Competency based pay - Employee pay and benefits

A description of this approach is included for information but the additional bureaucracy and costs involved mean it is not recommended for small or medium sized employers.

Traditional job evaluation schemes firmly stick to assessing the job, not the individual doing the job. As a result pay structures running in parallel with grading structures have to be broad pay bands to allow for differential between individual performance. Competency-based pay is different.

Competency pay seeks to reward individuals as they acquire skills and demonstrate the ability to apply them. The most common approach is where Jobs are grouped into common 'job families' such as 'Software engineering', human resource professional', ' Accounting Professional' etc. Progression through the job family is then defined in terms of acquiring skills and experience, starting from a basic trainee ranging up to a fully competent experienced person. All staff are then allocated to a job family, their salary is increased as they acquire skills and knowledge.

Organisations embarking upon competency based pay should be aware of the following:

Job family categorisation and the definition of the required progression skills/knowledge is a very large and detailed task, which can produce mounds of paper. This is a continuing demand which must be kept up to date. Those that opt for computer-based questionnaires will find the paper is reduced but the training/skills analysis is just as complicated and time consuming.
There is a real potential that organisational change will be slowed as job tasks are reallocated during the course of a reorganisation so the competency definitions need to be redefined.
Annual performance reviews need to be rigorous and in far more detail than is the case with a normal performance review.
There are likely to be more appeals against the fairness of the performance review and/or the fact the individual has not been given the opportunity during the review period to acquire new skills etc.
This system is a fundamental change in remuneration strategy. Instead of paying for the work an individual is doing or has done this system rewards them for their experience/knowledge and skills i.e. the work they are capable of doing.

To be economic such an approach must have some built in mechanism to control the gap between the competencies employees hold and the competencies required at any time by the organisation. It must also have an efficient mechanism to cope ensure that acquired skills which have become redundant are not rewarded.

The writer has not yet seen a system which effectively manages the last two points. Our advice is to embark upon such an approach with great caution and certainly to pilot it for two or three years in one job family which exposes these issues (e.g. information technology).