Competency-Based Pay | Meaning and Definition

What is competency-based pay or skill-based pay?

Competency-based pay, also known as skill-based pay, is a compensation system that pays workers based on their skills and abilities. Under this system, workers are classified into levels based on their skills and experience. They then receive pay based on the level they are in. 

This system is designed to motivate workers to improve their skills and abilities. It also helps businesses save money by paying workers only for the skills they need. 

Skill-based pay can be used in any business. It is commonly used in the manufacturing and service industries. In these industries, worker productivity is often easy to measure. 

There are a few different approaches to competency-based pay. One common approach is to assess employees regularly and then provide bonuses or salary increases based on their performance. Another approach is to create specific job roles with associated compensation levels based on the required skill set. 

Advantages of skill-based pay

There are 3 primary advantages to skill-based pay: 

  • It allows employees to be rewarded for their skills and expertise. This can help to motivate employees and encourage them to learn and develop new skills continually.
  • It helps employers to identify and reward high performers. Employees who have mastered a particular skill can be given a higher salary than those who have not.
  • It encourages employees to take on more responsibility and work harder. When employees know that they will be rewarded for taking on additional responsibilities, they are likely to be more motivated.

Disadvantages of skill-based pay

Here are some of the drawbacks of skill-based pay:

  • Greater Pay Subjectivity- As you are not making use of traditional system things become open for interpretation which brings subjectivity
  • Vulnerability to favoritism- Employers may start to see favoritism when one worker get rewarded while other didn’t get. The feeling of unfair treatment arises.
  •  Inaccurate measurement of company needs- It’s a little bit tricky to determine which skills are important for organization and what are not.
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