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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Competency Based Pay

What Is Competency-Based Pay?

Competency-based pay is a pay structure that compensates employees based on their skill set, knowledge, and experience rather than their job title or position.  A competency-based pay plan encourages employees to reach the pay rate that they want by taking charge of improving their skills and work.

What Is the Difference Between Competency-Based and Traditional Pay Plans?

The main difference between competency-based and traditional pay plans is employee potential. Because traditional pay plans are based on an employee’s job title and position, their pay can be limited by their ability to move up in seniority at their organization. However, in a competency-based pay plan, employees are able to increase their pay potential by improving on their skills and gaining knowledge related to their field.

Competency-Based Pay Pros and Cons

Like all compensation plans, competency-based pay has both advantages and disadvantages. The following are some examples of competency-based pay pros and cons to help you determine if this pay structure could work for your company

Pros

  • Individual self-motivation: Instead of basing pay on seniority and job level, the employee achieves as much as they’re willing to and is rewarded for it.

  • Company-wide motivation: Competency-based pay encourages a culture of self-motivation and self-improvement within the company. It can create a company of employees who are actively seeking to improve their skills and finding new ways to contribute to the company. Competency-based pay helps to tie your company’s culture directly to the success of the company.

  • Increased transparency: Employees will better understand what they have the potential to earn with a competency-based pay system and what skills they need to acquire to reach the pay they desire. 

  • Reduced turnover: Employee turnover is costly for a company, and a competency-based pay plan curbs that by helping employees feel that their skills and knowledge are important to the company, which improves retention.

Cons

  • Greater pay subjectivity: As your company strays away from a traditional pay system, things become more open to interpretation and that brings subjectivity into the equation. The actions of an employee might not be judged correctly or, worse, they might be overlooked.

  • Vulnerability to favoritism: Employees may start to see favoritism when one worker gets rewarded more than another. Employees might think that they are being treated unfairly and that their skills are not being recognized by the company.

  • Inaccurate measurement of company needs: It’s tricky to determine which skills are important to a company or which skills translate to productivity. Since that’s the basis for this pay system, it may introduce more inaccuracy when gauging company needs.

Why Use Competency-Based Pay?

As we mentioned above, a competency-based pay plan can be a great motivator for an employee and could help them take their work to the next level. Competency-based pay doesn’t follow the traditional paying system, but that’s it’s main advantage, too. It might just be the change that motivates your employees to improve.

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