Competency Based Compensation System

In the 1990s, a new idea gained acceptance in a number of organizations that more closely aligned human resource practices with organizational strategies, missions and cultures. A number of organizations switched from a traditional job-based structure to a competency-based structure that emphasized the development and attainment of behaviors, knowledge and skills compatible with and aligned to the organization’s mission and business strategies.

The focus of competencies is centered on characteristics of the employee, including behaviors, skills and knowledge that can be demonstrated and positively affect the organization. Competencies emphasize the attributes and activities that are required for an organization to be successful. Therefore, human resource practices using Competency Models tap into the employee capabilities that are aligned to the organization mission and business need.

Competency Models when implemented in totality can impact all of the agency’s human resource practices including recruitment, selection, compensation decisions, performance planning, performance evaluation and career development.

Like other alternative pay and job evaluation systems, a Competency-based System is fairly labor intensive and requires the agency’s commitment to designate the necessary staff resources during the development stages. Agencies will also want to consider the financial and human resources required to administer such a system. Additionally, Competency-based Systems should not be perceived as a “one size fits all” approach. It is important that an agency identify the specific work unit(s) where competencies may be identified that directly and positively impact the success of employees and the agency.

What are Competencies?

Competencies are identified behaviors, knowledge, and skills that directly and positively impact the success of employees and the organization. Competencies can be objectively measured, enhanced and improved through coaching and learning opportunities. There are two types of competencies, Behavioral and Technical. Depending on the purpose of the Competency Model, one or a combination of these competency types may be used.

Behavioral Competencies are a set of behaviors, described in observable and measurable terms that make employees particularly effective in their work when applied in appropriate situations. Behavioral Competency Models may be designed to describe common or “core” behaviors that are applicable to employees throughout an agency, or may be more narrowly defined to reflect behaviors unique to an Occupational Family or Career Group.

Technical Competencies are underlying knowledge and skills, described in observable and measurable terms that are necessary in order for employees to perform a particular type or level of work activity. Technical Competencies typically reflect a career-long experience in an agency.

What is a Competency Model?

A Competency Model is a listing of Competencies that apply to a particular type of work. Competency Models can include Behavioral Competencies only, Technical Competencies only, or both. An example of a Competency Model for Human Resource Professional follows:

Human Resource Professional

Behavioral Competencies

  •   Agency (implies company) Mission Focus
  •   Customer Focus
  •   Teamwork
  •   Consultation
  •   Achievement Orientation

Technical Competencies

  •   Compensation Expertise
  •   Recruitment/Selection Expertise
  •   Employee Relations Expertise
  •   Employee Benefits Expertise
  •   Training and Development Expertise

How are Competency Models used?

Competency models can serve as a way to integrate human resource practices under the Compensation Management System. Agencies that elect to use Competency Models need to consider exactly how they will be used to support the agency’s mission and desired strategic outcomes, and determine the extent to which Competency Models will impact and affect the agency’s human resource practices. The following is a list of human resource practices that should be taken into consideration when determining the purpose and intent of an agency’s rationale for using Competency Models:

  1. Training and Development - connection to agency business need is a major focus of Competency Models. These models can serve as a tool to assess employees’ current behaviors, knowledge and skills; identify learning areas for development and improvement and be used for career planning purposes.
  2. Recruitment and Selection - models can be developed to identify criteria for recruiting and assessing applicants for agency positions.
  3. Performance Management - models can be used to support the assessment of employee performance.
  4. Compensation Decisions - models can be developed to determine internal alignment and how pay will be administered based on defined competencies (e.g. starting pay, promotions, in-band adjustments, etc.).

Competency Based Compensation Systems

Historically, the pay systems of most of the organizations have been based on jobs and job evaluation methods. It was based on relative worth of the job. The compensation was based on comparing the jobs to one another and assigning internally equitable pay rates for each job. Thus, the pay rate for job principally depends on job itself, not on who is doing it. This approach was appropriate in those days during which individuals had stable duties and no frequent changes were involved in way performing these jobs. In such cases, the jobs were usually well defined and individual was expected to perform only what was given. There was in fact, no need for “thinking”, but only for “action”. Hence the incentive and compensation system focused on the “Job” and not on the “Action”. But today the scenario is completely different. Now we do not have traditional jobs and individuals are often able to add considerable value because of their high levels of competencies, and it is very dangerous to pay them according job than their individual worth.

Traditional system ignores value added by people and it fails to develop the right skills and knowledge. Now organizations need to design compensation plans that not only reward performance, but also to improve it. Compensation has become a strategic issue, and strategic compensation helps the organizations focusing on making them more competitive through improved future performance. Effective pay for performance requires two processes, compensation management, and Performance management.But the real challenge is how to integrate these two processes. Compensation management cannot fully realize its potential without accurate assessment of employee which comes from a good performance management system. Similarly performance management cannot fully realize its potential without a well administered compensation system. Traditional compensation systems cannot bring in this integration and hence there is a need for designing a better system to meet this challenge. The new system must support the recruitment and retention of competent workforce who value team work, individual effort, hard work, meeting deadlines, quality, innovation, and flexibility. All these are inherent competencies of employees.

Developing an approach that pays individuals according to their market value requires a pay system which measures competencies of individuals and prices them in external market. This can help organizations in accomplishing two objectives. First it will have a positive effect in motivating individuals to learn the skills and knowledge to perform in their current role, and second, they will raise the pay of the individuals as they become more valuable in the external labour market. This helps in creating a learning organization.

Experts also advocate that competency based compensation systems empower employees to take charge of their own development. By focusing on optimum performance rather than average performance, competencies can help employees maintain their marketability. Competencies are characteristics of a human being which are transformed into inputs to a role performed by the individual which enables an organization achieve its goals. Competencies can be divided into two parts: Functional and Behavioral competencies. Functional competencies are the basic competencies like knowledge and skill which are essential to the role at hand. They can be looked at as the minimum requirement needed to perform the role. Behavioral competencies are desirable competencies like attitude and personal characteristics which when present; enable a person to perform a role exceedingly well. Every individual carries a set of competencies with him or her to the workplace. The organization should ensure that the gap between “bringing to” and “using at” the workplace is bridged with regards to individual competencies. Thus competency based compensation system has gained importance in today’s perspective.

In Competency based compensation management system, employee compensation is based on an evaluation of the following pay factors:

  •   Agency business need;
  •   Duties and responsibilities;
  •   Performance;
  •   Work experience and education;
  •   Knowledge, skills, abilities and competencies;
  •   Training, certification and license;
  •   Internal salary alignment;
  •   Market availability;
  •   Salary reference data;
  •   Total compensation;
  •   Budget implications;
  •   Long term impact; and
  •   Current salary

Competency Models can be used to help evaluate performance or to determine internal salary alignment and starting pay. Various formats may be used to determine actual employee pay rates. Formats can range from comprehensive inventories of individual competency ratings to pay matrices that reference a general evaluation of competencies and expertise.

Comprehensive inventories provide detailed information that can be used for development purposes and simpler pay matrices can save time in determining pay.

With a comprehensive inventory including staged competency rating, an assessment form (or automated format) may be used. The feedback provider checks off indicator levels for each competency. This data results in a competency rating summarized into a total rating score, which is then mapped to a pay band.

A pay matrix is a point system in which points are accumulated based on educational level, work experience, and other value added compensable factors such as licensure, certification and specialized coursework that lead to a competency level. These pay matrices serve as a guide for determining pay for new hires and pay adjustments for current employees. Total pay matrix points are converted to a range of pay on the pay band. The total matrix points help identify internal alignment considerations and are used with the other pay factors to arrive at appropriate pay.

How are Competency Models linked to performance planning and evaluation?

Competency Models provide the supervisor and employee with a clear understanding of performance expectations, and address training and development activities necessary for successful performance. Models that include specific performance criteria ensure that supervisors and employees share the same understanding of performance expectations. Most Competency Models require an employee self-assessment of their performance that provides input to the supervisor in their appraisal of the employee. Additionally, some may elicit performance feedback from other internal and external peers, direct reports and customers.

How is Competency-based System evaluated?

The final step in the development of a Competency Model is the design and implementation of an on-going evaluation plan to measure the effectiveness of the model’s content and usage. Competency Models must be reviewed and modified periodically to reflect changes in desired behaviors and technical knowledge and skills that result from an evolving work environment. The evaluation plan, at the minimum, should include the individual(s) responsible for evaluating the Competency Model, evaluation timelines and may follow the same process used to develop the original Competency Model.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

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