has been identified, there are several different human resources strategy options that could be deployed to address the attraction and retention issues. These options can include a select number of non-compensation solutions, and range from contracting out to revising specific HR policies and programs to attract and retain hot skill talent (for example, training and development, unique career paths, and even specialized benefits). Many organizations, however, conclude that a compensation response is also needed, especially when competing human resources strategies appear to be comparable and not differentiated.

A compensation strategy to address a measured hot skill challenge, however, is a major decision and can have profound ramifications.  As a starting point, an employer should consider its overall compensation philosophy – is it willing to offer a unique element of compensation to a designated workforce segment to the exclusion of its broader talent-base, and thereby alter internal equity practices to address external equity realities? Once these priorities and guiding principles have been confirmed, management can then explore a number of different compensation strategies or options for dealing with hot skills.  These options can be varied and include:

1. Simply examining and better promoting one’s full total rewards package. Are there plans that your organization offers beyond direct total cash compensation to attract and retain hot skill employees? For example, better emphasizing above-market pension and/or benefits programs that other competing employers may not offer at all – as is typically the case in healthcare;
2. Identifying and defining possible base pay premiums that would be selectively offered to hot skill jobs and incumbents, but on an annual renewable and without prejudice basis;
3. Identifying and defining very specific attraction [e.g. sign-on bonuses] and retention-based [tenure] variable pay rewards for designated “hot skill” jobs and employees;
4. Working within one’s existing base salary range framework and administering one-off in-range adjustments for existing hot skill employees whose compa-ratio positioning is below target control points;
5. Possibly offering above minimum range base salaries for external recruits; and,
6. Exploring other non-monetary benefits (e.g. extra vacation, paid membership or license fees, etc.).

For a number of reasons, including the varying nature of what skillsets are considered “hot”, how long pay premiums last, and the confidentiality of strategic compensation practices especially in the same industry sector, it is difficult to find and establish concrete external trends and data sources. Current but limited research, however, suggests that organizations offering hot skill pay supplements offer time-based premiums of 5% to 10% of base pay that are deemed separate from established classification and base salary policies – to do otherwise would blur and possibly compromise both core internal equity and pay equity principles. Some organizations may also offer a “sign-on” bonus [supported by specific tenure-based “claw-back” requirements], or one-time retention bonuses supported by specific tenure criteria in order to secure certain skills.

Contextual Considerations

Even in the face of identified and measured hot skills and related compensation challenges, not all organizations are able to respond and deploy an agile compensation response to address hot skill priorities. Unionized employers and unions working within an existing collective agreement will likely be constrained in this regard. Other constraints may include fiscal year timing and budget limitations, pay equity requirements and the gender predominance of designated hot skill jobs, as well as legislative pay restraints found across various public sector jurisdictions.  Finally, some employers may philosophically be of the view that they will not make unique provisions for the few to the perceived detriment of the many, and therefore, are prepared to explore other broader HR strategies to address hot skill shortages such as outsourcing, strategic partnerships, multi-skilling, and even incremental overtime.

Conclusion: Intended and Unintended Consequences

While the identification of hot skill jobs within one’s organization can be a straightforward exercise, the related compensation and human resources decisions that are made to address them will have profound policy implications, and possibly unintended consequences. For example, a decision to not offer some sort of compensation premium or adjustment when you have specific hot skill roles may undoubtedly impact your attraction and retention of these incumbents, and therefore materially constrain marketplace growth aspirations and customer expectations. Conversely, a deliberate strategy to offer a select compensation adjustment or premium runs the risk of perceived internal inequities and broader employee disengagement. More specifically, providing a hot-skill premium to a very select number of roles and employees within a particular function [e.g. IT/IS] or job family [e.g. digital] may be viewed as being overly generous and unfair to the balance of employees in the function or business unit.  Increased absenteeism and turnover, let alone declining employee engagement and productivity may then be the unintended consequences!

Even in the case where the hot skill premium is profoundly needed because of profound competitive pressures, the decision may be costly, and difficult to undo in the future if related labour markets strike a balanced demand/supply equilibrium.  Employers must also weigh the need for additional administrative and management efforts that will be required to monitor and assess external labour market and compensation practices, and related policy responses. For some organizations, this incremental management cost has become more pronounced because of the speed and impact that the COVID-19 pandemic has had on labour market and compensation practices, and how quickly they can be up-ended and render one’s compensation program, let alone hot skill strategies, irrelevant.

As many of us can attest, the COVID-19 pandemic has turned well-intended compensation strategies upside-down, including measured hot-skill premiums. With the economy and labour markets now rebounding as we hopefully move into a post-pandemic era, those employers that are able to identify their hot skill jobs and people, and determine and “stress test” relevant compensation strategies, will be strategically well-positioned to optimize attraction, retention and related performance for years to come.

About the Authors

Ian Cullwick is a retired Partner with an international consulting firm, and served as the Vice-President of HR and Organization Research at the Conference Board of Canada. Ian is a specialist in human resources governance, organization and performance management, and compensation strategy.  He is also a noted thought leader and has authored articles on organization design, performance management and compensation strategy. In addition to serving as a Queen’s IRC Instructor, Ian also teaches in the Executive MBA program at the Telfer School of Management.

Katarina Galic is a Compensation Specialist at a large asset management organization in Toronto, responsible for the development, governance and administration of compensation programs and practices. Katarina specializes in job evaluation, broader workforce market benchmarking, salary structure design, and total rewards for a global organization. Previously, Katarina was a consultant in Ottawa with an international HR consulting firm, where she supported clients on competitive pay analyses and job levelling in the public, private, and crown corporation sector. Katarina holds a Bachelor of Commerce specializing in Human Resource Management at the University of Ottawa.

References

Perez, T. (2019, January 30). Which Skills Are the Most Valuable? – Compensation Research. Retrieved July 09, 2021, from https://www.payscale.com/data/which-skills-are-most-valuable.

Ledford, G., & Heneman, H. (2011, June). Skill-Based Pay. Retrieved July 09, 2021, from https://www.shrm.org/hr-today/trends-and-forecasting/special-reports-and-expert-views/Documents/SIOP%20-%20Skill-Based%20Pay,%20FINAL.pdf.