Pay for knowledge for managers too complex to put to use

By Richard Long
||Last Updated: 03/28/2005

Designing a compensation system to reward workers not for the job they do but for the knowledge they possess can bring certain advantages to a company. In a March 28, 2005, article, it’s shown how skill-based pay, a form of pay for knowledge tailored for production or service work, can help organizations improve flexibility and employee retention. This article looks at another form of pay for knowledge, one that is geared for managers and knowledge workers and is unfortunately much more complex to implement. This type of pay for knowledge is known as competency-based pay.

Many firms are now attempting to apply the concept of pay for knowledge to their professional and managerial personnel through the use of competency-based pay systems. These can vary greatly in format. For example, a defence electronics firm has a master list of more than 30 competencies that may apply to professional and managerial staff, and each department selects those most relevant to its operations. Pay raises are tied to the achievement of each competency. In another case, a manufacturing firm pays managers for their degree of progress in mastering four managerial competencies that are deemed to apply to all managerial jobs. In a third case, professional and managerial employees negotiate “learning contracts” with their supervisor, and pay increases are based on accomplishment of these objectives.

There are several motives for the use of competency-based pay at the managerial or professional level. One major motive is part of the ongoing search to find a more equitable way of compensating these employees than the traditional and much-maligned “merit pay” system. Another motive is to promote ongoing employee development, while still another is to produce employees with broader knowledge and skill sets that will enable them to take a wider view of organizational problems and issues. Of course, this also creates more flexibility in the deployment of personnel.