Chapter 15: Competency-Based Pay

Overview: This chapter looks at pay based on competencies, the knowledge, skills, and abilities that make employees valuable to an organization.

INTRODUCTION

The distinguished Management educator, Ed Lawler, in an article looking back at the dot-com era and its implications for the future of Compensation Administration concludes that this era "accelerated an inevitable move from focusing on paying individuals for the job they do to paying individuals for the skills knowledge and competencies they have."¹ This is not the only article that states that paying for the person would replace paying for the job in the future. There was a whole rash of articles in the late 1980's to the mid 1990's that carried the same theme. It is significant that since then there has not been more attention paid to this idea.

Competency pay is a fancy term given to the idea of paying for the person rather than the job. In fact, very few compensation plans pay for only one thing. As discussed in the first chapter of this text, pay can be based upon the job, the person or their performance, and most systems are combinations of all three. The real questions are which one will be the base platform for the other two and what weight will each have in the decision of how much to pay the individual. The past chapter focused on compensation that is based upon performance. In this chapter we will examine competency pay as the base platform for establishing the pay rate.

Paying the person rather than the job is not entirely a new idea. There are compensation plans, such as maturity curves, that have been around for many years. In addition there are other societies, Japan for instance, in which pay for the person is predominant. However, the last twenty years have seen more demand within the United States for competency-based plans and this has resulted in a proliferation of these types of plans.

THE CONCEPT OF COMPETENCIES

Competencies are one of the inputs to the organization's operation; the human input. Individuals bring their competencies to work and use them in accomplishing the tasks required by the organization. As such, competencies are indirect measures of individual accomplishment. It is posited that if the individuals that make up the organization have the appropriate competencies and are rewarded appropriately, then the organization will have the best chance of achieving its goals. Using them as the basis for reward makes the assumption that the use of the individual's competencies will result in the type and level of outcome desired.

Definition of Competencies

Defining competencies is problematic. There are no clear-cut definitions. Some human characteristics definitely fall within most definitions, but from there a wide variety of human characteristics may also be included. These first two competencies are agreed upon by almost everyone:

• Knowledge. This is the accumulated information that the individual has attained through education and experience.
• Skill. This is the application of knowledge to particular situations. These are the things [tasks] the individual can do.

Together these might be called the individual's ability: these two factors are the essential characteristics of individuals that are required to do the job (as in the motivation model that states that performance is a function of ability x effort). Knowledge and skill requirements are the basis of the selection process and can be found in the job specification section of job descriptions.

A second level of competencies is that of behaviors. In this regard competencies look very much like Behaviorally Anchored Rating Scales [BARS] used in performance appraisal. These competencies represent the application of skills and knowledge in work related situations, much like behavior-based questions interviewers would ask of applicants.

A third level of competencies are more controversial, those of personal characteristics. This opens up competencies to a wide variety of factors such as motives, general disposition, attitudes, values and self-image.² The premise behind using these kinds of factors is that through observation and research, the organization can elicit the critical factors that distinguish superior performance. Then the characteristics that distinguish superior performance from average performance can be used as rewards. The ultimate goal being that the total productivity of the organization be increased. What the organization is seeking to discover with these factors is what causes the individuals to apply their effort: this answers the part of 'effort' in the motivation model. However, these factors may vary by areas within the organization and over time as the organization grows and changes.

Using this third level of competencies runs into three problems:

1. Developing competencies that reflect the organization’s character takes both time and effort. Further, the factors may change over time.
2. Measuring these factors in a reliable and valid manner may be difficult. Even knowledge, skill and behaviors are difficult to measure as the employment process shows, and these personal characteristics are even more susceptible to error.
3. Related to #2 above, the use of these factors can run into legal problems with the Civil Rights Act. The difficulty of proving the validity of personality tests led organizations to stop using them in the selection process.

Types of Competencies

There are many different types of competencies and these can be classified along a number of dimensions.³ The first dimension is that of generality, that is, how general or specific is the competency. The most general competencies would be those that are common among all organizations and individuals in those organizations. Honesty might be one such competency. On the other extreme would be a competency that is specific to not only one organization but to a particular task within that organization. An example might be a skill in blowing a particular type of scientific glass. General competencies, particularly those related to many persons in a specific organization can be used for a compensation plan covering many employees but may not identify those factors that make for individual or organizational success. Very general competencies make recruiting easier, but organizations assume that others will have provided the training in these competencies to their own standards, which is not necessarily true.

A second dimension is that of basic vs. advanced. In today's work world most work requires at least basic skills to operate a computer. But there are many stages from this basic skill level all the way up to being capable of designing computer systems. Basic skills are the building blocks for the development of higher skills. Often organizations will hire people who have some level of skill sets and then train them or reward them for obtaining further skills needed by the organization. Many organizations hire new college graduates assuming they have mastered basic level skills in their education and place them into training programs to teach them the skills required by the organization. Defining the basic skill level and the further level of competency required is a difficult task but forms the basis for a competency-based pay plan.

Lastly, competencies can be based upon the organization or upon roles. Role based competencies relate to the tasks and accomplishments desired in what the individual does within the organization. Role competencies define individuals and what they can be expected to do for the organization. Design Engineering would be a type of role. Organizational competencies would be more related to the organization’s mission or values. For instance, many high-tech organizations have very unstructured work environments but require high commitment in terms of work hours.⁴

There are some themes running through these dimensions.

1. Developing Competencies. Where does the individual obtain the competencies desired by the organization? If the answer is outside the organization then the question is when; before or after being hired? This is a selection vs. training question. The answer will help determine the type of competency pay system that is appropriate. For instance, if the training is done outside by an educational institution, then the pay system focuses on being competitive in the labor market for graduates and paying for courses that improve the individual's skills. Otherwise, if the answer is certification training, then the skills acquired need to be specified that along with the certification increases the individual’s pay.
2. Competitive Edge. The goal of a competency-based human resource approach is to create a workforce that is unique and provides the organization with a strategic advantage in the marketplace. This suggests that the organization’s needs and desires should create an atmosphere that rewards behaviors and attitudes as well as skills that are clearly related to the organization’s mission. This seems most likely to happen where the organization has carefully defined the needed competencies, established methods whereby individuals can obtain or sharpen a competency, and the individual is rewarded for obtaining and using the competency.
3. A Lot of Work. All the discussion in this section suggests a sophisticated and integrated Human Resource program within the organization. This is a program that requires professionals in a number of areas, not only compensation, working together with organization leaders to create and operate an advanced Human Resource program.

DEVELOPING A COMPETENCY MODEL

A competency model can be designed for any level within the organization, a job, a role, a function, or the organization as a whole. This spectrum can be seen as extending from very specific to very general. At the organizational level, competencies are more likely to be general and advanced, while job related ones are more likely to be specific and basic. The competency model determines the competency levels that individuals need to have success. This is not only for compensation purposes but for all Human Resource functions, particularly selection and training. In fact, the process of establishing competencies as a basis of pay would follow the same steps as developing predictors for selection.

Selecting Competencies

One of the toughest parts of doing a job analysis is developing the job specifications. This section of a job description describes the knowledge, skills and abilities [KSA] required to perform the job. The reason that it is so challenging is that there is no direct information that tells the analyst which KSA’s are required for the successful performance of any particular job. This is the problem faced by all selection procedures and in this instance, the problem of selecting competencies for use in a compensation plan. The first part of this is selecting the appropriate criterion; that is defining successful performance. In selecting competencies, the group to be covered by the plan to a large degree determines the nature of the criterion. Selecting appropriate competencies then is a matter of judgment on the part of the person doing the selecting. However, the competency must be a clear concept, preferably an observable one. Some competencies, such as a degree in Aeronautical Engineering for a job designing aircraft or keyboard skills for most clerical positions, are obvious. A term like Entrepreneurial Drive for managers is not as quantifiable; what is its exact definition, and is it needed for all mangers or only some?

A second requirement is that the competency needs to be variable, that is, to have levels. A competency that is simply present or not may be sufficient, or even desirable, for selection but it does not provide a range for purposes of payment. Again, these levels need to be measurable and preferably observable. Variations or levels of competency may be in terms of either depth or breadth. Depth is becoming more expert in a particular field. Orthopedic surgeons tend to specialize on a particular part of the body, such as knees, and become very skilled at conducting surgery on that part of the body. Increased breadth in a competency is related to acquiring knowledge that allows the person to do more of some function. For instance, a sales person who learns more about an organization’s product line to sell more to current or new customers. Sources. Sources for competencies can be developed from outside expert sources or developed internally by the organization. There are many sources of pre-defined competencies available for use. These are available through governmental and consulting sources. Some of these are:

• Hay Group Competency Dictionary⁵
• Career Architect⁶
• Profiler⁷
• O*net⁸
• eDOT⁹

The advantage to using these off-the-shelf sources is that they are ready-made and tested, though not for a specific situation. These sources are good, but not likely to identify competencies that will be unique to your organization and provide a competitive advantage. Figure15-1 is a list of the competencies that can be found in the eDOT.

Each of the competencies in the eDOT contains a range. Figure 15 -2 shows the range for reasoning.

Developing a custom program for your organization is more complex but can produce a much better result. Designing competencies from scratch will take time and the efforts of many managers in the organization. The steps are:

1. Determine the unit to which the pay system is to be applied. This may be a few workers or the whole organization.
2. Gather a group of people, managers, and workers, who are familiar with the work to be done.
3. The group examines the work to determine what competencies are required to accomplish the work. These may entail looking at:
   • Job descriptions
   • Performance data
   • Organizational materials
   • Work flow analysis
4. Distinguish which competencies "make a difference," that is which ones are related to successful or superior results.

Developing Measures

If a company is going to pay for a particular competency, then they must have a measure of that competency. They need to know if an employee has the competency, and the degree to which they have it, if decisions are to be made about how much to pay the individual for that competency. Further, the proposed measure must in fact measure that competency, not an easy task in all cases. In general, measures are not the competency; they are indicators that the employee has the competency. Thus, the value of using a particular competency is partially a function of how well the competency can be measured. Measures can fall into a number of categories:

• Education and Training. A major indicator of a person's competency is the education and training they have. This may be before being employed, in which case the pay upon hire should reflect the level of education and appropriate training. Degrees and certifications are major indicators of the level of competency. Organizations need to direct education and training taken after hire. The type and level of education and training the organization desires the employee to have, as well as the reward for attaining that level of competence, needs to be made explicit.
• Experience. Often, experience is called the best education and training. Organizations usually reward experience, either consciously or unconsciously. Pay systems in which employees receive a standard increase each year, independent of cost-of-living increases, are rewarding experience.
  
  Breadth of experience is attaining competence in a variety of tasks. These may be closely related tasks permitting the person to perform a larger part of the total task or they may be new tasks that provide the person with a new skill set. Organizations can effect employee attainment of new skills by establishing planned programs and connecting them to rewards in the form of increased pay. The value to the organization of this approach is that employees with a variety of skills can be moved more readily into new tasks as the organization changes.
  
  Depth experience is attained by being able to perform more complex tasks within the person's current occupational area. This is typical of the experience gained by engineers as they are assigned more complex design work as they attain more experience. However, as those experienced in selection know, there is the problem of distinguishing 10 years of experience from one year of experience 10 times over.
• Tests. Education, training, and experience are rough measures of competence. To improve on the accuracy of measuring these competencies or for measuring other more personal characteristics of employees, the organization may resort to testing. There are tests for almost any psychological concept imaginable, so if the organization wishes to use a psychological concept as its basis for paying a group of employees, then there is undoubtedly a ready-made test available. On the other hand, if what the organization needs is specific information on the KSA of a particular job, it may be necessary to build a test specific to the situation. The methods for doing all of this are available in any book on employee selection, as this is what is done in the selection process.¹⁰
• Behaviors. Another way to measure competency is to record behaviors. After all, if one is competent in something it should show up in how a person behaves. This is measuring competency by observing the person in action. This necessitates determining what behaviors represent the competency concept for which the organization wishes to pay.
  
  Measuring behaviors has been done mainly for purposes of performance appraisal. Two common methods are the Behavioral Observation Scale [BOS] and the Behaviorally Anchored Rating Scale [BARS].¹¹ These two techniques have the advantage, in the realm of performance appraisal, of getting away from personal characteristics and focusing on behaviors that lead to superior performance. Developing these types of systems requires a great deal of work as they are specific to a job or a solitary part of the organization. They also take up the time of the supervisor who must observe the employees on the job sufficiently to make accurate decisions about their behaviors.
  
  A question that comes up in all performance appraisals is who should collect this data that is so necessary in making performance decisions. The trend is toward 360-degree appraisals. These appraisals ask all persons who have significant interactions with the employee to complete an evaluation.¹²
• Accomplishments. A final category of measures would be the person's accomplishments. These would be measures of how well their past behavior has led to positive results. Essentially, this is an output measure. As such, pay for accomplishments is usually part of a variable pay plan. The requirement here is that the reward and the accomplishment are spelled out in advance and the connection between the two is made clear.

For all these measures there needs to be an accompanying rating scale. This is so that distinctions can be made between employees to the degree that they exhibit the desired competency; from these distinctions differences in pay can be developed. Most of the above have either obvious scales, such as experience, or the measure has, as an integral part of its development, a set of scales such as BARS. Accomplishments are an exception, suggesting that appropriate rewards for this measure may be in the form of an incentive such as a bonus.

Competency Assessment

It may seem obvious, but these measures should in fact measure the competency that the organization wishes to reward. In addition, the competency should have a positive effect upon the operations of the organization. Making these distinctions is a process of testing the validity of the competency. In addition, it is also a requirement to validate these competencies for legal purposes. So, assessment of competencies needs to answer two questions:

1. Does the way the competency is measured accurately measure the competency?
2. Does the competency make a difference? That is, does the competency lead to improved organizational outcomes?

There are several ways to measure validity, from fairly simple and obvious to very complex, technical and theoretical.

• Face Validity. Face validity simply means the validity at face value. It is common sense that the competency is useful to the organization. To some degree experience working in the company falls in this category. It takes a period of time to understand and know how the organization works and once learned performing is easier and more efficient.
• Criterion-Related Validity. This type of validity compares the scores on the competency measure against a criterion measure. For instance, a test of extroversion compared to the sales record of sales people. There are two types of criterion-related validity: predictive and concurrent. The difference in these two has to do with the timing of the collection of the competency measure. In predictive validity the competency measure is collected before the criterion measure and the comparison made after the criterion measure is collected. In concurrent validity the two measures are collected and compared at the same time. The latter is probably more appropriate for competency pay purposes.
• Content Validity. In content validity two measures mirror one another. One is a sample of the other. For instance, in a skill-based pay system people may move up to a new level by showing on a test, based upon a job sample, that they are capable of performing the task.
• Construct Validity. This type of validity looks very much like the process by which the organization might develop competency constructs that are personal characteristics. The job is examined, and a set of competencies identified [extroversion for sales persons?]. Then the performance on the job is compared to the construct.

These are brief outlines of very complex methodologies. They are used to determine whether the competencies the organization has chosen to pay for are "worth it" in terms of superior organizational performance. Refer to books on psychological testing for more complete information.¹³

LINKING COMPETENCIES TO PAY

It has been stated a number of times in this text that there are three things for which an organization pays an employee: the person, the job, and performance. This chapter is about pay for the person. Seldom is a pay system design based upon only one of the three, but one of the three is usually the basis for the pay structure and the others contribute to it. In most cases, the job is the basis for the pay structure and the other two are contributors.

There are pay structures that use competencies as the base, however. In the next section we will look at a number of these. Typically, a salary structure consists of a series of levels, although in some competency-based plans it is more like a continuum. Where levels are established in competency pay, they tend to be quite broad, lending themselves to a broadbanding approach. In this system the organization needs to select a limited number of bands. Within these bands, the competency zones would be established that define levels of competency. Individuals would be placed first into the appropriate band and then within the competency zone. Movement within the zone would occur as the person's competency increases.¹⁴

The basic problem that occurs in these kinds of systems is pricing the structure. Salary information comes in the form of jobs, not competencies. However, it is important to figure out ways to estimate the market value to establish controls that keep the organization from paying too much. An approach would be to use competency benchmarks. The easiest way would be to develop from salary surveys the highest and lowest paid competencies within a band. An example of the lowest would be a new college graduate in engineering and the highest an expert design engineer. Or at a higher level an engineering supervisor and the Head of engineering for the entire organization. All others would fall between the two based upon their level of competency.

The ERI Salary Assessor presents salary data on jobs by level. Figure 15 - 3 is a description of the three levels used to present the data.

It is more likely that competency would be used where the basis for the structure is the job. Although some structures may use a very broad definition of the job that is more like an occupational area. The job or occupational area will have a range connected to it. The width of this range will vary depending on a number of factors and the fewer the number, as in broadbanding, the wider the width of each range. This is considered one of the advantages of using competencies and broadbanding together, as they allow a person to advance without having to "be promoted" to a new job.

To the extent that experience is a major competency, and the measure of experience is years on the job, just about any salary structure has a large component of competency in it. Years on the job is the major predictor for where in the range a person falls. This is despite the organization's claim that they have a merit pay plan.

All the above assumes that increases in competency will lead to permanent increases in pay for the person. There is an alternative: a bonus system. There are some advantages to this approach. First, it may make sense from a budgetary standpoint; a bonus does not go into next year's base pay. Second, there may be competencies needed by the organization right now that will not be required over a long period of time. Third, a bonus system is relatively simple to design and administer and people like bonuses.¹⁵

EXAMPLES OF COMPETENCY-BASED PAY SYSTEMS

This section will examine three competency-based pay systems: professionals, teachers, and skill-based pay.

Professional Pay Systems

Certain professional jobs in an organization call for special compensation systems. This is determined by the nature of the job and the labor market for these skills.

The Professional's Job. A professional job is one that "involves the application of learned knowledge to the solution of enterprise problems and the achievement of enterprise goals."¹⁶ This learned knowledge is ordinarily acquired through a college education or some other extended period of formal study. Professional work is mental, requiring the person to apply specialized knowledge to decision making. It is difficult to manage professional work since management often does not have the same knowledge and is therefore dependent on the judgment of the professional. The training a professional receives engenders a sense of independence that does not conform with traditional management techniques.

True professional jobs are non-supervisory. They include such fields as engineers, scientists, attorneys, economists, physicians, psychologists, and editors. Sibson suggests that these professions can be classified into three groups.¹⁷ The first comprises professions that require advanced knowledge in a specific academic field, such as engineers. The second group consists of professions that require original and creative work, such as artists and designers. The third group requires knowledge of business disciplines, such as finance, and includes mainly staff groups. A competency-based pay system would be appropriate for the first two categories.

Professional work is often hard to describe in the way that most organizational jobs are described. Different levels of professionals are not doing different tasks but are applying more expertise to the same kinds of problems. In addition, the exact project, set of activities, and goal pursued by the organization changes often, so typical descriptions rapidly become out-of-date.

To overcome these problems, organizations have developed generalized job descriptions for engineers and scientists. One type is called the functional job description. The tasks described are typical of persons who are engineers and sientists but may not describe the exact job of a certain person at a certain time. A second type, the generic job description, is similar in that it describes in broad terms the work involved for a series of levels of work. Sometimes, a specific task is an attachment to these descriptions. A third type is the work-sample description. It describes the past assignments of the person, highlighting the ones that demonstrate the highest level of work they are capable of performing.¹⁸

The Professional Worker. From the discussion thus far, it can be seen that professionals are educated, independent and have a close personal connection with their job and profession. In some ways the idea of being a professional and working in an organization are antithetical. The professional is an independent agent and the organization is a client. This is an extreme and traditional notion of the professional, but the vestiges of it remain with the organization professional. The feeling of independence from organizational constraints still creates a tension between the organization and the professional. Certainly, professionals perceive that their most important input to the employment exchange is the knowledge and skill they bring to the job.¹⁹

Organizational commitment, or the membership decision, is lower in professionals than in other employee groups. Researchers have classified employees into cosmopolitans and locals.²⁰ Cosmopolitans look to their profession for rewards. Locals associate their goals with the organization and are responsive to those rewards. Although professionals are not wholly cosmopolitan, they are more so than other employee groups. Such people are more aware of job market conditions, and because of their lower organizational commitment the organization needs to have a compensation program that is very responsive to the market.

In some professional areas, particularly the sciences, the new college graduate may be worth more to the organization than an experienced professional since their technical field is changing rapidly. It becomes hard for older professionals to keep up in the field as they gain experience. This is a situation almost opposite other employee groups, and the career pay curves of professionals reflect this difference. Scientists and engineers are hired at higher-than-average salaries. They then progress fast in the first few years, because progression takes place within the technical field. At midlevel in their career their pay curve begins to flatten out considerably. This is the result of obsolescence combined with the organizational dynamic of going as far as one can within a professional area. Those who break out of the flat curve move into management.

All three of the following major compensation decisions require some rethinking and adaptation to accommodate the professional employees into the organization's compensation program. Each of them will be considered in turn.

The Salary Level Decision. In most organizations that have large numbers of professionals, particularly scientists and engineers, these employees are central to the successful functioning of the organization. Therefore, it is likely the organization will choose a strategy of leading or, at a minimum, meeting the market in paying this group of employees. In addition, the labor market for professionals is clearly defined. Knowledge of the market can be gained from college graduates' salaries since the major entrance embarkation point is directly from college campuses.

Information about salaries in the professional arena is widely disseminated in professional literature. In fact, this is a major problem for organizational compensation decision makers. Much of the information published about salaries in professional literature does not meet the collection and analysis standards discussed in chapter 6, so the accuracy of the data is suspect. But the fact is that the professional feels just as inequitably paid after examining that misleading information as if had been accurate.

Salary surveys for professionals are difficult to construct and use. Obtaining information about salary rates for a category of professionals, such as engineers or accountants, may be easy in general but it is not enlightening. As discussed, professionals may appear to be doing the same thing but, depending upon their experience level, are being paid very differently. Also, close examination of professionals' jobs show that they are doing considerably different things, requiring different types of experience. All this makes it difficult to determine comparability for the salary survey. An answer to this is to collect data in terms of the skill and experience level of the professional, such as a maturity-curve approach does. This alternative is considered in more detail shortly.

Finally, labor markets for some professional groups have been very volatile. Changes occur more rapidly there than in most labor markets. Combine this with the professional's lower level of organizational commitment and there can be high turnover because this group is willing to move frequently to take advantage of changes in the labor market.

The Salary Structure Decision. Evaluation of professional jobs is difficult. Particularly in scientific and artistic areas, the organizational compensation decision maker needs long exposure to the language of the field before accurate judgments can be made. The use of a body of knowledge is the primary task of the professional. This is not always a factor in job evaluation, and it is not always weighed as heavily as it ought to be to accurately evaluate the professional's job. There is a great deal of freedom as to how work is done by the professional. But this factor can be overweighed, since the amount of control on the professional is more internal than external. All this leads to difficulty in determining the proper level of the professional's job within the job hierarchy. Higher-level professionals apply more experienced judgment to the decisions they are asked to make.

The career pattern just discussed affects the nature of the salary structure. Professionals, most of them college graduates, enter the organization at an advanced salary level. Typically, organizations have a series of levels, five to seven, within which the professional moves without leaving professional work. These levels overlap the lower and middle managerial levels of the organization. So, the regular salary structure can usually accommodate the professional career pattern but may have some aspects of inequity for other employee groups, who do not have this high-level escalator of pay ranges.

Many organizations recognize this limited career-growth pattern, which flattens out the professional's pay curve at an early age, and attempt to create a longer career path through the use of a dual-career ladder.²¹ In this system, the professional may continue to do technical work while moving into pay grades that are parallel to managerial levels, as illustrated in Figure 15-4. But dual-career ladders have come under attack for several reasons. First, professionals may be unable to grow beyond their technical expertise. Second, it is not realistic to separate technical and professional decision making at higher levels. And third, execution is often poor, because qualifications and performance criteria are not made explicit.

A major problem with using the standard organizational salary structure for professionals is the dynamic character of the labor market for professionals. When market rates change faster for professionals than for other employee groups, the rate ranges quickly become obsolete in determining professional rates. The informal response to this is grade creep, the placement of the professional into a higher grade-level than warranted at the time to meet the market rate.

The Pay System Decision. Professional employees are not likely to be placed into incentive plans. If anything, they may be granted stock options given their decision-making responsibilities. Movement within grade and promotion are important ways of rewarding the professional. The criteria used for both decisions are mixed, since performance is often hard to judge for this group of employees. Time and experience are major considerations. It is assumed that performance improves with experience for professionals, at least in the early years, and that they can undertake higher-level jobs as they gain experience. Promotion and movement within grade appears, then, almost automatic for at least a few levels. Later, obsolescence leads to the problem of professionals occupying levels above their usefulness to the organization.²²

Movement within grade is also affected by the fast-changing conditions within professional labor markets. Since professionals are more cognizant of labor market conditions and are likely to move when better offers are advanced, making changes in salary to counteract these offers is a typical procedure. Thus, movement within grade often looks more like a bargaining situation than reward situation.

To the degree that contribution is high for the new professional and levels off with time, there is a lag between performance and reward. It is impossible to reward the new professional to the full extent of his or her contribution. This would entail salary levels that would be considered inequitable by long term employees. Further, there would be no room for the professional to grow within the salary structure. So, the increases are spread out and the person appears to be receiving automatic increases when in fact their salary is catching up with the contributions already given.

Maturity Curves. Paying for skills and knowledge seems particularly appropriate for rewarding professionals since their job emphasizes the personal contributions of their skill and experience. One way of achieving this type of payment system is by establishing a maturity curve. This technique is a deceptively simple device. It is a set of curves that record the progression of professional salaries in terms of years of experience, usually defined as years since college or last degree. Figure 15-5 below is an illustration of a maturity curve.

The data for the curve is derived from a salary survey conducted by a professional society. Salary figures for the professional group are collected by years since college. For any year this will provide a range of salaries. This range is illustrated in Figure 15-5 by the cutout vertical distribution. The curve represents a proportion of the distribution for each year. For instance, the middle curve in Figure 15-5 is ordinarily either the mean or median for each year's distribution. The other curves can represent percentiles, proportions, or standard deviations. Note that the shape of these curves show the typical nature of career pay for professionals: starting high, moving rapidly in the early years, and then flattening out in later years as obsolescence takes over. The ERI Salary Assessor includes a graph that is a maturity curve for most jobs.

Instead of a pay range based upon the market value of the job, the maturity curve provides a pay range based on the market value of the professional's experience level. This pay range can then be used in conjunction with a pay-for-performance system (chapter 14). The professional's position in the pay range should then match his or her position in the performance ratings. The professional who is at the 67th percentile in performance should then be at the 67th percentile of the salary range for their years of experience on the maturity curve. Many large organizations that employ large groups of professionals, such as engineers or programmers, find it useful to use a ranking system of performance appraisal to coordinate the performance ratings with the maturity curve.

The maturity-curve technique leaves the job out of the direct compensation determination process. The assumption is that management will assign tasks to the professional that are the best and highest use of their capabilities. When this in fact occurs, the labor costs of the organization are kept to a minimum, but when this is not the case, labor costs are higher since the professional is not being employed at the level of work for which they are being paid. A maturity curve pays for experience and performance. It pays for the job to the degree that the survey(s) on which the maturity curves relies is for a particular job and these curves vary in range and slope by job categories.

Teacher Pay Schedules

Almost all teachers in the U.S. are paid on the basis of a similar pay plan. This plan, called a Step and Lanes approach, pays for the teacher's experience and education. The plan can be visualized as looking like an Excel worksheet. On the vertical axis is years of experience and on the horizontal axis are course units taken beyond the basic college degree required to be a teacher, plus the requirements to be certified. There are usually some points along the horizontal axis where the number of courses taken will result in a graduate degree with the end point being a doctorate. On the vertical axis either in the top left corner or the lower left corner is placed the salary for the new teacher who has just completed the basic requirements. On the right side on the opposite corner is placed the highest paid teacher’s salary, that of the teacher with a doctorate and the maximum number of years experience possible in the plan. Each box has a salary rate in it that is a percentage more than the minimum or less than the maximum whichever way you like to count it. Each year the teacher moves vertically one box for experience and also horizontally if he or she has taken courses that year. The entire pay schedule will change periodically when the district studies its competitiveness in the market place or responds to changes in the cost of living. There are two other decisions that can be made about this pay schedule:

1. The depth of the pay schedule as measured by the distance from the minimum to the maximum. For competitive purposes this can be estimated from the market by obtaining the market rate values for the beginning teacher and the top qualified teacher.
2. The relative value of experience and education. This can be altered by adjusting the percentage increases both vertically and horizontally.

Typically a school district has one pay schedule for all classroom teachers. The pay schedule developed above was in response to perceived inequity and favoritism. Studies, however, show that experience, at least after five years, does not show much of a relationship to quality of teaching. Further studies on the influence of additional education are inconclusive.²³ Recently, this pay system has fallen under increased criticism with the current focus on educational standards.

There have been several suggestions and attempts to change the current teacher pay system, and these are instructive to this discussion of competency pay.

• Develop a Career Progression. At present all teachers are treated as being the same since they all do the same thing, which is teach classes. This is unlike most professions where there is a progression of responsibilities or a change of roles as the person gains experience in the field. This progression often takes up to 5-7 years before the person is considered proficient and is left to do their job with minimal supervision. Toward the end of their career, many professionals become mentors to younger professionals. There have been some attempts at programs that have developed these career-ladder programs within the teaching profession with some success.²⁴
• Knowledge Based Pay. The current pay system rewards teachers for the accumulation of educational credits and degrees. Knowledge and skills-based pay links teacher salaries to specific knowledge and skills that the district has determined are needed for their schools to be effective. Teachers might acquire the desired knowledge and skills through coursework, individual study, and collaboration with others, professional networking, professional development, or reflective work in their classrooms. What is important is not how much time teachers spend in university classrooms, but that they have developed and demonstrated specific teaching skills, such as adapting teaching approaches to student learning styles, using assessment to measure student learning and modify curriculum and instruction, and using technology as an instructional tool.
  
  Many districts reward teachers who achieve National Board Certification. The National Board for Professional Teaching Standards [NBTS]is a professional standards board for teachers that has identified the knowledge, skills, and abilities of expert teachers. This board has developed a set of assessments to certify teachers who have achieved high levels of competency.
  
  Another approach comes from districts that have developed a comprehensive knowledge and skills-based compensation system that links professional standards to all career stages. These programs use certifications such as the Interstate New Teacher Assessment and Support Consortium (InTASC) and the PRAXIS exams developed by the Educational Testing Service. These certifications are designed to measure actual teaching practice-not just "book knowledge" of teaching.²⁵
• Equality vs. Equity. Most current teacher pay systems pay all teachers on the same pay scale with the assumption that "a teacher is a teacher." There are two circumstances in which this breaks down. The first is where skill in a specific discipline is needed to teach the students. This is a problem that increases in the upper grades. Mathematics exemplifies this problem. It is hard to get Mathematics majors to go into teaching because there are too many employment opportunities in other areas of the economy that pay considerably more money. To pay competitively, the school district would have to grant some form of bonus to these teachers or set up a different pay scale based upon the market salaries for Mathematicians.
  
  The second circumstance arises because not all schools are equal. Because of location and school populations, some schools are more challenging to teach at than others. As teachers gain seniority, they often get a say in where they teach and experienced teachers tend to choose schools where success comes most easily. This leaves the most inexperienced teachers to teach in the more challenging schools, just the opposite of what should happen. To get teachers to teach in these more challenging schools there needs to be a bonus system or a different pay scale.
• Pay for Performance. Probably the most talked about and politically popular approach to improving teacher pay is some form of pay for performance. In an era of testing student achievement, this would seem to be a good solution, but this in not always the case. Proposed plans vary on several important dimensions:
  • Individual or group [school wide] plans. Individual plans provide an incentive to each individual teacher, yet these types of plans have not proved very effective. A school is a cooperative system that relies on people working together, not competing with one another. The competition can be particularly bad where the plan is a zero-sum game. Group or school-wide plans tend to fare better. However, like all group plans the connection between performance and reward is lessened and reduces the individual incentive value. Where some teachers perceive that not all the teachers are contributing to positive outcomes this can create tensions within the school.
  • Bonus or Salary? Most of the plans being implemented or discussed provide bonuses to teachers. These can be effective if they are seen as significant, but they rarely are. A major advantage of the bonus is that it can be implemented without disturbing the current pay system and it is not built into ongoing salary rates. This is assuming that the bonus plan is an add-on to the salary budget and is not taken out of the base salary budget. The additional cost of bonuses in districts and states has been a major reason for dropping the programs. Increasing the teacher's salary has two drawbacks. The first is that the increase then carries forward to following years meaning that teachers are rewarded year after year for what they did in a prior year. The second drawback is that the current pay system that rewards experience and advanced education must be changed to include performance.
  • What is performance? The best pay-for-performance plans, even in industry, measure the quantity of work in a measurable manner. However, in education the important outcome is the quality of output. The teacher has little or no control over the quantity, which is the number of students. In fact, a major argument is that reducing the number of students will improve the quality of output, which is student learning. The obvious measure of quality is test scores. Whether test scores measure student learning is a question beyond this discussion. What is of interest here is the impact of the teacher on the student's test scores. The argument is made that the teacher is only one of the influences on how the student scores on the test and probably not the major one. In addition, the major motivation to the teacher may be to either one, teach to the test, or two, manipulate the testing situation to obtain higher scores for their students. Finally, there is the argument that student test scores are not the only performance standard to which teachers should be held.

Skill-Based Pay

The term Skill-Based Pay has two meanings in the literature. The broad meaning would be identical to the term Competency Pay used in this chapter and would include everything discussed here. The more restrictive meaning refers to Competency Pay associated with blue-collar work and usually involves work teams or groups. Skill-Based Pay in this more narrow sense is a pay system in which pay increases are linked to the number or depth of skills an employee acquires and applies to the organizational unit's work, as opposed to the job to which the employee is assigned.

The reasons given for installing a Skill-Based Pay plan are many:

• Employee Flexibility. This is probably the most important advantage claimed for skill-based Pay. This improves the utilization of employees. There is a definite value to employees who are able to do a variety of tasks in organizations that are rapidly changing.
• "Leaner" Organization. When employees can do more tasks, the organization can run on fewer employees as each is more fully utilized..
• Improved Competency. As we shall see, Skill-Based Pay requires substantial training on a continual basis.
• Support for New Organizational Forms. As organizations move to working in teams, it is advantageous to have team members able to step into different roles with an understanding of the bigger pieces of the whole process.
• New Technology. Not only are organizational forms changing, but so is the technology used within organizations. This new technology requires employees to change what they do, as well as how they implement these changes.. Pay for learning skills makes sense in this environment.
• Employee Desires. Employees prefer to be paid for something that is integral to them: their skills and aptitude. They give more value to this than merely being paid for the value of the job to their company.
• Employee Involvement. The combination of working in teams, improving competence, and being paid to improve, has the effect of increasing the involvement of employees in the work of the team.

Design of Skill-Based Pay. There are three basic steps to establishing a Skill-Based Pay program.

1. Determination of skill requirements
2. Training and Certification
3. Relating skills to Pay

Determination of Skill Requirements. First, the work or tasks of the organizational unit under study need to be examined. As a starting point, it may be useful to review the discussion on determining the job specification from the tasks of the job in Chapter 10 on Job Analysis. The same process can be used here. This process is intended to convert all work activities in the workflow process into the skills required to perform them. This requires input from both those doing the work and those supervising the work. These lists of skills then need to be placed into what are called skill blocks.

Skill blocks are groupings of knowledge, skills, abilities, or competencies collected from determining the skills required to do the work. These skills can be classified in two directions:

1. Skills can be classified in dimensions of breadth or depth. Collections of skills on breadth identify different types of skills required to perform the work. The depth dimension identifies the more complex skills for performing certain work. Skill blocks may be designed for either.
2. Skill blocks are organized into an increasingly complex set of levels for the purposes of training and pay.

The number of skill blocks depends upon the number of different types of skill blocks and the number of levels of each type of skill block. For instance, if there are three types of skill blocks each with three levels to them, there would be nine skill blocks. Delineating these blocks both in variety and depth is one of the most difficult and judgmental parts of developing a Skill-Based Pay plan. Further, each of these skill blocks must have a clear definition of the skills required and a measurable standard for judging if employees have that type and level of skill.

Training and Certification. For a skill-based pay system to work, a training program must be established that provides all employees access to the training that would qualify them for higher levels of pay. Training may be done in-house by the organization or outsourced to other organizations that provide training in the desired skills. It is important that the training has a defined curriculum that is clearly related to the skills delineated in each skill block. In addition to what is to be taught, a schedule of when the training will take place must also be crafted. The schedule needs to include how long, under what conditions, and what prerequisites the trainees will need. The organization must provide equal access to all employees within the area to be covered by the skill-based pay system to avoid violations of Civil Rights Acts. A good way to do all this is to develop a contract with each employee that shows where they are now, and the steps needed to move ahead.

The last part of the training program is to certify that the employee has mastered the skills of the training program. This "testing" can be done several ways including written and oral tests, observation, work samples or interviews. Ideally, the testing would move beyond whether the employee simply knows the material and determine if they are also applying that knowledge on the job. Periodic recertification will be necessary to assure that skills are kept current.

Since in much of skill-based pay the employee is trained more broadly than the daily activities require, so a re-certification program is needed. Like the initial certification, a variety of techniques can be used including a rotation into different activities that require a demonstration of the skills.

Relating Skills to Pay. The skill blocks represent a hierarchy of skills required to perform the work of the organizational unit. As employees learn the skills required to perform the skill block, their pay should increase to reflect their higher level of competence. Note that they do not necessarily move to a new job, they are just capable of doing more things for the organization. This hierarchy of skills suggests that there is some minimum and maximum salary that needs to be established for paying employees while utilizing this skill-based pay system.

But there is no intrinsic worth for certain skills any more than there are for jobs. However, unlike pay for jobs, there are no salary surveys of skills by which to determine what a competitive salary is. Survey data can be used indirectly by using selected pay survey data which represents either a composite of several skill blocks or the extremes in pay survey rates for particular skills. Most commonly, an entry level job can be found in the survey that is close to the work done in the organization. The salary for this job is used as the pay for the lowest level skill block. Similarly, the reported rates at the top and bottom 10th percentiles of one or more jobs in a skill category usually provide appropriate guidance for the boundaries of skill block pay rates. The organization should keep in mind that certain skills may be of special value or importance to the company and need to be appropriately compensated.

Once the extremes of pay for a group or family of skill blocks have been determined, the rates for the intermediate skill blocks can be established as a percentage of the difference between the high and low skill blocks. As with any pay structure design, the final scheme must be in line with the strategy of the organization and must be seen as equitable by the employees.

Critiques of Skill-Based Pay

From the discussion above it should be clear that setting up a skill-based pay system requires a large expenditure of time and money. Developing skill blocks and setting up training programs takes up the time of many people, managers and staff within the organization. This is not to say that it is not worth it if the advantages discussed at the beginning of this section are deemed important to the organization. But this is not the only critique of skill-based pay plans. Some of the others are:

• Cost control is difficult as all employees can reach the top skill block over time
• It is hard to know if the labor costs are competitive as market pricing is difficult
• Skill-based pay may not mesh well with the compensation system in other parts of the organization
• A lot of time and money go into training employees, and changes in organizational strategy may make that very training obsolete
• Some skills may be paid for but used infrequently
• Unusable skills may be acquired unless the system is properly administered
• It is not always easy for an employer to accurately anticipate which skills will be needed in a few years' time
• Employees who reach the maximum skill level can be de-motivated when extra payments, distinct from general pay increases, cease

An International Perspective

Other countries use compensation systems that are not based upon the job. Japan has been an extreme example of this. Pay is mostly what we have been discussing here, pay for the person. The system used is called Nenko Joretsu, or seniority-based pay. The main determinants in salary are seniority and the number of years the employee has been working for the company.²⁶ The system has some similarity to the pay system for teachers. The employee starts at a minimum figure that is determined by the labor market. Starting from there, given that the employee’s skills are expected to improve with age or experience, the employee moves upward one rank each year. However, an additional increase can be given that is directly based upon the evaluation of the employee’s proficiency in using their skills.²⁷ This added increase utilizes a performance evaluation that is based partly upon current performance and partly on future promise. In this way, some employees are paid more than others hired at the same time and may be given rotational assignments to round out their experience and prepare them for eventual movement into management.

There are two other parts of the Japanese pay system that are important: the bonus and allowances. Base salary rates in Japan are low, but every six to twelve months all employees receive a substantial bonus that may be as high as 50% of their base salary. This bonus is based on their current salary, and is not contingent on meeting performance goals. In addition, there are a series of allowances paid to employees. These can be categorized into three types. The first are position related. These are often paid for supervision. A second type is related to specific employee behaviors such as attendance or having certain skills. The last type has to do with the employee's circumstances such as number of children or commuting distance.²⁸

It should be noted that not all employees in Japan fall under this system. It is restricted to what we would call the permanent workforce. Temporary employees are not covered. Further, the system is changing to put greater emphasis on performance, and in some cases, the type of job to which the employee is assigned.²⁹

SUMMARY

In the late 1980's pundits, as they looked at the changes in the American economy and its business organizations, saw a fundamental change on the horizon for compensation administration. The heart of this change would be to pay for the person as opposed to the job. As these people saw it, there was a coming preponderance of employees in higher skilled and professional jobs in what is now today's economy. This trend became known as the movement to competency-based pay.

Competency-based pay is a fancy name for making the basis of pay the person, not the job. Competencies are the knowledge, skills and abilities that employees bring to the job. It also includes the attitudes, behaviors and other personal characteristics that employees exhibit on the job, and which influence their effectiveness. In designing a competency-based pay plan, the personal factors that allow the employee to be effective need to be determined, and then measures of these factors must be devised. It is important that these measures be assessed to be sure that they in do fact measure the competency, and are related to effective performance.

Maybe the most difficult part of establishing a competency-based pay plan is relating the competency to payment. There is no measure that tells us how much a competency is worth. Unlike jobs that have salary surveys to assign a labor market value to them, there is no economic measure of competency. Thus, the value of a competency has to be derived from what is known: the labor market value of jobs. This is most often done by pricing the extremes of the competency scale and estimating the intermediate values.

This chapter concludes by examining three types of competency-based pay plans that are commonly used today. Since a major change in the constitution of the American workforce is an increased numbers of professionals, it is natural that competency is used for these kinds of employees. The nature of the professional and the extensive use of knowledge in their jobs, makes professionals a natural for the development of competency-based pay. The technique for doing this is the maturity curve. This curve reflects the natural change in salaries for employees over time on the job. Teachers have salary schedules that have traditionally been established based upon experience and additional education. The pros and cons of this type of plan were discussed. Finally, using the narrow definition, skill-based pay plans for blue collar employees were explored. These plans are based upon the development of skill blocks and the training of employees in these skills. Attaining these skills becomes the basis for pay increases. Any pay plan is expensive to develop but can be worth it if an organization has a need for flexibility in its workforce.

Footnotes