- Competency-based pay: what is it?
A compensation plan known as competency-based pay bases employee compensation on their knowledge, abilities, and skills rather than their credentials or position within the organization. This type of compensation plan is based on the employee’s performance and the outcomes attained.Instead of emphasizing a person’s abilities and room for development, the traditional pay approach focuses on the duties and responsibilities performed in a job or what the employee possesses.Competency-based compensation, on the other hand, recognizes and compensates workers according to their talents and the degree to which they exhibit them. Taking into account the outcomes attained and the methods used to get there, it also values the work process.
The meaning of competency-based compensation
“Paying for the development and application of essential skills, behaviors, and actions that support high levels of individual, team, and organizational performance” is how Brown and Armstrong (1999) define competency-based compensation.What constitutes competency-based pay’s core components?
Components of remuneration depending on competencyCompetency-based compensation consists of three primary components. Below is a description of them.
Demonstrating Capabilities for Compensation
Employees who demonstrate they possess the requisite abilities are rewarded under competency-based compensation. However, under traditional job compensation, even if a person isn’t extremely excellent at their profession, they are still compensated according to their title.Accreditation for Proficiency
Competency-based compensation involves a formal test to determine if employees possess the necessary abilities. They could be awarded a certificate. No certification is required for regular work income simply holding a job entitles you to compensation, which only varies when you switch jobs.Additional Earning Possibilities
Compared to job-based pay plans, competency-based pay plans provide more alternatives for compensation. These chances are accessible to employees who want to improve their abilities and receive greater compensation, but not all employees may opt to take advantage of them.
There are four forms of competency-based pay.
Pay based on skills versus competencyCompetency-based compensation emphasizes an employee’s general attributes, such as leadership and communication. Conversely, skill-based remuneration focuses on certain job-related knowledge and abilities.
Therefore, skill-based pay is more focused on job-related talents, whereas competency-based pay considers broader competencies.
This is a quick table of comparisons:
Traditional pay plans versus competency-based payEmployees are compensated according to their skills, knowledge, and abilities under competency-based compensation. Traditional pay plans, on the other hand, base remuneration on predetermined wage scales, seniority, or job title.
Competency-based pay promotes a highly trained and engaged workforce by directly reflecting each employee’s contributions and level of expertise. Employees may not feel as motivated to advance their knowledge or go above and beyond the call of duty under the typical compensation structure.
What are competency-based pay’s benefits and drawbacks?The following are competency-based pay’s benefits and drawbacks.
Benefits
1. Complies with the business plan: By emphasizing employee performance, competency-based remuneration helps the company achieve its objectives and gives it a competitive advantage.2. Encourages People Development: By providing incentives for ongoing learning and development, it encourages staff members to advance their abilities, particularly in flexible roles.
3. Replaces Conventional Systems: It can be used in place of conventional techniques that aren’t always effective, offering a more efficient means of praising and rewarding staff members’ achievements.
4. Facilitates Organizational Change: It assists companies in adapting and changing, permitting changes in culture or structure as the business develops, and guaranteeing that the workforce continues to be in line with the demands of the organization.
Drawbacks
1. Implementation Issues with PossesAccording to polls, implementing competency-based compensation can be expensive and time-consuming, making it a difficult process for companies.
2. Challenges with Objective Assessment
The complexity of objectively assessing competence makes it difficult for managers to evaluate a variety of skills. Accurate competency evaluation is a challenge for many businesses.
3. The linkage is unclear.
The motivational influence of money can be lessened when competencies are linked to various incentive systems, making the relationship with pay less evident. This may occur as a result of an unclear distinction between performance review and compensation.
4. Possible Pay Concerns
If not handled appropriately, it could lead to salary rises without real performance gains, particularly when grading schemes are confusing or progressive.
