Compare and contrast marketbased pay and competencybased pay

Compare and contrast market-based pay and competency-based pay.

Solution

Pay can be based upon the job, the person or the performance of the person, and most systems are combinations of all three. The questions this system raises 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.

Traditional pay structures within companies have traditionally been focused on the assigned job. Wages have been based on position and seniority and influenced by factors like the minimum wage and negotiation. Although skills and competence have been reflected indirectly, pay systems were not designed to encourage the development of individuals. With technological advancements and the focus on productivity and quality, the corporate world has now recognized the need to focus on individual contributions.

Skill based systems have long been used to define jobs within the trades. Increasing skill levels are the determining factor in describing positions like apprentice, journeyman and master craftsman. Other examples of skill-based pay systems can be found among white-collar jobs where the company is providing a career progression based on increasing technical skill as an alternative to being promoted through various management levels.

Competency pay is a term given to the idea of paying for the person rather than the job. Competencies are the human input to the organization\'s operation. 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. 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. The term competency based pay describes a system where rewards are based on the use of competence without consideration for results. The premise is that individual performance depends on having relevant competencies and higher levels of competence will produce superior performance. A competency based pay system focuses on individuals. Competency may be one of the factors determining pay, but performance is also a factor. While both skill and competency based pay systems are focused on individuals rather than jobs, how the individual is evaluated for pay purposes is different. Skill based systems are better defined having been used for years as the basis for defining certain jobs. Pay is based on skills verified by some type of assessment or certification. These pay systems have been applied both to blue-collar and white-collar jobs. In contrast, competency-based pay systems have been applied as components of a pay system and so far have been applied to individuals at professional or management levels.

The tendency toward leaner organizations over the past few decades has contributed to the development of pay systems that favor employees with a broad base of skills and competencies. Some of the results related to this trend include reduced staffing levels and expectations of higher performance by individuals. The dot-com era has 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. It implies paying for the person would replace paying for the job in the future.