Competency Based Pay Systems

Broad banding versus Competency based pay systems:
Organizations that follow a skill based or competency based pay system frequently use board banding to structure their compensation payments to employees. Broad branding simply compresses many traditional salary grades (say 15 to 20 grades) into a few wide salary bands (three or four grades). By having relatively few job grades, this approach tries to play down the value of promotions. Depending on changing market conditions and organizational needs, employees move from one position to another without raising objectionable questions (such as when the new grade is available, what pay adjustments are made when duties change etc.). As a result movement of employees between departments, divisions and locations becomes smooth. Employees with greater flexibility and broader set of capabilities can always go in search of jobs in other departments or locations that allow them to use their potential fully. Broad banding further helps reduce the emphasis on hierarchy and status. However, broad banding can be a little un-setting to new recruits when they are made to roll on various jobs. Most employees still believe that the existence of many grades helps them grab promotional opportunities over a period of time. Any organization having fewer grades may be viewed negatively — as having fewer upward promotion opportunities. Moreover a number of individuals may not want to move across the organizations into other areas.
Below versus above market compensation:
In high tech firms R&D workers might be paid better than their counterparts in the manufacturing division. Blue chip firms such as HLL, Nestle, Procter & Gamble, TCS, Hughes Software Systems might pay above market compensation to certain groups in order to attract (and retain) the cream of the crop. To grow rapidly and to get ahead of others in the race, especially in knowledge based industries most companies prefer to pay above market salaries. Above market wages are typical in well-established manufacturing units operating in a highly competitive environment. Firms paying below market tend to be small, young and non-unionized.
Open versus secret pay: In real world the issue of paying compensation openly or in a secret way may often become a bone of contention between employees and the employer(s). Current research evidence indicates that pay openness is likely to be more successful in organizations with extensive employee involvement and an egalitarian culture that encourages trust and commitment. Open pay eliminates doubts in the minds of employees regarding equity and fairness — because there is equal pay for equal work. But open pay has a downside. First, managers are forced to defend their compensation decisions publicly. The question of how much pay one should get is more or less decided by the manager, based on his own subjective assessment of various factors. In such decisions, it is not easy to please everyone. Second, the cost of making a mistake in a pay decision increases when the pay is open. Third, to avoid never ending and time wasting arguments with employees, managers may eliminate pay differences among subordinates despite differences in performance levels. This may in the end force talented people to leave the organization. Pay secrecy involves withholding information from the recruits regarding how much others make, what raises others have received and even what pay grades and ranges exist within an organization. Pay secrecy gives managers some amount of freedom in compensation management, since pay decisions are not disclosed and there is no need to justify or defend them. Employees who do not know how much others are getting have no objective base for pursuing complaints about their own pay. Secrecy also serves to cover up inequities prevailing within the internal pay structure.
Source: HRM

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