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Competency Based Pay - Meaning, Importance & Example

Published by MBA Skool Team in Human Resources Terms Last Updated: February 01, 2024Read time:

What is Competency Based Pay?

Competency based pay is a pay structure in which an employee is paid for the skills, knowledge and market relevance he or she possesses and not on the basis of the job role, years of experience or position employee is currently holding as per the previous qualifications or skills. 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 in the organization and get promoted. The employees are not paid by the virtue of their position but competency hence the name.

Importance of 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

Competency based Pay Example

Let us say a company is into Consulting. A person who is well versed and up to date with all the latest trends and happenings would perform well in the job. Certifications for relevant tools and frameworks would increase the skills and relevance in the market. That would help the company to get more business and customers as this person would help in solving the problem with right solution based on the competency he or she has gained over the period through proper planning and training. This person would rise faster and would get promoted as per the competency based pay structure if adopted by the company.

Comparing to another employee who is on a similar role but has not upskilled at all and is still working based on the competency which was held 5 years back and may not be relevant in the market anymore.

Hence, this concludes the definition of Competency Based Pay along with its overview.

This article has been researched & authored by the Business Concepts Team which comprises of MBA students, management professionals, and industry experts. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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