What is Competency Based Pay | Meaning & Definition

What is Competency Based Pay?

Competency based pay is a way of paying employees in which, instead of being paid per hour or per task, employees are paid according to their level of competency. This means they get paid more for possessing higher levels of performance.

The idea behind Competency based pay is simple: instead of paying employees for working long hours, companies reward them based on their skills and encourage them to reach higher pay rates by improving their work.

Why are Competency Based Pay Plans Different From Traditional Pay Plans?

The main difference between them is traditional pay plans are often associated with long-term employment contracts. They usually involve a fixed salary or hourly rate and don’t offer much flexibility.

On the other hand, competency-based pay plans allow employees to earn extra income through their skills and experience. This type of plan also offers more freedom and flexibility.

Competency Based Pay Pros and Cons

Competency based pay has many benefits. It allows employees to demonstrate their skills and knowledge through performance rather than just experience. The employees can demonstrate a higher level of creativity and inert talent as they are encouraged more to do so through receiving rewards.

This type of pay plan also helps companies retain top talent by rewarding people who perform well. However, there are drawbacks to competency-based pay.

Here are the Pros and Cons of Competency based Pay:

Pros

Individual self-motivation:Instead of calculating pay based on their job title, they achieve as much as they are willing to and earn an hourly rate.
Increased transparency: An employee will better understand their potential to earn and what they need to acquire to reach the pay they want when they base their pay on competencies.
Company-wide motivation: A competency based pay policy takes into account the economic performance of a company. It aims to foster a culture within a company of self-motivated employees who are constantly seeking new ways to succeed and reach their personal potential in order to make the company flourish.
Reduced turnover: Business owners know that hiring a new employee costs a company, and succession planning through a competency-based pay plan can help curb the loss of employees. By offering employees specifically what the company values in them, a competency based pay plan can help retain employees.

Cons

Company needs are not accurately measured: It's difficult to determine which skills are key to productivity in a company. It may introduce more inaccuracy in working out what skills are needed.
Greater pay subjectivity: While there are objective measures of competence, aspects of it can be highly subjective in nature, leading to disparity and perhaps even discrimination in how employees are compensated.
Vulnerability to favoritism: Employees at companies often begin to see favoritism when one person, over others, begins to receive more favorable treatment and recognition for their work. When employers do not recognize employees' skills, they may conclude that they are being treated unfairly, leading to bias and partiality.

Why Use Competency Based Pay?

Incorporating competency based pay might be the change your employees could benefit from, as well as your company. The biggest advantage of competency based pay is that it is not based on the traditional pay system.

Incorporating a competency based system into a payment plan could just be the change you need that will help motivate your employees to step up their game.