A competency-based pay system can be useful for employers who worry about fairness in the salaries they pay employees within their organizations. Because if there isn’t a legitimate reason for differences in pay between employees working the same job, that opens the door to accusations from employees that illegal pay discrimination has taken place. While there can be justified and defensible reasons for paying employees different amounts, illegal pay discrimination has been happening for decades and is unfortunately still occurring today.
So how can employers avoid negative perceptions and potentially expensive litigation stemming from accusations of discrimination? There are a number of different strategies that organizations can employ, including wage transparency practices, cost of living considerations and other tactics. However, one model that has gained some popularity for structuring consistent and fair pay differentials is the competency-based pay system.
Related link: The Pros and Cons of Using Fixed Pay for Employees
What Is Competency-Based Pay?
According to Bamboo HR, competency-based pay is “a pay structure that compensates employees based on their skill set, knowledge, and experience rather than their job title or position.” These kinds of plans “encourage employees to reach the pay rate that they want by taking charge of improving their skills and work.”
The basic premise behind competency-based pay is to compensate employees for their value through skills, education, credentials and abilities, rather than the job title they hold. In theory, this line of thinking seems logical. However, some important parameters must be considered to ensure that such pay models don’t go off the rails.
For example, Disney CEO Bob Iger currently makes $27 million annually, according to Fortune. Let’s suppose that a custodial worker cleaning restrooms for Disney’s theme parks decides to follow Bob Iger’s life path. That employee enrolls at the same schools Bob went to, reads the same books Bob read, and embraces the same learning and development endeavors that Bob pursued.
A good-faith question emerges here: Should the custodial worker expect, at any point along this undertaking, that his pay at Disney should be bumped to $27 million? Probably not.
Why? Clearly, Bob Iger’s skills, knowledge and abilities are unique. He has been places, seen things and done stuff that has enabled him to provide distinctive value to the company. All of the various qualities that make up Iger likely contribute to the Disney Board of Directors’ decisions around his compensation.
The reality is that in a million years, there will never be another Bob Iger. But that’s not because Iger is special in some way. It’s because we are all unique people with unique experiences that can never be perfectly replicated. There will never be another you either, for what it’s worth.
So try as the custodial worker might, he will never be able to perfectly duplicate Bob Iger. Consequently, no matter how close that worker gets to copying Bob, some differences in their salaries (that are probably enormous) are still justified. Now, whether such an extreme difference is entirely defensible is another issue entirely.
Related link: The Advantage of Using Variable-Pay Models in 2022
It Can Be Difficult to Determine What Standards to Use with Competency-Based Pay
The difficulty with competency-based pay systems lies in determining which qualities are relevant, how to measure them and to what extent they should affect the overall pay scale for a given employee. In other words, how can we even begin to compare knowledge, skills and abilities for the purposes of determining pay differentials?
Due to the complexities inherent in such a task, many employers limit competency-based pay structures to objective, verifiable metrics like the possession of a college degree. This standard seems like a fair place to start, since the conferral of a degree by an accredited institution is a clear standard to use when it comes to professional qualifications.
But further parameters are still needed. For example, consider that Bob Iger graduated in the 1970s with a bachelor’s of science in television and radio from Ithaca College. Now suppose our custodial worker enrolls at Ithaca and earns that exact same degree as Bob.
Should this be enough for the $27 million raise? Again, no. Because there is much, much more to Bob than his degree. But under a competency-based pay system, a degree should still be worth something.
Most Organizations Use a Tiered Pay System
To address this issue of pay fairness, employers commonly allow for tiers of pay within a given role or position in an organization. In the higher education world, for instance, many colleges and universities reward employees who earn college degrees with pay increases.
For example, here is a chart from Valencia College in Central Florida that outlines pay brackets for different types of employees and different types of jobs. It is based on both college degree and “step,” which is largely a product of tenure with the institution.
As you can see from the Valencia College tables, employees can look forward to pay increases if they engage in academic professional development. However, at no point should they expect to earn what the President of Valencia College makes. So the competency-based pay system places reasonable parameters around upward pay mobility within the organization.
Related link: Pay Equity and Private-Sector Accountability
The Government Uses the General Schedule Payscale Table to Determine Civilians’ Pay Level
Incidentally, a similar practice is also used within the federal government, which employs millions of people, according to USA Facts. The government uses a system called the General Schedule (GS) Payscale Table to determine the pay level of each civilian employee.
Employees are ranked by pay grade. Those pay grades (GS-1, GS-2, GS-3, etc.) are based on a number of factors, including seniority, performance and (partly) college education level.
Within any given job in the federal government, employees are eligible to achieve the potential pay levels within a range of pay grades. So for example, some jobs within finance, management, information technology and other areas are eligible for the GS-10 pay range, according to the Internal Revenue Service.
According to FederalPay.org, that range is listed in the GS Tables as between $53,990 and $70,190, depending on employee qualifications and characteristics. So there is – to some degree – a fair, consistent and objective system for determining pay levels within the government’s work environment.
Competency-Based Pay Systems Should Be Carefully Designed to Be Effective
Employers can stand to benefit from the implementation of competency-based pay strategies through transparency, consistency, fairness and the obviation of accusations about discrimination. However, for these kinds of systems to be practical and effective, they must be carefully designed with detailed prescriptions so as to give employees clear and reasonable expectations about pay mobility in each position within an organization.