Overview: This chapter looks at pay based on competencies, the knowledge, skills, and abilities that make employees valuable to an organization.
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 upon a compensation system based upon the job. In the chapters that follow this one, we will examine how factors relating to the person and to his or her performance help determine the pay rate of the individual employee. In this chapter we will examine competency pay as the factor that is the base platform for the establishment of 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.
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 accomplishment 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 be included. These first two competencies are agreed upon by almost everyone:
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:
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, meaning how general or specific the competency is. 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 a majority of work requires at least basic knowledge in operating 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.
A competency model can be designed for any level within the organization, a specific job, a role, a function or the organization as a whole. This spectrum can be seen as extending from very precise to very general. At the organizational level competencies are more likely to be general and advanced, while job related ones tend to be more specific and basic. The competency model determines the level at which competencies need to reach to ensure 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.
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 variables that have degrees. A competency that is simply present or not may be sufficient, or even desirable, for selection but does not provide a range for purposes of payment. People may be honest or not, but rarely would we consider degrees of honesty worth rewarding. Again these degrees 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, i.e. 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 learning more about an organization’s product line enables them to sell more to both new and current 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 to use. These are available through governmental and consulting sources. Some of these are:
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 specific 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:
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 the employees have a specific competency and the degree to which they have it, so that accurate decisions about how much to pay the individual for that competency can be made. 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 person 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:
For all of 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.
It may seem obvious but these measures should in fact measure the competency that the organization wishes to reward. In addition, the competency should make 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:
There are a number of ways to measure validity, from fairly simple and obvious to very complex, technical and theoretical.
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
As has been stated a number of times in this book, there are three things for which the organization can pay its employee - the person, the job and/or performance. This chapter is about pay for the person. It is also true that seldom is a pay system designed based upon only one of the three. However one of the three is usually the basis for the pay structure and the others contribute. In most cases the job as the pay structure is the base and the other two are the 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 wage structure consists of a series of levels, although in some competency based plans it is more like a continuum. When 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. Wage information comes in the form of jobs, not competencies. However, it is important to figure out ways to estimate the market value so as to establish controls that keep the organization from paying too much. An approach would be to use certain benchmarks. The easiest would be developed from wage surveys establishing the highest and lowest within a band. An example of the lowest being 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 has started to deal with this problem by presenting data on some 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. Some structures may use a very broad definition of job that more closely resembles an occupational area. The job or occupational area will have a range connected to it. The width of this range will vary with a number of factors. The fewer the number used, as in broadbanding, the wider the width of each range. This is considered one of the advantages of using competencies and broadbanding together, as it allows for the 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 wage structure has a large component of competency in it. Those years of experience on the job are a major predictor as to where in the range the 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; that of 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 time period. Third, a bonus system is relatively simple to design and administer and people like bonuses.15
This section will examine three competency-based pay systems: professionals, teachers, and skill-based pay.
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 of the professional develops a sense of independence that does not jibe well with traditional management techniques.
True professional jobs are non-supervisory. They include such areas 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 both of 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 the organization's goals pursued change often, so typical descriptions get out of date rapidly.
In order to overcome these problems, organizations have developed generalized job descriptions for engineers and scientists. One type is called functional job descriptions. The tasks described are typical of persons at that level but may not be the exact job of a certain person at a certain time. A second type, generic job descriptions, is similar in that it describes in broad terms the work involved in a series of levels of work. Sometimes a specific task is made as 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 organizational 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 market conditions and because of their lower organizational commitment the organization needs to have a compensation program that is very responsive to market conditions.
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 wages. 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 major compensation decisions require some rethinking and adaptation to accommodate professional employees into the organization's compensation program. Each of these will be considered in turn.
The Wage Level. In most organizations that use 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 wages 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 wage rates 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. On one hand, obtaining information about wage 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, be paid very differently. Also, close examination of professionals' jobs show that they are doing considerable different things, requiring different types of experience. All this makes it difficult to determine comparability for the wage survey. An answer to this is to collect data in terms of the skill and experience level of the professional, 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 lower level of organizational commitment and there can be a high turnover. Professionals are a group who are very mobile and are willing to move frequently to take advantage of changes in the labor market; faster than organizations can adjust to these changes.
The Wage Structure. Evaluation of professional jobs is difficult. Particularly in scientific and artistic arenas it takes a long exposure time to the language of the field before accurate judgments can be made by the organizational compensation decision maker. 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 over weighted, since the 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 wage structure. Professionals, most of them college graduates, enter the organization at an advanced wage rate. 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. The regular wage structure can usually accommodate the professional career pattern. Problems can arise when the quicker escalation of professional pay ranges seem an inequity to other employee groups.
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 on a number of grounds. Professionals may be too stunted in growth to be able to move beyond technical expertise, it is not realistic to separate technical and professional decision making at higher levels, and execution is often poor, because qualifications and performance criteria are not made explicit.
A major problem with using the standard organizational wage 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 present time, in order to meet the market rate.
Variable Pay. Professional employees are not likely to be placed into incentive plans. If anything they may be granted stock options given their decision making responsibilities. It is both movement within grades and promotions that are important ways of rewarding the professional. The criteria used for both of these 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 in 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 in 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 wage levels that would be considered inequitable by long term employees. Further, there would be no room for the professional to grow within the wage structure. So the increases are spread out and the person appears to be receiving automatic increases when in fact the wages are catching up with the contributions already given.
Maturity Curves. Paying for skills and knowledge seems particularly appropriate for rewarding professionals; their job emphasizes the personal contributions of their skill level and experiences. One way of achieving this type of payment system is though the establishment of 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 is an illustration of a maturity curve.
The data for the curve is derived from a type of salary survey that is commonly conducted by professional societies. 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 vertical distribution at year 15. The curve represents a particular 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 reflect the nature of career pay for professionals: starting high and moving rapidly in the early years, 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 13). The professional's position in the pay range should then match his or her position in the performance ratings. Professionals who are at the 67th percentile in performance should then be at the 67th percentile of the range of wages for their years of experience on the maturity curve. Many large organizations that employ large groups of professionals in particular categories, 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 the professional to the best and highest use of their capabilities. When this in fact occurs, the labor costs of the organization are kept to a minimum. 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. Clearly a maturity curve pays for experience and performance. It pays for the job to the degrees that the survey[s] on which maturity curves rely, are for a particular job. These curves vary in range and slope by job categories.
A great many teachers in the U.S. are paid on the basis of a similar pay plan. This plan is called a Step and Lanes approach. The approach pays for the teacher's experience and education. This 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 must 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-the teacher with a doctorate and the maximum number of years experience possible according to 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 years the teacher moves vertically one box for experience and horizontally if he or she has taken courses that year. The entire pay schedule should be changed 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:
Typically a school district will have one pay schedule for all classroom teachers. The schedule may have developed in response to feelings of 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 a number of suggestions and attempts to change this teacher pay system.These are instructive to this discussion of competency 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 is a particular form of 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 units' work, as opposed to the job to which the employee is assigned.
The reasons given for installing a Skill-Based Pay plan are many:
Designing Skill-Based Pay. There are three basic steps to establishing a Skill-Based Pay program.
Determination of Skill Requirements. First the organizational unit needs to examine the work or tasks that are being studied. 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 work flow process into the skills required to perform them. This requires the 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:
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 have 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, in order to avoid violations of Civil Rights Acts. A good way to do all this is to develop a contract with each employee that shows them where they are now, and the steps they need to take in order 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 in a number of 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 his/her daily activities would require a re-certification program needs to be in place. 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 wage rate 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 wage 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 wage 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 particular 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 to the employees.
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:
Other countries use compensation systems that are not based upon the job to near the same extent that the U.S. utilizes them. Japan has been an extreme example of this: pay is for the person. This system is called Nenko Joretsu, or seniority-based pay. The main determinants in establishing salary are seniority and the number of years the employee has been working for the company.26 The system has some similarity to the teachers pay system. The employee starts at a minimum figure that is determined by the labor market. On the basis that the employee's skills improve with age or experience the employee moves upward one rank each year. However, there is also an additional increase that can be directly based upon the evaluation of the employee's proficiency in using these skills.27 This added increase utilizes a performance evaluation that is based partially upon current performance and partly on future promise. In this manner some employees move beyond their peers hired at the same time. They are given rotational assignments to round out their experience and are eventually moved into management positions.
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 work force. Temporary employees are not covered. Further, the system is changing to include performance more strongly, and in some cases the type of job to which the employee is assigned.29
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 was a trend toward paying for the person as opposed to paying for 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 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 given measure that tells us how much a particular competency is worth. Unlike jobs, that have wage surveys to place a labor market value, there is no economic measure of competency. Thus, value of competencies has to be derived from what is already 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 concluded 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 utilized for these kinds of employees. The extensive parameters of the professional worker, and the use of particular knowledge in their jobs, make professionals a natural choice for the development of competency-based pay. The technique for doing this is the maturity curve. This curve reflects the natural change in wages for employees over time on the job. Teachers are a particular type of professional whose salary schedules have traditionally been established based upon experience and increased education. The pros and cons of this type of plan were discussed. Finally, using the narrow definition of 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 a plan's worth is realized when an organization has the freedom of flexibility in its workforce.
3 Heneman, R. & Ledford, G., "Competency Pay for Professionals and Managers in Business: A Review and Implications for Teachers" in Heneman, R. Strategic Reward Management: Design, Implementation and Evaluation, Greenwich, Conn. Information Age Publishing, 2002.
19 Chen, C., Ford, C., Ferris, G., "Do Rewards Benefit the Organization: The Effects of Reward Types and the Perception of Diverse R&D Professionals" IEEE Transactions on Engineering Management, Vol. 46, #1 1999. pp. 47-55.
24 Odden, A., Kelley, C., Heneman, H., & Milanowski, A., Enhancing Teacher Quality Through Knowledge and Skill-Based Pay, Philadelphia: University of Pennsylvania Consortium for policy Research in education, 2001.
28 "Impressions of Compensation Administration in the Pacific Rim" in J. Ferris and K Rowland Eds. International Human Resource Management. Supplement Vol.2. Research in Personnel and Human Resource Management, 1990.
Internet Based Benefits & Compensation Administration
Thomas J. Atchison
David W. Belcher
David J. Thomsen
ERI Economic Research Institute
Copyright © 2000 - 2013
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HF5549.5.C67B45 1987 658.3'2 86-25494 ISBN 0-13-154790-9
Previously published under the title of Wage and Salary Administration.
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