Competency Based Pay

What is competency based pay?

Competency based pay is a compensation system that rewards employees based on their specific skills, knowledge, and abilities. Instead of paying employees based on their tenure or job title, this pay structure focuses on the competencies required for a particular job role.

In a competency based pay system, employees are assessed on the skills and knowledge they have and how well they perform their job based on these competencies. As employees acquire new skill sets or improve their problem solving abilities, they become eligible for pay increases.

What are the different types of competency based Pay?

There are several types, each focusing on different aspects of employee competencies:

1. Skill based pay: This system links pay to the specific skills employees bring to their job role. Employees are rewarded for acquiring and demonstrating skill sets relevant to their position. For example, learning new technical skills or improving problem solving abilities can lead to pay increases.

2. Knowledge based pay: Similar to skill based pay, this type rewards employees for gaining specific knowledge required for their job. Employees who enhance their knowledge, whether through formal training or hands-on experience, are compensated accordingly.

3. Performance based pay: This system ties pay to the high performance of employees. Achieving or exceeding performance goals leads to higher compensation. It’s a common pay strategy in roles where reaching specific targets is important, such as in customer service or sales.

4. Broadbanding: In this system, broad pay ranges cover various jobs and levels. Managers have greater flexibility to adjust pay within these ranges. This simplifies the pay structure while offering more discretion in determining pay increases based on competencies.

Competency based pay: Pros and cons

Pros:

1. Encourages skill development: Employees are motivated to acquire new skills and knowledge, which can lead to higher performance and improved job satisfaction.
2. Aligns with business goals: By rewarding specific competencies required for a role, a competency based pay system helps align employee efforts with the organization’s objectives.
3. Increased flexibility: These pay systems allow for more personalized compensation structures, rewarding employees based on their unique contributions rather than a fixed pay grade.
4. Promotes long term growth: Focusing on skill sets and proficiency encourages continuous learning, which benefits both employees and employers over the long term.

Cons:

1. Complex to manage: Tracking and measuring specific competencies can be difficult and time consuming, especially in larger organizations with diverse roles.
2. Potential for subjectivity: Determining which skills and competencies deserve higher compensation can lead to inconsistencies, especially if not well-defined or standardized.
3. Higher costs for employers: Implementing a competency based pay system can increase labor costs as employees are continuously rewarded for learning and improving their skills.

What Is the difference between competency based and traditional pay plans?

The key difference between competency based and traditional pay plans lies in how they reward employees. In traditional pay plans, compensation is based on factors like job title, seniority, and fixed pay scales. This often means that employees’ earning potential is limited by their ability to move up the organizational hierarchy.

On the other hand, competency based pay plans reward employees based on their demonstrated skills, knowledge, and abilities, allowing them to increase their compensation as they improve their capabilities. This system encourages continuous learning and skill enhancement, directly linking pay increases to an employee’s potential and performance, rather than just their tenure.

Aspect	Competency based pay	Traditional pay plans
Basis for pay	Skills, knowledge, and abilities	Job title, seniority, and predetermined scales
Focus	Individual competencies and skill development	Job hierarchy, tenure based progression
Flexibility	Highly flexible, adaptable to changing roles and responsibilities	Less flexible, rigid pay structures
Incentives	Promotes continuous learning and skill growth	Limited incentive for skill enhancement
Recognition	Rewards for individual contributions and expertise	May not always recognize individual talents
Motivation	Encourages employees to acquire new skills and competencies	May not drive skill development or innovation

In competency based pay systems, the focus is on individual contributions and expertise, creating a highly skilled workforce that is motivated to grow. In contrast, traditional pay structures are often seen as more rigid, offering limited incentives for employees to enhance their skills or contribute beyond the basics of their roles.

Competency based pay vs. Skill based pay

While both competency based and skill based pay plans reward employees based on their abilities, they focus on different aspects of employee development.

• Competency based pay looks at a broader range of employee behaviors, attributes, and competencies, such as leadership and communication skills.
• Skill based pay is more focused on specific, job related technical skills and knowledge that employees acquire, like mastering programming languages or earning certifications.

Aspect	Competency based pay	Skill based pay
Focus	Employee behaviors, attributes, and overall competencies	Specific technical skills and job-related knowledge
Evaluation	Overall competency levels demonstrated by the employee	Mastery of particular job-related skills
Reward basis	General competencies applicable to various roles	Acquired technical skills and certifications
Encourages	Well-rounded employee development	Specialization and continuous skill acquisition
Examples	Leadership, communication, teamwork	Programming languages, certifications, specialized training

In essence, competency based pay promotes well rounded development by focusing on broad competencies that can apply to multiple roles, while skill based pay is more targeted, rewarding specific technical expertise. Both systems, however, aim to motivate and retain employees through personal and professional growth.