Competency-Based Pay: The Emerging Model for Salary Management

By Howard Risher

There is mounting interest in a new model for salary management, competency-based pay (CBP). The traditional model, where a job's ranking in the hierarchy depends on assigned job duties, is now more than 50 years old. The new model focuses on the individual and his or her capabilities. The old model ignores the job incumbent and concentrates on the value of the job.

Competencies can be used as the foundation for human resource management. Leading edge companies, like Dow Chemical, now use an understanding of the competencies required for job success as the basis for selection, work force planning, employee development as well as salary management. In fact, a profile of the required competencies can replace the traditional job description. Going beyond the HR tools, competencies are a logical basis for managing people.

Significantly the philosophy and beliefs that serve as the foundation for CBP are essentially the same as those which are so well established for faculty salary programs. New employees start at the bottom of the career ladder and progress to high salary levels based on an assessment of individual growth and competence. In a well designed CBP system, there are career stages and only the most competent can expect to progress to the highest levels.

This chapter discusses possible introduction of this new model in a college or university environment. The initial sections look at the historical origins of traditional programs and the recent changes in the way work is organized and managed that affect our pay systems. The balance of the chapter looks at the design and management of competency-based pay systems.

The traditional salary management model has its origins in the era of scientific management — from the end of World War I to perhaps the Vietnam War — when the goal was to manage organizations like the proverbial well-oiled-machines. This was an era of industrialization, labor strife and rapidly growing multi-national corporations. Workers were often treated harshly with little concern for fairness. Industrial engineers (IEs) worked to systematize manufacturing operations, using time-and-motion studies to increase efficiency and optimize management systems. They were responsible for creating job descriptions as a way to document job requirements.

The fields of personnel and industrial psychology were conceived as a response to what was happening to workers in the early factories. The harsh treatment triggered a push for unionization and demands for more humane and equitable treatment. The early wage and salary systems were introduced to address these concerns and to provide for more centralized control of payroll costs. Pay is now one of the basic HR functions but the early systems were conceived by industrial engineers and by industrial psychologists building on the work of the IEs.

The heart of the traditional model is a job evaluation system, usually in the form of a so-called point factor system or in public employers a classification system. Job evaluation is a decision process to determine a job's relative position in the internal hierarchy of jobs. The early Personnel specialists coined the phrase "internal equity" and defined it as the ranking that results when a job evaluation system is installed. Job evaluation is far from scientific and all too subjective but it was not until the 1990s that employers started questioning the value of the time and money invested in evaluating jobs. It is relevant to note that the most widely used job evaluation system, the so-called Hay system, was introduced by a series of articles by Edward N. Hay prior to the Korean War.

Academicians studied job evaluation and salary management in the 1950s but interest waned and the field was moribund until the concepts of comparable worth and pay equity became a rallying cry for women's groups in the late 1970s. Their demands triggered a flurry of interest and creative thinking that ran through the next decade. The result was the introduction of computer-based systems that speeded up the process and reduced the subjectivity that contributed to discrimination. The new systems were, however, still based on the same logic as earlier manual systems. The new systems were also seen as black boxes that were understood by few people.

By 1990 the interest in new job evaluation systems was over taken by the downsizings, the concern with payroll costs, and by pressures to find more efficient, less bureaucratic management practices. Early in that decade, process reengineering became the flavor of the month and that opened the door to questioning of established management practices.

Those years also saw the beginning of what has been referred to as a new work management paradigm. The traditional pay model was developed for static organizations; that is to say, jobs and work systems not subject to frequent changes. The traditional model was also developed for a hierarchical organization. Its logical in that environment to pay managers, for example, based on the number of people they supervise. But that thinking was out of sync with the emerging paradigm.

The Critics are Among Us

About this time, for the first time, a recognized expert in compensation, Dr. Edward Lawler, went public in a book and a couple of articles that were highly critical of the traditional model. Most of his criticisms were not new to people working in compensation; criticizing the pay system is almost a sport in many organizations. The criticism from Lawler was far different, however, since he was perhaps the most influential writer in the country.

The problems, from his perspective, include:

• The traditional model promotes and is mired in bureaucratic management.
• The bureaucratic process is costly to administer.
• It over the job hierarchy and contributes to a hierarchical culture.
• The time emphasizes that managers and employees must spend to pursue the re-evaluation of a job discourages organizational changes.
• The evaluation process focuses on narrowly defined jobs and makes any change in job responsibilities a reason to re-evaluate jobs.
• The job analysis process and the dependence on job incumbents and managers as the primary sources of job information opens the door to dishonesty and "game playing."
• The importance of moving to higher salary grades emphasizes job changing rather than mastering the current job and skill development.
• The need to control the decision process forces the HR program into a "police" role and makes it difficult for them to serve effectively as consultants when managers need advice.

His writings opened the door to similar articles by other critics. In fact, it would be very difficult to find support for the traditional model in the literature along or in presentations at professional meetings. The focus now is on new program concepts.

The emerging program model has more in common with academic practice than is commonly appreciated. One of the important new pay concepts, broad banding, was introduced in 1980 by a surprising employer, a Naval research lab in the San Diego area referred to as China Lake. It was conceived when two labs were scheduled to merge and the commanding officer was told that it would take three years to reclassify all of the jobs. He realized that would be a serious impediment to realizing the benefits of the merger. The answer was based on new legislation that allowed federal agencies to test new ideas in pay as a demonstration or pilot project.

They decided to simplify the federal General Schedule salary system by collapsing a number of grades into a few broad bands. As a research lab, China Lake has a high percentage of Ph.D.s. The concept of banding was intended to simulate a faculty pay system, with pay progression controlled by supervisors and based on merit. The new system is now beginning its third decade and the concept has become a widely espoused alternative.

The initial success of the bands at China Lake is attributed to the commanding officer. When the new program was set for roll-out, he called his direct reports into a room and said, "If you have any questions or concern, now is the time to voice them. When you leave this room, you will be expected to support the new program." There was little resistance after the meeting.

Banding is important because it reduces the focus on small differences in job value. In a traditional program, small differences in job value can affect the assigned grade and any differences can quickly become a point of contention. In a banded program, the jobs assigned to a band are assumed to more-or-less equal in value. When the differences are not important, employees spend less time worrying about their position in the job hierarchy. That changes the culture and way people view the salary program.

Competency-based pay fits this new environment. It provides an ongoing incentive to employees to enhance their ability to perform their jobs. Employees are rewarded with salary increases when they add new knowledge or skills or when they demonstrate higher level competence on existing capabilities. The annual or periodic assessment of competence is also the basis for promotions from one rung in the career ladder to another. Career progression rides on individual competence.

Competence in this context refers to an employee's knowledge, skills, abilities, and learned behaviors. There are different definitions, depending on the source, but the focus is on employee capabilities. The new model is based on a simple premise: the more competent he or she is, the more we [the employer] can expect, and the more we can afford to pay.

That premise is deeply rooted in our national values. The word "meritocracy" was coined years ago. Our most competent people in every field are often singled out for special rewards. There is a widely shared expectation that the most competent people should earn more. That is true in the academic world as well as other professions.

It is also consistent with the shift to a knowledge economy. It reinforces the importance of individual growth and development, and the need to invest in knowledge development.

In a learning organization, and colleges and universities certainly qualify, the focus on competence and the importance of individual growth is tied explicitly to the organization's mission and values. It is also consistent with the growing interest in life long learning. It's to everyone's benefit to continue to improve their capabilities.

It is also a concept that fits every job family, from housekeepers to physicians. There are few job families that have not been studied. When job incumbents are asked to identify the competencies needed to perform at high levels, they normally have no problem doing so. And they appreciate why this is an important question.

With blue collar occupations, the concept, skill-based pay, has been in use for over 20 years. Those pay programs are based on the same philosophy but with a more limited focus on manual skill acquisition. It may make sense for several reason to refer to all programs as competency-based pay - that eliminates a meaningless distinction between blue and white collar jobs - and broaden the capabilities that warrant higher pay to include cognitive skills like, for example, problem solving for all jobs.

It is important to appreciate that competency-based pay is not pay for performance. The traditional merit pay increase is arguably dependent on performance over the prior year. Too often, particularly in the public sector, merit policies have been used as a "gotcha" or excuse to deny pay increases. In contrast, with a competency-based pay program, salary increases are not linked explicitly to performance. The corporate sector is moving rapidly to add cash incentives, as the reward for results, and to complement the competency focus.

This is more than a semantic difference. Merit pay is past oriented; competency-based pay is future oriented. The implicit message to employees is also very different. "It is to your advantage and ours [the employer’s] to develop your capabilities. We want you to be as good as you can be. We believe our most competent employees should be paid accordingly."

There is also an assumption that the more competent employees will perform at high levels. There are job families where it is difficult to plan and measure performance. Human resources is perhaps one of them. But it is possible to identify the key competencies and at least in the HR field the competencies have been accepted as an important to professional success.

The list of everything an employee needs to know or do can go on and on. Some lists include 40 or more competencies. But to keep it practical, the list for a specific job is best limited to perhaps 10 or so of the most important competencies. That list is referred to as a competency profile.

Longer lists of competencies may serve a purpose if they are developed for use by HR specialists. However, managers and employees need something that is brief and focused on key competencies. The credibility of the profile is a key to acceptance of the appoach..

To develop a job's competency profile, the most common approach is to bring together a small group of the best performing employees - subject matter experts (SMEs). They are asked to identify and define the competencies that enable them to be the best performers. To increase the validity of the profile, it may be advantageous to ask two or more groups to focus on the same job(s).

Research done long ago by the Air Force Human Resources Laboratory confirmed the obvious - job incumbents know the job best. Outsiders can facilitate the discussions but it is important to involve job incumbents in the decision making. Competencies developed in other organizations, even if they were the product of "experts," will never be as well accepted. When a profile is used for salary management, employee acceptance is a fundamental consideration. Normally a group of high performers can define competencies in three or four meetings.

Salary management, of course, involves the progression of an individual’s pay as he or she progresses up a career ladder. That means the task is to define the competencies for the stages in the career ladder. They need to start by defining a profile for the novice or trainee level - "This is what we expect trainees to be able to do to qualify for promotion." - and then additional profiles for each stage or rung in the ladder. At each level new competencies are added or redefined at a higher level.

Most career ladders have three or four levels. For professional occupations, the third level is normally the "full performance" level and the fourth is reserved for senior experts.

In a broad band salary program, the bands are typically defined for career stages. That is to say, the band for entry-level positions is defined by the market pay levels for people at that stage. With occupations where it lakes sense to adopt a dual career ladder, the fourth band or senior expert stage should be equivalent to the pay for managers.

The more specific the competencies, the better (although that needs to be balanced with keeping the profile short). Every job family is in some respects unique and the competencies need to reflect the nuances that affect performance. For example, a group of parole officers concluded that they need the flexibility to switch back and forth between two distinct roles - social worker and law enforcement officer - to respond effectively to an offender's behavior. The flexibility to switch roles was seen as an important learned behavior to be an outstanding parole officer. For that occupation, "flexibility" needs to be defined differently than it would, as an example, for human resource specialists who also need to be flexible.

It is important to emphasize that the focus is on the competencies that contribute to commendable performance. A less useful alternative is a focus on minimal or threshold competencies needed to reach an acceptable level of performance. That may help employees avoid job security problems but it does not help them realize their career aspirations. Too much emphasis has been given to meeting minimal performance expectations.

There is also an important distinction between the knowledge and skills acquired in classrooms or training sessions, that can be measured with tests, and the softer, behavioral competencies that are intuitive or acquired through experience. Many employees, including novices in an occupation may have the "book knowledge" but the more important competencies are those that involve effective application of that knowledge. The best performers are often the individuals who stand out on the softer competencies like "team building" or "leading change".

The competencies effectively serve to define expectations. As an employee moves up his or her career ladder, the expectations go up. Employees can meet those expectations in the way they perform their jobs, they can exceed those expectations, or they can fall below the expected performance level. When the competencies are combined with the planed performance results or goals, it establishes the basis for the annual performance review.

With a short of list of six to ten competencies, the appraisal can be completed in a reasonable time. The page illustrated here shows the competency, "Planning," defined first in general terms and then for three levels of performance for jobs in administrative occupations.

At the beginning of the year, the supervisor simply checks the box that informs the individual of the level of expected competence. The evaluations can also be planned as a multi-rater system.

The employee then not only knows what is expected but what may be necessary to reach the next level in his/her career ladder. He can then use this to plan any development actions.

The completion of the form only takes a couple of minutes.

The employer in this case requires the supervisor to explain or justify high and low ratings. There is also a committee of managers and employees to review situations where an employee disputes a rating.

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This approach works best in organizations, including higher education, where the management philosophy emphasizes individual growth and empowerment.

The choice and definition of competencies sends a clear message to employees - "This is what we believe is important. Your competence in these areas will determine your success." The competencies and the appraisal ratings have to matter to employees - there must be consequences - and where that is true, they will pay attention to the message.

The choice of competencies can also be used as a strategic consideration to shift an organization's culture. For example, an organization that wants to place more emphasis on team work or on individual accountability can add a new competency that reflects that strategy. When the rating on the competency affects the way people are rewarded, it will trigger a change in the way they think about their jobs and their priorities.

The message helps the employee plan his or her career. In fact, an understanding of his or her strengths and weaknesses is information needed for career planning.

At the executive level, where results tend to be the focus, the best practice thinking is to combine results with competencies - the "what" and the "how" - as the basis for year-end appraisals. The how is basically management style and studies have shown that the way managers perform their jobs is important to long-term organizational health. For example, using the competency, Decisiveness, as a factor in evaluating executives for salary increases or promotions will reinforce the importance of that ability.

The interest in competencies has permeated every sector. There is a virtual stampede to adopt competency requirements in selection, training and career planning. It is also compatible with the emphasis on credentials and career success in research. Arguably faculty salary programs and promotions are based on assessed competence. It's become important in government, health care and even in public schools (where the first CBP systems have been introduced to replace the traditional teacher salary systems).

The use of competencies is also consistent with the discipline of job classification. Recently issued federal classification standards now incorporate expected competencies. Classification systems have been based on career ladders and on defining the differences between steps or stages. Competency profiles are consistent with the logic of classification.

There is evidence that the "X" and now the "Y" generations are not going to be willing to wait for tenure-based promotions and salary increases. They want to control their own careers and to know their successes will be recognized and rewarded. Switching to competency-based HR systems is a better foundation for this generation.

A hurdle is that competency-based pay works best in a broad band environment. A common strategy is to define the bands to fit career stages. A few universities have moved to a banded structure but the practice is not well established. Within a banded structure, the old "pay the job, not the person" logic is undermined by the decreased importance of job evaluation and attention to job details. The change opens the door to more emphasis on the individual and the value of his or her capabilities.

In a traditional structure, with grades and ranges, the profile for a career stage may overlap several grades. At least one major corporation, Dow Chemical, relies on competencies within a more-or-less traditional salary structure but managers have considerable discretion to manage individual pay.

Higher education never fully accepted the discipline of tightly defined and managed jobs, which is a central assumption in a traditional pay model. The well-oiled machine analogy simply doesn't fit. To some degree, the adoption of rigorous job evaluation systems, with traditional salary structures, to maintain close, centralized control is inconsistent with the way jobs and people are managed.

The transition to a new salary model is difficult for any employer. The worst strategy is to plan the new program as a "behind-closed-doors" project. Collegiality and process considerations are always critical in higher education. That is consistent with the strategy that's proven to be successful in corporations that have moved to a competency platform.

The similarities between faculty salary programs and competency-based pay systems are striking. Faculty pay increase decisions and promotions are based on criteria that are accepted within the academic community. That is a key in any salary program. The acceptance of individual development and skill acquisition as the criteria for the rewarding staff employees should be a natural in higher education.

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