Competency based pay

What is competency based pay?

Competency-based pay in HRM is a compensation system where employees are paid based on the skills, knowledge, and competencies they possess rather than solely on their job title or years of experience. 

This system encourages employees to develop a broader set of skills and abilities, as doing so directly impacts their earning potential.

Key components for calculating competency-based pay

Competency is generally only a component of the total compensation package.

Skill assessment

The first step in implementing a competency-based pay structure is to assess what competencies are critical for an organization. These could range from technical skills to soft skills like communication and leadership.

Benchmarking

Research what the market rate is for the various skills and competencies you’ve identified. This could be done through surveys, industry reports, or by consulting with HR experts.

Level of competency

It is not only the presence of a competency that matters but also the level of expertise in that competency. Levels can be often classified as novice, intermediate, and expert. Different pay scales may be attributed to each level.

Competency mapping

Competency mapping is defining the competencies required for each role within the organization. Each role may require a different mix of competencies at various proficiency levels.

Employee assessment

Evaluate employees based on the competencies relevant to their role. This could be through performance reviews, interviews, tests, or third-party assessments.

Monetary value assignment

After evaluation, a monetary value is assigned to each competency based on its level and market rate.

Pay structure

Once monetary values are assigned to each competency and level, a pay structure can be created that reflects these values. For instance, an employee with an ‘expert’ level in a high-demand competency may be paid more than someone with a ‘novice’ level in the same competency.

Total compensation

An employee’s total compensation would be the sum of the monetary values of all their competencies at their respective levels.

Periodic review

Competency-based pay is dynamic and requires regular reassessment to remain effective and fair.

Competency-based pay example with structure

Let's assume a hypothetical conversion to make it easier to relate. 

You can decide that competence-based pay will be 10% of your total compensation. You can give different percentages for different teams or allow it only for certain teams.

Now, every employee, based on the role they are in will have certain competencies identified. They have to attain these competencies and based on how much they have achieved it, competency-pay will be given. 

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Competencies Identified for software developers:

• Programming skills
• Project management
• Communication skills
• Teamwork
• Problem-solving

Levels:

• Novice
• Intermediate
• Expert

Monetary Values in INR:

(Assuming these values have been benchmarked against industry standards)

Programming Skills:

• Novice: ₹3,00,000
• Intermediate: ₹6,00,000
• Expert: ₹12,00,000

Project Management:

• Novice: ₹1,80,000
• Intermediate: ₹3,60,000
• Expert: ₹7,20,000

Communication Skills:

• Novice: ₹1,20,000
• Intermediate: ₹2,40,000
• Expert: ₹4,80,000

Teamwork:

• Novice: ₹60,000
• Intermediate: ₹1,20,000
• Expert: ₹2,40,000

Problem-Solving:

• Novice: ₹2,40,000
• Intermediate: ₹4,80,000
• Expert: ₹9,60,000

Employees and their competencies:

Employee A:

• Programming Skills: Expert
• Project Management: Novice
• Communication Skills: Intermediate
• Teamwork: Intermediate
• Problem-Solving: Intermediate

Employee B:

• Programming Skills: Intermediate
• Project Management: Intermediate
• Communication Skills: Novice
• Teamwork: Expert
• Problem-Solving: Novice

Competency-Pay Matrix (in INR)

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Calculating Pay in INR:

Employee A:

• Programming Skills: ₹12,00,000
• Project Management: ₹1,80,000
• Communication Skills: ₹2,40,000
• Teamwork: ₹1,20,000
• Problem-Solving: ₹4,80,000 Total: ₹22,20,000

Employee B:

• Programming Skills: ₹6,00,000
• Project Management: ₹3,60,000
• Communication Skills: ₹1,20,000
• Teamwork: ₹2,40,000
• Problem-Solving: ₹2,40,000 Total: ₹15,60,000

Final Pay in INR:

• Employee A would have a competency-based pay of ₹22,20,000
• Employee B would have a competency-based pay of ₹15,60,000

These figures would typically be part of a broader compensation package, which might also include a base salary, bonuses, and other benefits.

Difference between skill and competency

Here's a table that outlines the differences between skill and competency: