According to competency based pay, an employee is paid for the skills and knowledge he possesses and not according to the job or position he is currently holding. Competency based pay structure motivates employees as the employee feels he is being paid for the worth he/she has. The entire structure of the company revolves around this then. The motivated employees rise and get promoted. The employees are not paid by the virtue of their position but competency, hence competency based pay.
When businesses become flatter eliminating non-value adding activities, competency-based pay may complement the move by assigning value to an employee’s work in terms of the competencies that enable the staff member to perform effectively in his role. It rewards employees by better compensation and benefits for the skills, knowledge and behaviors important for personal performance and organizational success and not just for the activities they perform.
Competency based pay encourages better performance and facilitates lateral career development. It is suitable in organizations where there is an over-emphasis on outputs, fit with a performance appraisal is required, cultural change towards greater flexibility is sought. A compensation based on an employee's performance is also appreciated by an employee.
Advantages of competency based pay
There are many pros of competency based pay. Some of its advantages are:
1. It helps motivate employees to perform better and contribute to the company
2. Since the employees get rewarded for something they feel they deserve, they become loyal to the company
3. Competency based pay helps push employees beyond their comfort zone as they feel they can earn more based on their competencies
4. Subordinates can also earn more as compared to seniors based on their competency levels
Disadvantages of competency based pay
On the contrary to the benefits, there are certain cons for competency based pay. Some disadvantages are:
1. Sometimes competition within the organization can lead to a disjoint in a team, which affects overall output
2. In some cases, competency based pay can lead to favoritism towards a particular employee