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Competency Based Pay

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    New Compensation Model-Competency-Based Pay

    Competency-based pay as one of recently developed compensation model has been widely recognized and implemented through all types of organizations. According to Human Resources Management In Canada written by Gary Dessler and Nina D. Cole, competency-based pay is defined as “pays employees for the range, depth, and types of knowledge that they are capable of using, rather than for the job that they currently hold”. Furthermore, the definition of competencies needs to be well understood and identified by Compensation Executives and Human Resource Managers that this mode of compensation basically deals with rewarding employees for their expertise, knowledge and their conduct. As it is the “individual knowledge, skills, and behaviours that are critical to successful individual or corporate performance based on their relation to the organization’s visions, values, and business strategy” (Decenzo and Robbins, 2007).

    According to Hoyt W. Doyel a counselor at Effective Compensation, Incorporated (ECI) these capabilities include the ability to lead, to be able to work for the larger goal, the talent of working under pressure, having a creative mind and coming up with innovative solutions, possessing the skill of dealing with people and convince them , also having additional proficiency and knowledge. In order to reward those who deserve to be compensated much more because of the flair they possess, companies’ should make use of competency based pay. Otherwise this will lead to employees with low self esteem and a high turn over for the organization. Organizations should make use of promotions, skill or knowledge based pay, certification awards, also scholarships if employees are further achieving an education and supplementary pay if they are at leadership positions. The employees are an asset for the organization and the employers should try their very best to retain their assets and assure that the employees are content with their jobs and the compensation that they receive. Before the employees become so frustrated that they leave and join the competitors, which will result as a major downfall for the organization. (Rose , 2006)

    The benefits of adapting to a competency based pay is that it encourages employees to continuously gain knowledge and learn acquire new skills. This way the employees are always trying to become more skillful and the company can utilize the skills of the employees when the need arises. This means that organizations will not have to do continuous external hiring they can hire internally. Internal hiring has an added advantage for the employees as well as the company. The company will not have to spend thousands of dollars in training the employees and they employees can start working on their designated tasks as quick as possible as they are well acquainted with the organization culture. As for the employees, they get an opportunity to work in diverse positions of the company; moreover there are more chances for progress for the employees at the workplace.  Additionally employees are well acquainted and have diverse knowledge so with their bright ideas and leadership skills they can provide brilliant and applicative solutions to the company’s problems. As these employees have a lot of experience they can easily adapt to changes and even if the can courageously cope up with any alteration that arouses at the workplace. Furthermore at a lot of skills will be incorporated with the individuals there will be lesser need for hiring more people as a single employee will be able to perform a diverse set of tasks, which means horizontal growth for the employees and also the company will still be embrace a flatter organization structure, however, on the sideline providing chances for development for organization members. (Zingheim & Schuster, 2003)This way the company can fit in job switching and job enlargement as part of the motivational techniques applied at the work place.

    Along with these advantages, competency based compensation also has disadvantages associated with it, like for example the employees are being paid for their skills but it not true that the employees are utilizing all those skills in their work. This means that the company is incurring an added expenditure, as its compensating employees for those abilities that aren’t even being utilized at the workplace. Furthermore, these competent employees are learning new skills regularly and if the company stated paying them for all these newly acquired proficiencies then the company would end up being in a state of loss.  More to add some of the competencies are not so simple to measure, like creativity, leadership skills, negotiation skills, etc and if the managers do not justly include them in the compensation of the staff these biases will cause frustration amongst the employees leading to decreased productivity. (Zingheim & Schuster, 2003)Also introducing this new concept will incur a lot of training and support cost in the beginning which means added expenditure for the company, in addition to that the model is quite complicated and time consuming for functioning on a daily basis.

    The adoption of this new compensation model indicates that the traditional pay program is no longer efficient to motivate employees to achieve their best working performance, which contributes to organizations’ overall success. The underlying theme of adopting this new compensation model is to recognize employee’s individual value and use it as a management tool to motivate them to achieve desired working performance. (Rose , 2006) Additionally, competency-based pay has confirmed to be more flourishing when utilized with regard to professional people or those who are at middle or top managerial positions. Dow Chemical and Motorola are just two of the well-known companies with well-built research background that have moved to competency based pay system. Companies should make sure that they are making use of competency based pay systems regarding those jobs where the skills are highly valued. If the companies pay huge sums of rewards to employees for capabilities that are not so useful the organization will bear added expenses which will not be fruitful for the overall purpose of the organization. (Zingheim & Schuster, 2003)


    Gross, Steven E. (1995) Compensation for Teams: How to Design and Implement Team-Based Reward Programs.

    Decenzo A. and Robbins S.P (2001) Human Resource Management, Seventh Edition

    Rikleen, Lauren Stiller. (2007)”Time to Reappraise Performance Appraisals.” Management Corner

    Rose, T. Allen. (2006) “Separating Performance Appraisals from Salary Reviews Enhances Staff Progress.”

    Wilson, Thomas B. (1994) Innovative Reward Systems for the Changing Workplace.

    Zingheim, Patricia K., & Schuster, Jay R. (2003). Competencies and Rewards: Substance or Just Style? COMPENSATION & BENEFITS REVIEW.


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