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.
Overall, competency-based systems are much more problematic than skill-based systems. Virtually nothing is known about their effectiveness. This is partly due to the enormous confusion and lack of precision about just what constitutes a “competency-based system.” Some systems appear to be little more than the old trait-rating appraisal system under a new guise. For example, one list of possible “competencies” includes traits such as “self-confidence” and “assertiveness” as well as “flexibility” and “initiative”. Although personality traits can be assessed with established psychometric measures, these measures work better as part of the selection process than as part of an ongoing competency-based pay program.
In developing any competency-based pay system, there are four main issues, including:
-identifying competencies that demonstrably affect performance;
-devising methods to measure achievement of each competency;
-compensating each competency; and
-providing learning opportunities.
Unfortunately, many so-called “competency-based” systems fail on all four counts.
Many consulting companies sell “competency-based” systems that are simply menus of any kind of trait imaginable. Firms are expected to select “appropriate” competencies from this menu, whether or not they are valid for that employer. A sounder process is to develop a list of competencies that may distinguish high performers from other employees in a particular occupational group, test all employees in that group on the presence of these competencies, and then statistically identify the competencies that differentiate the top performers from the other employees. Of course, to do this, you must already have valid performance measures for each employee. Another potential problem with this approach is that it is only valid as long as the factors that differentiated performance in the past continue to be valid.
The second issue is measurement. It may be difficult to develop reliable and valid measures for some competencies, measures that are also accepted as fair by employees.
Third, effectively relating achievement of competencies to pay is not straightforward, because there is no generally accepted method for so doing, unlike the case of skill-based pay. If a statistical process has been used for identifying the key competencies, these data can be used to determine the relative weighting of each competency in terms of how strongly it contributes to performance. However, deciding the absolute dollar value for each competency is highly subjective, because there is no external test equivalent to the high-low method used for skill-based pay (the high-low method involves calibrating the skill grid to the market by identifying a job in the market that encompass all the skills included in the skill grid and a job in the market that is equivalent to the entry level of the skill grid).
The fourth issue, providing learning opportunities, is not necessarily straightforward, because some competencies are more inherent than teachable. But, as with skill-based pay, providing opportunities to develop key competencies is essential to success of the system. However, it should be noted that not all organizations need all employees to have the full range of competencies possessed by top performers. If they don’t need this, the firm may end up paying for capabilities it cannot utilize, leading to employee frustration and higher costs to the employer.
Overall, given all these problems, it is not at all clear that “competency-based pay” — unlike skill-based pay — is a practice from which many employers would benefit.
Richard Long is a Certified Human Resources Professional and professor of human resources management at the University of Saskatchewan in Saskatoon. He is the author of Strategic Compensation in Canada, published in Toronto by Nelson Thomson (nelson.com). He can be reached at (306) 966-8398 or by e-mailing firstname.lastname@example.org.