Why use Competency based Pay?

Why pay employees based on the skill, knowledge or competency level they achieve rather than based on the duties of the jobs they’re assigned to? For example, why pay an Accounting Clerk III who has achieved a certain mastery of accounting techniques the same (or more than) someone who is an Accounting Clerk IV? There are three good (and interrelated) reasons for doing so.

Support High performance work systems

First, traditional pay plans may actually backfire if a high performance work system is your goal. The whole thrust of these systems is to encourage employees to work in a self motivated way, by organizing the work around teams, by encouraging team members to rotate freely among jobs (each with its own skill set) by pushing more responsibility for things like day to day supervision down to the worker and by organizing work around projects or processes where jobs may blend or overlaps. In such systems, you obviously want employees to be enthusiastic about learning and moving among other jobs. Pigeonholing workers by classifying them too narrowly into jobs based on the job’s points that actually discourage such enthusiasm and flexibility.

Studies suggest that analytical types of job evaluation (such as the point or factor comparison methods) may conflict with the high performance work approach. In one study, the researchers found that workplaces in which the high performance approach has been most fully implemented are less likely to have the more formal analytical type of job high performance work system are less likely to have high above average financial performance than those with either of these on a single basis. The less quantitative job evaluation methods such as classifying grading or ranking jobs didn’t seem to be a problem.

Support Strategic aims

Second, paying for skills, knowledge and competencies is more strategic. For example, Canon Corp, needs competencies in miniaturization and precision manufacturing to design and produce its cameras and copiers. It thus makes sense for Canon to reward some employees based on the skills and knowledge they develop in these two strategically crucial areas, not just based on the jobs to which they’re assigned.

Support Performance management

Performance management means aligning employees’ goals training appraisals and rewards so that they support the company’s strategic goals. The manager can influence an employee’s competencies (skills or knowledge) There is not much a manager can to do manage the employee’s job duties. So, (third) paying or competencies rather than duties thus gives the employer more control over managing the employee’s performance. At Canon, this might mean training appraising and paying some employees based on their miniaturization and precision manufacturing competencies.

Competency based pay in practice

In practice skill / competency /knowledge based pay programs generally contain four main elements:

1) a system for defining skills, and a process for tying the person’s pay to his or her skill level;
2) a training system that lets employees seek and acquire skills;
3) A formal competency testing system, and
4) A work design that lets employees move among jobs to permit work assignment flexibility.

Competency based pay: Pros, Cons, and results

Competency based pay has its detractors. Many companies reported competency based pay implementation problems. Some experts note that competency based pay ignores the cost implications of paying [employees] for knowledge skills and behaviors even if they are not used. There may also be simpler ways to encourage the necessary leaning. For example, one aerospace firm has a quasi skill based pay program. It has all exempt employees negotiate learning contracts with their supervisors. The employees then get raises for meeting learning (skills improvement) objectives.

Whether skill based pay improves productivity is an open question. When used in conjunction with team building and worker involvement and empowerment programs it does appear to lead to higher quality as well as lower absenteeism rates and fewer accidents. However, the findings in another firm, which are not conclusive, suggest that productivity was higher at its non skill based pay facility.

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