What is Competency-Based Pay?

Similar to skill or knowledge base pay, competency-based pay plans identify competencies, for example, attitudes, behaviours and abilities employees need to master to be eligible for pay raises.

Competency-based pay is a highly structured pay system that identifies the competencies employees need to master to be eligible for pay raises.

The competencies are identified for the firm as a whole or a particular work unit, which are believed to be the most critical if the firm is to achieve its goals.

Employees receive higher compensation when they demonstrate that they have a higher level of the competencies valued by the company.

For a competency-based system to be successful, managers must clearly define the competencies employees need to have to outline an exemplary process for determining whether they have them.

Competency-based pay advantages:

  • There is no Seniority Factor

One advantage of competency-based pay for less experienced personnel is that seniority has minimal influence on salary. Instead, the emphasis is only on how effectively the individual performs regarding abilities like leadership or attention to detail. This can alleviate the notion that the employee must "pay their dues" to get more excellent pay.

  • Motivation to Achieve

Competency-based compensation schemes may also boost the worker's incentive to become a high achiever. They may concentrate on the characteristics of their assessment process, knowing that if they do well in these areas, they will be rewarded accordingly.

  • Improvement Culture

According to the American Academy of Family Physicians, a competency-based compensation system can foster a "culture of Improvement." Because pay depends on demonstrated improvement in the specified abilities, there is a strong emphasis on self-development. This can lead to a widespread societal belief that the better you do, the greater the reward.

Competency-based pay disadvantages:

  • Subjectivity

A possible disadvantage of competency-based programmes is that they add subjectivity to the assessment process since they grade people based on generic criteria rather than particular accomplishments. Concepts like leadership and multitasking are susceptible to interpretation, which increases the likelihood of an unfair assessment.

  • Favouritism

According to LocateStaffing, another potential disadvantage of competency-based compensation systems is the sense of partiality. If one employee believes they are more valuable than another but learns that the other person earned a better salary raise, they may conclude that they are being mistreated. Disagreement may be an unwelcome result.

  • The Relationship Between Competencies and Performance

Determining which abilities lead to increased work performance or productivity might be challenging. For example, if your customer service person handles more daily questions, is it due to an enhanced capacity to multitask or better attention to detail that allows them to fix issues quickly.