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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 on their skill set, their knowledge, and their experience. Competency-based pay is an alternative to pay based on job title and position. Competency-based pay is meant to encourage employees to contribute to the company by improving upon their skills. Keep reading to learn more about the benefits of competency-based pay from BambooHR.

What is a Competency-Based Pay Plan?

A competency-based pay plan is a tool used to measure an employee’s skill level, knowledge of their job, and their past experiences. Employees are then paid based on their merits. It does away with the normal hierarchical way that business is traditionally done and encourages employees to take charge of their own work. It motivates them to reach the pay-rate that they desire.

Competency-Based Pay Pros and Cons

Competency-based pay has both its advantages and its disadvantages. Knowing these aspects of competency-based pay will help you determine if it would be right for your company. The following are some examples of the different competency-based pay pros and cons.


  • It’s a great motivator for employees. Instead of basing pay on seniority and job level, the employee is left to achieve as much as they are willing to. If they motivate themselves, an employee can accomplish amazing things for the company. There is no longer a ceiling or a limit as to how far they can climb if they just buckle down and do it.

  • It will help to reinforce your company’s culture. Competency-based pay encourages a culture of self-motivation and self-improvement within the company. It will now be a company of employees who are actively seeking to improve their skills and find new ways to contribute to the company. Competency-based pay helps to tie your company’s culture directly to the success of the company.

  • It improves transparency within the company. Your company will become more transparent because they will know what is expected of them and what they are getting with a competency-based pay system. They will understand what they have to do to improve at their job and how they can get rewarded for it.

  • Employee retention will go up. Employee turnover is costly for a company, and a competency-based pay plan helps to curb that. When an employee feels that their skills and knowledge are important to the company, they are more likely to stick around.


  • It’s a subjective pay system. As your company strays away from a traditional pay system things become more open to interpretation and that opens the door for subjectivity into the equation. The actions of an employee might not be judged correctly or, worse, overlooked.

  • It opens the door for 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 might think their skills are not being recognized by the company.

  • It may create an improper measurement system. A system determining what skills are important to a company or what skills translate to productivity can be tricky and can lead to errors in the system.

Why Use Competency-Based Pay?

A competency-based pay plan can be a great motivator for an employee and will help them take their work to the next level. As it does not follow the traditional paying system, competency-based pay is quite different from how most companies do work. However, it might just be the change that your employees need to improve their work. One of the best ways to determine if competency-based pay would work best for your company is by reading over the pros and cons of competency-based pay listed above. They can help you see the possible outcomes to this system and if you should apply to your own business.

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