While it may sound reasonable to pay employees the same pay for the same job, the fact is that some team members contribute more to profit margins. Competency-based pay structures may take a little more administrative effort to create and implement, but they benefit your business in numerous ways.


Improved Performance

Many executives believe that employees should be paid for their competency, but what is competency based pay? It means that every employee is paid based on their performance, regardless of position or length of time on the job. Greater rewards for superior performance is an incentive for everybody on the team to excel. This depends in large part on the employee’s role. A machine operator might be judged by their output, a salesperson by the orders they pull in, and a supervisor by their leadership skills.

While experience is often a factor in pay grades, it doesn’t guarantee that a worker with five years on the job will consistently produce more than one with two years. By implementing performance-based pay, you must also establish metrics for each position that provide reliable data in setting standards and identifying areas where the desired skill or knowledge is lacking. Performance metrics and reporting enable you to monitor overall production and discover means to make continuous improvements in performance management.

Effective Training

Setting standards for competent performance will require detailed job descriptions and understanding of each role. You must know the skills and expertise required to do well, and teach these skills to employees. Comparison to standards will help to identify when an individual needs additional training, or what abilities they must master to go onto greater responsibilities.

It will also help to identify exceptional employees who can impart some of their talents through mentorship or leadership opportunities. With the right incentive, you can look forward to a staff that’s constantly improving at their jobs, and constantly adding more value.

Determining Pay

While you may also pay differentials based on skill-sets such as education to draw top talent, or for length of service in appreciation for loyalty, it should be recognized that employees who are worth more to the company deserve to be paid more. A salesman bringing in millions in revenue is worth more than an executive who squanders it.

There are a number of factors determining competency which may include skill, knowledge, error rate, efficiency, or workplace behaviors. Peer reviews can help to determine how a team member is perceived by coworkers. Management must have a clear picture of how an employee’s skills should be developing and share their rating of competency with the employee at each review. You might want to establish a series of grades and assign a percentage of pay increase for each grade.

Recruiting New Employees

A competency-based pay structure will appeal to performance-focused job seekers. When paychecks and advancement opportunities are dependent on a competency framework, job requirements are more transparent to both management and team members. Backed with real-time metrics on performance, employees will perceive a system that’s fair and consistent. This must be explained to them at the time of hiring.

Those who aren’t willing to learn or to keep a high standard will likely move on. It helps to also establish and share an outline of what your expectations are for each period of service. Workers who can’t achieve the desired competency at a particular position and period of experience can be let go with documentation to avoid accusations of wrongful termination. This helps to keep the overall level of morale high. Those who continue to do well and get rewarded for it will feel higher levels of engagement and employee retention that save on hiring costs.


In a business with a competency-based pay structure, you have the means to develop and maintain a superior workforce. it creates a more equitable and open company culture where the rewards go to those who are committed to your company success.