What Is the Competency-Based Pay Plan?

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Competency-based pay plans support  career path development through knowledge and skills acquisition and application.
Competency-based pay plans support career path development through knowledge and skills acquisition and application. (Image: Phil Ashley/Lifesize/Getty Images)

A competency is a set of related knowledge, skills, abilities and behaviors associated with a major aspect of a person’s job and tied to effective job performance. Competencies make up the value that workers bring to the employer. Competency-based pay is founded on the premise that when workers use their knowledge, skills and abilities on the job, they will achieve the type and level of accomplishment required for the organization to meet its strategic goals.

Competency vs. Performance

Competency-based pay is not pay-for-performance. It depends on workers developing and applying competencies to meet certain performance standards, rather than to achieving performance goals as is the case with performance pay. It is used in professional positions, such as a university professor or scientist, where wage increases are the result of acquiring additional knowledge and publishing articles and books, rather than seniority or past performance. In other areas, such as software development, developers may receive pay raises when they complete the training and pass the certification test for a new programming language. Competency-based pay is often used in conjunction with performance pay like bonus or incentive programs for meeting sales goals. According to human resources consultant Howard Risher, the message of this pay model is that it's to the advantage of the both the employer and the employee to develop an employee's capabilities.

Types of Competencies

Competency-based pay plans include organization, department, job and personal competencies. Organization and department competencies are tied to strategic goals and may include problem solving, planning, service delivery and communication. Competencies related to a job are based on the knowledge and skills required for the job, along with the behaviors required to effectively use the knowledge and skills. These job competencies form the basis for employee recruiting and hiring. Personal competencies include attitudes, personality and motivation.

Plan Requirements

Certain processes must be implemented as the foundation for a successful competency-based pay plan. There must be a formal employee performance appraisal system in place that includes training for managers on evaluating employee competencies. Employee and managers must agree on what competencies will be evaluated and what the performance standards will be. A training system must be in place so that employees can acquire new skills, and there must be a flexible work design system that allows employees to implement and use their new skills. All employees must be educated about the plan, and it must be structured so that it is fair to everyone in the program.

Advantages

Competency-based pay plans offer a number of advantages to both employers and workers. Employee development can be tied directly to service objectives or product innovation. These plans address the need for employee development, which is a key issue in employee retention, by giving workers the opportunity to develop new skills and become eligible for promotion. Within a job class, a series of competency levels may clearly define a career path so that employees understand their career development options. Competency-based pay plans set and communicate performance standards to workers.

Disadvantages

Competency-based pay plans are complex and labor intensive, especially in the development and implementation phases. They also require the commitment of significant financial resources for training and support costs. In addition, defining and measuring competencies may be hard to do and may be seen as subjective, while manager bias may distort the competency assessment process.

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