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Advantages and Disadvantages of Competency-based Pay. Pros and Cons
Jaap de Jonge, Editor, Netherlands
Like any other system, there are pros and cons to Competency-based Pay…
Advantages of Competency-based Pay (CBP):
- MOTIVATION: CBP is a great motivator for employees. Instead of basing pay on seniority and job level, employees are invited to achieve as much as they are able and willing to. If employees motivate and develop themselves, they can accomplish amazing things for the firm.
- CULTURE: CBP will help to reinforce a company culture of self-motivation and self-improvement. A culture in which employees are actively seeking to improve their skills, etc., finding new ways to contribute to the company. Competency-based pay helps to tie your company’s culture directly to the success of the company.
- TRANSPARENCY: CBP improves transparency within the company because employees will know what is expected of them to improve at their job and how they will be rewarded through the competency-based pay system.
- RETENTION: Employee retention is likely to go up. CBP helps to bring costly employee turnover down, because employee who feel that their skills and knowledge are important to the company, are more likely to remain in the company.
Disadvantages of Competency-based Pay (CBP):
- SUBJECTIVE: CBP is a subjective pay system. Compared to a traditional pay system things are more open to interpretation and that opens the door for subjectivity. In certain cases, the (progress in) skills, knowledge, etc. of an employee might not be judged correctly or completely missed.
- FAVORITISM: CBP opens the door for favoritism. This could be actual due to unfair treatment, or employees may perceive favoritism when another worker gets rewarded more than them. They might feel that they are being treated unfairly and that their skills are not appreciated by the company.
- ERRORS: CBP requires a complex measurement system. A system determining what skills are important to a company or what skills translate to productivity can be tricky and requires sophistication to avoid errors in the system.
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