Competency based Pay

In general employers traditionally base a job’s pay on the relative worth of the job. The compensation team compares actually, compares each job’s set of duties using compensable factors such as effort and responsibility. This allows them (1) to compare jobs to one another based on its duties, one job seems to require about twice the effort of that one and (2) to assign internally equitable pay rates for each job. Thus, the pay rate for the job principally depends on the job itself, not on who is doing it.

For reasons which we’ll explain shortly, an increasing number of compensation experts and employer are moving away from assigning pay rates to jobs based on the jobs’ numerically rated, intrinsic duties. Instead, they advocate basing the job’s pay rate on the level of “competencies” the job demands of those who fill it. Title and tenure have been replaced with performance and competencies, is how one expert puts it. Compensation specialists call this second approach competency based pay.

In a nutshell, competency based pay is where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds. Experts variously call it competence, knowledge or skilled based pay. With competency based pay, and employee in a class I job who could but may not have to at the moment do class II work gets paid as a class II worker, not a class I. We can simply define competencies as “demonstrable” characteristics of the person, including knowledge, skills, and behaviors, that enable performance.

Unfortunately there’s some confusion over what exactly “competencies” mean. Different organizations define “competencies” in somewhat different ways. Some, like the US Office of Personnel Management, take a broader approach. They use “competencies” synonymously with the knowledge, or skills, or abilities required to do the job. Another approach is to express competencies more narrowly, in terms of measurable behaviors. Here the job is identified for the job’s required competencies by completing the phrase. In order to perform this job competently, the employee should be able to ….

Whether narrowly or broadly defined, several things distinguish the competency based pay approach. Employees build competencies through experience on the same or similar jobs. And, competency- based pay ties the person’s pay to his or her competencies pay is more person oriented. Employees here get paid based on what they can do even if, at the moment, they don’t have to do it. Traditional job evaluation based pay plans tie the worker’s pay to the worth of the job based on the job’s duties pay here is more job oriented. Employees are paid mostly based on what their current jobs demand.

In practice, competency based pay usually comes down to using one or both of two basic types of pay for knowledge or skill based pay. Pay for knowledge pay plans reward employees for learning organizationally relevant knowledge for instance, an employer might pay a new waiter more once he or she memorizes the menu. With skill-based pay, the employee earns more after developing organizationally relevant skills. Microsoft pays programmers more as they master the skill of writing new programs.

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 II who has achieved a certain mastery of accounting techniques the same or more than someone who is an Accounting Clerk IV? There are several good reasons fordoing so.

First, traditional pay plans may actually backfire if a high performance work system is the 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 workers, and by organizing work around projects or processes where jobs may blend or over lap. In such systems, employer or HR manager 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 may actually discourage such enthusiasm and flexibility.

There is evidence that analytical types of job evaluation such as the point or factor comparison methods do conflict with the high performance work approach. In one study, the researchers found that “work places in which the high performance approach has been most fully implemented are less likely to have the more formal, analytical type of job evaluation. Furthermore, those workplaces with both analytical job evaluation and the 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, more subjective job evaluation methods such as classifying, grading, or ranking jobs didn’t seem to be a problem.

Second, paying for skills, knowledge, and competencies is more strategic. For example, Canon’s strategic emphasis on miniaturization and precision manufacturing means it should regard some employees based ion the skills and knowledge they develop in these two strategically crucial areas, not just based on the jobs to which they’re assigned.

Third, measurable skills, knowledge, and competencies are the heart of any company’s performance management process. As at canon, achieving the firm’s strategic goals means that employees must apply certain skills and competencies. In performance management terms, its employees’ goals, training, appraisals and rewards must therefore focus in an integrated way on nurturing these skills and competencies. At Canon, this might mean, for some employees, setting goals for and training appraising, and paying them based on their miniaturization and precision manufacturing competencies.

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