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Competency Based Pay

Competency based pay structures compensate employees based on their skills and abilities rather than their job title or position. There are four key dimensions to competencies: knowledge, functional skills, leadership skills, and behaviors. To implement competency based pay, an organization must first establish a competency framework by analyzing what skills contribute to success. They then assess employees' competencies and introduce a reward system tied to competency levels. Competencies are difficult to measure, so organizations typically use competency profiles and manager ratings to evaluate employees. The process involves communicating the new system, training managers, and ongoing evaluation.

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76 views12 pages

Competency Based Pay

Competency based pay structures compensate employees based on their skills and abilities rather than their job title or position. There are four key dimensions to competencies: knowledge, functional skills, leadership skills, and behaviors. To implement competency based pay, an organization must first establish a competency framework by analyzing what skills contribute to success. They then assess employees' competencies and introduce a reward system tied to competency levels. Competencies are difficult to measure, so organizations typically use competency profiles and manager ratings to evaluate employees. The process involves communicating the new system, training managers, and ongoing evaluation.

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himanshi
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© © All Rights Reserved
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Competency Based Pay

What is Competency
Competency is defined as the combination of observable and
measurable knowledge, skills, abilities and personal attributes
that contribute to enhanced employee performance and
ultimately result in organizational success.”
- University of Nebraska-Lincoln
Four Dimensions of Competency
Knowledge areas: These are specific to your Functional skills: These are the hard skills
industry (for example, oil and gas exploration, required for each role. They are role-dependent.
rubber manufacturing or SaaS), your company For a digital marketing manager, functional skills
(your company history and values) and would be LinkedIn marketing, Facebook
regulations in your industry (for example, marketing and Google Analytics. For a data
HIPPA). These knowledge areas should be scientist, these might be data visualization, data
common to everybody in the company, from the modelling and Python. Note that digital skills are
production worker to the CEO. a part of functional skills, but some list them as a
separate competency category. It doesn't matter
where you want to place them, as long as you
think about them.
Leadership skills: These are the soft skills Behaviors: The first three categories are
required for different levels of leadership, measurable in some way, while behaviors are
irrespective of function. A widely accepted observable. Examples include ownership, trust,
industry norm here is to think about it in three sensitivity and approachability.
levels: leading self, leading teams and leading
businesses.
What is Competency Based Pay
Competency-based pay is a pay structure that compensates
employees based on their skill set, knowledge, and experience
rather than their job title or position.  A competency-based pay
plan encourages employees to reach the pay rate that they want
by taking charge of improving their skills and work.

Competency-based pay is a fancy name for making the basis of


pay the person, not the job.
Difference Between Competency Based &
Traditional Pay Plans
• The main difference between competency-based and traditional
pay plans is employee potential.
• Because traditional pay plans are based on an employee’s job
title and position, their pay can be limited by their ability to
move up in seniority at their organization.
• However, in a competency-based pay plan, employees are able
to increase their pay potential by improving on their skills and
gaining knowledge related to their field.
Distinguishing Features of Competency
Based Pay
• It is based on an agreed framework of competencies
• It is not based on the achievement of specific results, such as
targets or projects completed. However, it is concerned with the
attainment of agreed standards of performance.
Example of Levels of Competencies
Level 1 — Entry Level Level 2 — Intermediate Level Level 3 — Senior Level
Employees satisfy the basic job Employees require greater Employees require greater
requirements. As the employee knowledge, training, and/or knowledge, training, and/or
gains knowledge and experience than level 1. The experience than level 2. The
experience, the work reviews, amount of work review, checks, amount of work review, checks,
checks, and supervision may be and supervision are less for an and supervision are less for an
reduced. Complexity or variety employee at level 2 than at level employee at level 3 than at level
of work is typical, and there are 1. Complexity or variety of work 2. Complexity or variety of work
no additional technical, is moderately higher than level 1 is higher than level 2 and may
mathematical, or scientific and may involve greater involve greater technical,
requirements beyond the basic technical, mathematical, or mathematical, or scientific skills
requirements at this first (1st) scientific skills than level 1 than level 2. The scope of
level. assignments may vary when
compared to level 2
Steps in Competency Based Pay
Step 1: Establishing a competency framework
Step 2: Assessment of competencies for reward purposes
Step 3: Introducing the competency-based reward system
Steps in Competency Based Pay
Step 1: Establishing a competency framework

a. Conduct an analysis of what constitutes organisational success and how individuals contribute to that
success. Hence Homan (2000) describes competency-based pay as a means by which ‘pay and recognition are
used to communicate vision and values to employees and to reinforce desired behaviour and performance.’
b. A competency framework is likely to combine both core competencies that are applicable to jobs across the
organisation and competencies that are specific to particular jobs. In most organisations competency
frameworks contain both ‘soft’ or behavioural competencies and technical/ functional competencies, often
known as ‘hard’ skills.
c. Competency frameworks are typically developed via a process of internal research and consultation, with or
without expert external assistance. Typical stages, as reported by Miller, Rankin and Neathey (2001) include:
• individual interviews with senior managers, often at board level, to obtain their views on the current and
future key issues and challenges facing the organisation
• individual or group interviews with some other managers, to identify the characteristics associated with under-
and high-performance of individuals
• focus groups of managers and/or other staff, again to help identify key competencies, and
• benchmarking the draft competencies against the competency frameworks of relevant external comparators.
Steps in Competency Based Pay

Step 2: Assessment of competencies for reward


purposes
Competencies cannot be measured in quantitative terms, which makes assessment
difficult. Armstrong (1999) recommends the development of profiles for roles against
which individuals can be assessed. These ‘do not eliminate subjectivity. However, they
at least provide a framework within which more objective judgements can be made,
especially when these cover the contribution and impact which can be measured by
reference, not only to behaviour, but also to the results of that behaviour’.
Other approaches rely more strongly on subjective judgement A typical approach is
for managers to rate employees on a scale for each competency, which is then to
produce a total score. Brown and Armstrong (1999) found that in broad-banded
devolved structures, line managers were generally required to give only a single
competency score
Steps in Competency Based Pay
Step 3: Introducing the competency-based reward system
1. Communicate the purposes and potential benefits of competency-based pay.
2. Obtain the views of line managers, team leaders and employees.
3. Set up a project team to develop the process. Armstrong advocates a team that is ‘cross-functional and fully
representational’.
4. Define the broad approach that is to be used, and decide what work needs to be done to develop it. This might include
the development of a new or revised job evaluation scheme, the introduction of a broad-banded pay structure,
decisions on how competency assessment will be linked to reward, and means of maintaining and controlling the
scheme.
5. Develop the scheme whilst communicating and consulting with all stakeholders.
6. Communicate the details of the scheme to the whole workforce and show what it will mean to them as individuals and
groups.
7. Introduce the scheme and develop and implement appropriate training for managers.
8. Implement training aimed at allowing individuals to increase their levels of competency and so to have access to
opportunity for increased pay.
9. Monitor the introduction process.
10. Evaluate the results of the introduction.
11. Amend or improve the scheme as necessary.
Refer Article: Competency Frameworks: The four-way test

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