You want to employ
the best and the brightest people. But to get them (and keep them) you have to
offer the right compensation package. While the solution may be to pay more, often
the real answer lies in how you pay.
The following outlines the pros and cons of three of the most popular rewards
based compensation plans. These plans offer compensation that is based on the
skills and performance of an individual employee-rather than creating a benchmark
salary for certain positions within your organization.
As implied by the name, skill-based pay rewards employees for improving their
proficiency with essential job skills. Widely used in manufacturing, skill-based
pay is now becoming increasingly popular in other work environments. The basis
behind this pay structure is that employees are paid based on their skill level-not
the position they hold.
by developing a list of skills needed to excel in a specific position. Each
skill is then ranked by importance. As employee gains mastery of these skills,
their compensation is increased accordingly.
- It creates
a strong incentive for employees to improve their skills and master their
- It leads to
higher productivity rates and improves quality.
usually find a higher commitment to organizational goals.
self-management skills are improved.
adapt to changes in work environment and technology quicker.
- After an employee
reaches the top of the skills chart, their compensation reaches a plateau,
which may result in morale issues.
- It can sometimes
be difficult to develop skill charts in non-manufacturing work environments.
- If technology
and skill sets change frequently, you will need to continually update your
- A large amount
of time may be needed to accurately assess the skills of employees.
- Some skills
are difficult to objectively measure.
Competency-based pay is similar to skills-based in that it focuses on what the
employee brings to the table. However, competency-based pay looks at general
attributes of the employee as opposed to specific skills.
In this compensation
plan, the employer develops a list of important characteristics (detail-oriented,
strong leadership, ability to handle multiple tasks, etc.) and bases compensation
on the extent to which the employee displays these skills in their daily job
- Gives employees
a reason to show consistently high performance.
employees that wish to be paid for their contributions, not simply based
on the number of years with the company.
- It can be
very difficult to generalize what employee attributes actually result in
increased productivity and job competency.
can be very difficult to measure and is often seen as subjective.
may see this form of compensation as favoritism, which may cause morale
In this model, employees are paid a below-average base salary and can earn additional
bonuses by meeting or exceeding set goals. In many companies, employees are
given 75-90% of market compensation. They are then given individual, departmental
and corporate goals. If these goals are met or exceeded, the employees can earn
above market compensation.
see a direct correlation between their performance and pay.
generally work together more effectively in order to meet departmental goals.
- Provides a
personal connection between the employee and the company's goals and success.
- Allows top
performers to achieve above market compensation.
- When the economy
is down or the company is under performing, it may be impossible for employees
to meet their goals, therefore compensation lags and morale can become a
- A fairly complex
system must be created and maintained in order to measure goals. In some
instances complex computer tracking may be needed.
- May be difficult
to separate team and individual performance and awards.
is best for your company goals?
Designing a compensation plan is not something that can be done by copying someone
else. Every company has its own unique products, people, and processes. What
works in one organization may not work in another. Much can be learned by studying
what has succeeded or failed with other companies, but a sound understanding
of the different variables involved is essential to designing a plan that benefits
your company and your employees.