POV: Is it time to eliminate annual increments and move to skill-based pay adjustments?

For decades, annual increments have been the backbone of compensation strategy—predictable, structured, and often tied more to tenure than tangible contribution. But as job roles evolve at breakneck speed and skills emerge as the new currency of workplace value, a growing number of organisations are questioning whether this one-size-fits-all approach still serves them well.

With AI reshaping industries, continuous upskilling becoming non-negotiable, and employees demanding greater fairness and transparency, the traditional increment cycle may no longer capture actual contribution or future potential. Is it time to move beyond convention and reward employees for what they bring to the table—not simply how long they’ve occupied a seat at it?

HRKatha reached out to HR leaders across industries to explore how realistic this shift is, and whether skill-based pay adjustments could fundamentally redefine compensation philosophy for the modern workplace.

Sujiv Nair, chief people officer, MSN Group

The future is about human-machine alliance, which means one must have competency—a combination of knowledge, skill and attitude (K + S + A)—to deliver business outcomes. Competency-based pay will help employees develop the right attitude along with skills and knowledge toward change, innovation and outcomes in a cyber-physical world.

While skill-based pay sounds progressive, its execution is complex. In most organisations, rewards are tied to outcomes—and outcomes depend as much on attitude and application as on technical know-how. A highly skilled individual may not necessarily deliver business results if they lack the right mindset or the ability to work effectively with people.

When an employee creates value or delivers outcomes, that’s when they get rewarded. For delivering outcomes, skill alone isn’t enough—you need the right mix of knowledge, skill and attitude. For instance, as an individual contributor, I can perform my job well. But once I become a manager, I also have to drive and monitor the performance of my team. Skills alone don’t work there.

The future should lean toward competency-based pay rather than purely skill-based models. There are many highly qualified people—with PhDs or impressive degrees—who still can’t get work done. The ability to apply what you know is what differentiates a super performer from an average one. With AI and automation on the rise, the human edge will lie in understanding people, adapting to situations and customising solutions. That’s why I believe competency is the key—it’s what will truly define success in the next phase of work.

Takeaway: Competency, not just skills, will drive pay in the future.

Satyajit Mohanty, vice president – HR, Dabur India

Skill-based pay is not yet widely accepted in India. However, it is gradually gaining traction, particularly in sectors such as IT, green technology, digital manufacturing and electric vehicles—where skillsets are extremely rare.

Most industries still operate on generic, well-established skills. At Dabur, for instance, the one skill that’s in short supply is e-commerce. Other skills such as brand management, finance or sales are fairly generic, so there’s no strong business case for a skill-based pay approach. This model is primarily driven by skill shortages, not by a universal shift in compensation philosophy. It benefits only a small percentage of employees with specialised expertise, leaving the majority still aligned to annual increment cycles.

There’s always a danger that everyone begins to think their skill is paramount. The reality is that specialised skills are in the minority. For most employees, increments still depend on the company’s affordability and market trends. Yes, increment trends are slowing down, but skill-based pay will remain confined to select roles for now.

Takeaway: Skill-based pay will stay niche, limited to rare and specialised roles.

Pallavi Poddar, CHRO, Fenesta Windows

Linking pay to skills can create a powerful incentive for continuous learning. However, the challenge lies in defining and measuring what truly counts as a ‘critical skill’.

It’s not about ticking a box. It’s about how that skill translates into business value. Companies need a robust framework to evaluate skill application, impact and relevance over time.

Shifting entirely away from annual increments may not be feasible for all organisations. A hybrid model—where part of the pay is linked to performance and part to skill progression—is more practical. That way, employees are rewarded for both delivering results and demonstrating growth.

Takeaway: A hybrid model of increments plus skill-based pay is the most practical path forward.