Competency Based Pay

What is competency-based pay? 

Competency-based pay is a system of paying employees according to their mastery of skill, knowledge, and experience as opposed to their job title, position, or tenure in the company. Via this system of pay, employees are encouraged to reach their desired pay rate by improving and developing their skill set. 

Is there another name for competency-based pay? 

It may also be known as skill-based pay. 

How does a competency-based pay plan differ from a traditional pay plan? 

In a traditional pay plan, the focus is on paying for the job based on a grade level and experience that a specific job requires. In this traditional plan, the pay typically increases as the employee’s tenure with the company increases. Meaning, the more tenured the employee is, the more they can move up the organization, the more they are paid. 

On the other hand, the competency-based plan focuses on paying for the person’s skill set. In a competency-based pay plan, the pay increases on the level of skill mastery and not necessarily on the employee’s tenure with the company. 

What are the benefits of having a competency-based pay plan?

Here are the following perceived benefits of a competency-based pay plan: 

• It reinforces a culture of improvement and company-wide motivation. Competency-based plans foster a work environment that values improvement. In this way, employees actively seek ways to advance their skills relevant to their job. 
• It motivates employees to be more and do more. Instead of being limited by tenure and seniority, employees can take a more proactive stance in self-improvement to contribute more to the organization. 
• It increases transparency. In a competency-based pay plan, employees can better understand their earning potential and the skills that they need to reach their desired pay rate. 
• It improves employee retention. In this pay plan, employees feel valued because they see their skills as important to the company which improves retention. They are also more in control over their pay which can make them less likely to look for another job elsewhere. 

What are the possible drawbacks of having a competency-based pay plan? 

Here are the following potential drawbacks of a competency-based pay plan: 

• It can lead to greater pay subjectivity. Because competency-based plans are more prone to subjectivity because evaluations are more open to interpretation. 
• It may be difficult to conduct market comparisons. In a competency-based pay plan, job-to-job comparisons may be a challenge since most survey data are from the traditional pay plan models. 
• It may be challenging to establish the relationship of competencies to performance. It is difficult to pinpoint which specific competencies have a direct effect on productivity. 
• It may be more prone to favoritism. In a competency-based pay plan, employees may get discouraged if they discover that a colleague is being paid more, when, based on their perception, they are more skilled. This may lead to a feeling of favoritism and dissatisfaction. 

A competency-based plan has its share of advantages and disadvantages. Ultimately, it is up to the business to decide if it is a suitable plan for them or otherwise.