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.).

How are Competency Models linked to pay?

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.

Credit: Strategic Human Resource Management-MGU KTM

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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