1. HR Glossary
2. Competency-based Pay

Competency-based Pay: Meaning And Benefits

When you are getting bigger as a company and adding many employees, you will have to decide on which pay structure best fits your company. One possibility is a competency-based plan, that pays individuals based on how well they work in respect to general traits such as multitasking ability, rather than the traditional manner of paying based on an identified pay grade or compensation structure.

Competency-based Pay (CBP) is a system in which individuals are compensated for their abilities, skills, and expertise rather than the title of their position or years of experience. You are paid higher if you have relevant talents and can contribute better to the organization. It encourages people to grow professionally and compensates them for being highly skilled in their roles. So, the more competent you are, the greater your salary may be.

This article talks about what is competency-based pay and many other topics. Keep reading to explore it.

What Is Competency-Based Pay?

Competency-based pay is a system of pay structure that rewards employees determined by his or her level of competency, not the clock hours or hours in a day. Its environment is like that of a CBP system where employees are assessed on the degree of proficiency on some competencies and remunerated on the level attained.

CBP systems are frequently built on job profiling, which examines specific jobs in terms of the abilities and expertise required to complete them. Profession profiles can then be used to generate a competency map, which specifies the exact skills needed for each profession.

Workers are assessed based on how well they meet the skills described in the person’s job description, and the level of remuneration is determined by the exhibition of various levels of proficiency. This can be achieved through the organization of different pay structures, such as job-related pay structure, competency-related pay structure, and performance pay.

Currently, the use of CBP systems is gaining popularity in the modern workplace as they contribute to near-accurate remunerations based on the skill and competence of employees. They also foster ongoing learning in the organization so that employees may improve and advance in experience which in turn can increase performance and productivity.

Importance of Competency-Based Pay

CBP is an increasingly popular concept, and for a good reason, for any organization to succeed, the importance that it places on competency-based pay cannot be overemphasized.

When organizations implement structural change by reducing activities that do not add value, competency-based pay may help to promote transformation. This is by giving a value to an employee's work based on their skill level to perform their duties competently. This places a premium on ‘value added’ human resources, in other words, human resources that deliver on what is deemed essential for individual effectiveness and organizational effectiveness and not just for the activities that individuals get engaged in.

CBP enhances the delivery of quality performance and supports lateral career progression. It is suitable in organizations where there is excess pressure on the products produced in that organizational setting, where a performance appraisal is necessary to fit it, or where there is an organizational culture change in the search for flexibility. Another type of remuneration is when an employee is given a pay rise depending on his performance in his line of duty.

Important Components to Calculate Competency-Based Pay

Employee Skill Assessment

The key characteristic of the first preparatory step towards the implementation of a competency-based pay structure is to identify which competencies are relevant in an organization. These could range from technical competencies in line with the demand of the new job to behavioral competencies such as the ability to communicate or lead.

Level of Competency in Your Organization

It is not only of importance for an organization that certain competencies exist for its employees but also the level of mastery of that competency for the employee. Learners can be categorized and ranked as Low-, intermediate- and high-level learners. A stated pay structure may be assigned to each level of the organization.

Competency Mapping in the Organisation

Competency mapping is an organizational plan that aims at outlining the competencies needed in performing distinct tasks within an organization. The competencies needed for an activity can be different depending on the role of a person and can be needed to be at various proficiency levels.

Benchmarking Business Activities

Determine the market rate for the various activities, skills, and competencies that have been identified through benchmarking. This could be done through questionnaires, studies done on the companies, or seeking advice from personnel who deal with human resource departments.

Total Compensation Given to Employee

If the value of the competency were measured in money, then technically, an employee’s total compensation would be the sum of the monetary value of all their competencies at the given level.

Employee Performance Periodic Review

Competency-based pay is thus fluid and it would always undergo review to ensure that it meets the users’ needs.

Employee Performance Assessment

Assess the performance of each employee against the key competencies as defined within their respective job descriptions. This could be through appraisal interviews, tests, self and peer assessment or other tools such as questionnaires and checklists.

Current Pay Structure of Employees

Once monetary values are given to each competency and its level, a pay hierarchy can be developed that is befitting the design. For example, suppose that an employee has an ‘expert’ level in the competency that is considered to be crucial for accomplishing organizational tasks at the moment, then he or she would be paid more compared to the employee who has a ‘novice’ level in the same competency.

Process to Implement Competency-Based Pay

Develop Competency Development Specifications

Before embarking on any skill development efforts, it is necessary to first identify skill shortages. This requires discovering precisely what employees don't know how to perform or cannot do successfully. With development goals in mind, it becomes easier to plan how to effectively educate new workers to improve the company's key skills.

Create a Strategy

For everyone involved, developing a game plan for competent development activities is vital. A comprehensive plan may help you keep track of these tasks and make them as energy-efficient as possible, whether you're allocating key duties, developing timelines, defining goal dates, or conveying updates and changes.

Delegate Tasks

As an active organization, the executive team is already overworked. On the other hand, building an outline for a competency development plan is only beneficial if it is supported and implemented by those in control. It is sufficient to ensure that the deadline, standards, and competencies are met by delegating duties to appointed staff members.

Implement a Learning and Development System

The most effective technique for improving skill sets is to continue learning and development. Despite the organization's multiple business divisions and direct training sessions, any form of investigative activity is an essential component of a competency-based development strategy.

Use Technologies to Track Your Skills

Using skill management software, the business may organize and make all competency development activity data widely available. This helps to simplify the data collection, analysis, and reporting.

Advantages of Competency-Based Pay

Tailored Incentives and Rewards of Employees

If, companies can make rewards follow skills and performance, then they can create a system of rewards and recognition that will cause the growth of an individual and at the same time align with the organizational goals and vision. This approach encourages staff to focus on acquiring knowledge and skills, which are relevant to the company, thus, sustaining a culture of growth.

Employee’s Pay Equity

Compensation based on competency and not productivity promotes fairness in the remuneration policy as it does not favor any employee over others because of the perceived level of education or skills. This also makes sure that there is workplace equality, since people are paid depending on the services they offer and no discrimination against female or male employees, black or white employees, or those that have friends in high places.

Recruiting and Retaining Talent

In an environment of job competition, CBP is an effective tool for attracting and retaining top personnel. Environments that value and invest in their growth frequently attract skilled people. This pay approach demonstrates an organization's dedication to recognizing and cultivating talent, positioning it as a top choice for individuals who value settings that prioritize their talents and growth. As per the report Forbes report, 40% of employees tend to leave their jobs because of insufficient benefits. This is where CBP can help in retaining talent.

Employee Strategic Workforce Development

Skills-based pay systems will encourage workers to acquire a mix of skills that enable them to meet the company's strategic goals and objectives. This, in turn, results in a more flexible and efficient workforce that will adequately prepare for future threats and prospects in the organization. In addition, it fosters values for continuous learning and development to build the capability to meet future shocks and address new challenges in the business world.

Seniority Factor Consideration

Another factor that cannot be said to exist or has been provided is the Seniority Factor. Another positive implication of competency-based pay for the less experienced personnel is that the fact that the older personnel must be paid more does not hold water in this system. However, it only concerns the efficiency of how the individual conducts oneself in terms of skills, including leadership or attention to detail. It can reduce the mentality that the employee needs to work at the organization long enough and merit higher pay.

Employee Motivation to Achieve Goals

The provisions of competency-based compensation systems may also increase the incentive for the worker to be a high performer. Workers may focus on the various attributes of their assessment process because they understand that if they are excellent in these areas, they shall be compensated appropriately.

Better Talent Management in the Organisation

This is an approach preferable for developing CBP that makes the establishment of certain standards of checks and balances that would aid the competency-based pay in HRM departments in the management of talents easier. It establishes the reality that it is possible to notice the qualifications, promotions, and even the chance of a higher rank without other extraneous reasons but due to what a certain officer has accomplished, thereby enhancing much of a meritocratic talent management system.

Employee Participation

There is a path that connects specific behavior with its result, and if people can clearly and pretty much personally observe how specifically engaging themselves in acquiring certain skills in the course of their work leads to specific pay-offs, they are probably going to be more involved, and willing to contribute, in the process of their career building. Such an increase could translate to improved organizational productivity, job satisfaction, and morale of the company.

Disadvantages of Competency-Based Pay

Challenges for Implementation

It was noted in surveys that the process of adopting competency-based pay is a complex procedure that takes a lot of time and resources; thus, is costly.

Lacks Clarity at Times

Also, if competencies are linked to other reward systems, the link with pay becomes less certain, thus reducing the motivational impact of this pay. This situation might occur due to failure to establish a clear separation between a performer’s assessment and compensation.

Employee Potential and Pay Issues

It can lead to a rotten apple effect where employees are paid more without having corresponding performance enhancements, particularly where grading is not well spelled, or progression methods are progressive.

Difficult to Measure the Objective

The assessment of competencies in educational domains is therefore a multifactorial process, which poses difficulties for managers when establishing competencies across a broad spectrum of specific skills. It is often the case that employers are faced with the challenge of determining the competencies possessed by their employees.

Chances of Inaccurate Measurement of Performance

Skills and knowledge are somewhat difficult to quantify, even with the use of skills assessment surveys. Moreover, it is pertinent to note that it may not be clear which of those skills are most important to the company and those that have a direct correlation with organizational performance. Therefore, under competency-based pay, one can notice the inaccuracies in evaluating rewards.

What’s the Difference Between Skill-Based and Competency-Based Pay?

Pay-for-performance can be defined as compensation employees receive according to the skills, efficiency and capability that they possess. This is apparent in the trade professions for example construction and plumbing as they are normally learning from apprentices to supervisors. Promotion and various incentives follow the employees as they learn new skills and excel in executing their duties.

Skills-based pay is another approach to remunerating people based on the competency level of the organization. The rationale for the classical model is that an employee will do the job to the best of his or her ability because he or she has the required skills.

How are Competency-Based Pay and Traditional Pay Different?

The major distinction between competency-based and standard pay schemes is in the basis for compensation. Traditional pay structures base remuneration on job titles, experience, and the perceived hierarchical worth of roles, which frequently results in pay rises due to tenure rather than actual performance or skill growth.

Competency-based compensation, on the other hand, pays employees for specific competencies—skills, knowledge, and behaviors—that contribute directly to the organization's performance. This shift implies that an employee's ability to learn, change, and apply new skills might result in remuneration adjustments, regardless of their function or duration of service.

Therefore, competency-based systems foster a culture of continual improvement and match employee growth with strategic corporate goals, as opposed to traditional models, which may unintentionally encourage stagnation by prioritizing position over performance.

Conclusion

So, overall what is competency based pay? It is when an individual is compensated based on the type and amount of skills acquired and applied in the workplace. This payment structure differs from paying employees according to their tenure or seniority levels, and it is frequent in industries that need specialized knowledge.

Competency-based compensation has the advantage of being simple to arrange and using widely available salary tables. One distinct downside of the pay structure is that it might be difficult to change during periods of economic difficulty. Competency-based pay may also be referred to as skill-based or knowledge-based remuneration.

CBP systems have been employed as components of pay systems, but they have only been applied to individuals at the professional or executive levels thus far. CBP is a pay system that rewards people for applying their talents rather than for the outcomes they generate. A competency-based remuneration system focuses on individuals. Competence is one factor that might affect income, but performance can also play a role.

Frequently Asked Questions

Which Types of Companies Use Competency-Based Pay?

CBP can be used in a variety of industries. However, it is increasingly common among large international firms due to its capacity to analyze the abilities and potential of people all around the world. Still, many organizations, particularly small firms, continue to actively use CBP systems. Moreover, CBP in HRM can be useful for organizations that are planning to experience significant growth shortly because it can be used to determine the abilities of new employees within a short time.

Under What Circumstances Do Firms Use CBP?

Knowledge and skill are the most frequent components of CBP methods. This approach is based on the information an employee has acquired during his/her working experience and the abilities related to that information.

What Can Be Expected in the Future of Competency-Based Pay?

Extensions of CBP in the future are flexible for different and specific pay methodologies for adaptation and the use of technology in the evaluation process. It will focus on both interpersonal and technical talents, quantitative and qualitative analysis approaches, skill development rewards, and protected competency frameworks for employees’ diversity.

What Could Serve as a Concrete CBP Example?

Examples of competency-based compensation include Offering the same remuneration to servers with two or ten years of experience because the abilities required for the profession are the same, and increasing a new employee's wage because they have more specialized abilities than a coworker who has been with the company for a longer period.

What Is a Competency-Based Compensation System?

CBP is a remuneration structure that rewards individuals based on their abilities, competencies, and skills rather than their qualifications or employment role within the organization. This type of pay structure is based on the employee's performance and the achievements accomplished.

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