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What is competency-based pay?

Competency-based pay is a compensation system where employees are rewarded based on their demonstrated skills, knowledge, and competencies, rather than their job title or position.

Also known as competency-based compensation (or skill-based compensation), it aims to align compensation with the value that an employee brings to the organisation through their capabilities.

How does competency-based pay work?

Competency-based pay is assessed and awarded based on several factors, including:

• Skills and knowledge. Employees are compensated based on the specific skills and knowledge they have acquired and — importantly — can demonstrate in their work.
• Competency levels. Pay levels are determined by assessing the employee’s proficiency in relevant competencies, which can include technical skills, problem-solving abilities, leadership qualities, and other job-related skills.

Regular assessments and evaluations should be conducted to measure your employees’ competencies, and to adjust compensation accordingly.

What are the benefits of competency-based pay?

While it might not always be the most suitable approach, there are several advantages to competency-based pay for both employers and employees. These include:

• Enhanced performance. Competency-based pay incentivizes employees to improve their skills and perform at higher levels, leading to increased productivity and performance.
• Recruitment and retention boosts. Offering competency-based compensation can attract highly skilled and knowledgeable candidates who are confident in their abilities and value continuous development. It can also help retain your existing talent by recognising and rewarding their expertise and contributions.
• Alignment with business goals. Competency-based pay rewards those with the skills and competencies that drive your business’ success.
• Fair compensation. Employees are rewarded for their actual skills and contributions, leading to a sense of fairness and motivation.

Things to consider

If you’re planning to implement competency-based pay, here are a few tips and considerations:

• Implementing a competency-based pay system requires careful planning, clear definitions of competencies, and effective evaluation methods.
• Invest in training and development programs to help employees acquire the competencies needed for higher compensation levels.
• Regularly evaluate and update the competency framework to ensure it remains relevant and aligned with organisational goals.
• Clearly communicate the competency-based pay system to employees, explaining how competencies are assessed and how they impact compensation.