PERFORMANCE RELATED PAY VS.

COMPETENCY BASED PAY

Performance linked pay is any (typically) cash compensation paid in addition to an employees base salary. It is based on the performance of the individual, team, department, division, and/or company.

REASONS FOR LINKING PAY TO PERFORMANCE

Motivating Productivity Improving communications Facilitating team processes Justifying compensation levels Retention

PERFORMANCE CRITERIA

Individual performance Dept. performance Unit performance Organizational performance Mixture of the above

PITFALLS/BARRIERS IN LINKING PAY TO PERFORMANCE

Poorly defined goals Eyes on the prize Employees tend to rely on the additional compensation and perceive the system as unfair when it doesn't pay them Different practices or circumstances within an organization cause perceptions of inequity

PITFALLS/BARRIERS IN LINKING PAY TO PERFORMANCE contd..

Changes in performance standards also cause perceptions of inequity Corporate budgets for bonuses often limit the total payout, Pay-for-performance initiatives most often break down because companies fail to effectively manage change

Impact on the Firm

Improved focus on performance and firm finances Smarter hiring PFP exposes weaknesses in Firm Feedback & performance management needs to be stronger & consistent Need for training increased Weeding out of low performers

Impact on the Firm

Look out for Political Maneuvering! PFP undercuts existing Company Politics/Power Meritocracy vs. old boy/girl network Managers may try to protect their pets; or try to pay everyone same just to avoid complaints

Impact on the Firm

Healthy competition among the employees. Employee satisfaction since they are able to earn according to the quantity and quality of their work. Maintenance of discipline.

Impact on the Firm

A PFP plan will affect company culture & demographics Some low performers may leave; or stay & complain! Some employees may leave for companies with standard, fixed pay
Ensure everyone understands the plan

Competency Based Pay

CBP is an annual assessment of the employees overall performance compared with a set of competencies. It looks at the totality of the employees performance-the whole person in the whole job-not only those job elements that a PRP scheme might select for targeting in a particular year.

Competency Based Pay

In CBP, the competence principle can also be used for job evaluation. The competence principle defines a set of generic competencies that are relevant to all the jobs to be evaluated, and allocates scores to several defined levels of competence for each factor. Each job can then be scored by assessing the levels of competence necessary for the job to be performed to a fully satisfactory standard. The total scores are used to produce a ranked schedule of jobs that can form the basis for a structure of pay scales.

Two examples of sets of competency factors

Know-how, adaptability and functional, organizational and analytical skills. Job knowledge, technical skills, thinking and reasoning skills, problem solving abilities and interpersonal skills.

Most CBP schemes use five or six levels of competence per factor. Employees are assessed against these factors to determine how they rate against a fully satisfactory standard.

Taking the know-how factor as an example, the top, middle and bottom levels of a five level set of competence descriptions may be defined as:

Top level: the employee is widely recognized by colleagues and managers as an all round expert in every aspect of the work and its context. Middle level: the employee needs little or no help with the know how required to handle adequately all the normal elements of the work, though could still benefit from a broader understanding or its theoretical or strategic context. Bottom level: the employee frequently has to be given information or advice about the why, what and how of the work and its context.

PRP and CBP both require periodic assessment of how well people work.

PERFORMANCE RELATED PAY VS. COMPETENCY BASED PAY

PRP PRP essentially involves an annual discussion between manager and employee at which an annual set of targets is agreed. A year later, an assessment is made of the extent to which that years targets have been met, and the outcome of this assessment is an overall performance rating, which then determines pay levels. CBP CBP is still an annual assessment but this of the employees overall performance compared with a set of competencies It looks at the totality of the employees performance-the whole person in the whole job-not only those job elements that a PRP scheme might select for targeting in a particular year

PERFORMANCE RELATED PAY VS. COMPETENCY BASED PAY contd

PRP objectives require annual discussion and agreement. It is restricted to decisions about individual pay awards.

Competencies are nonnegotiable and permanent, changing only when there are fundamental changes in the nature of the work. In CBP, the competence principle can also be used for job evaluation.

Problems associated with PRP that are avoided by CBP

Difficulties in setting measurable performance targets for important qualitative factors Difficulties in converting assessments of varying performance against a large number of targeted factors into the single rating needed for calculating PRP

Problems associated with PRP that are avoided by CBP contd..

Difficulties in assessing the impact on target achievement of unexpected events or performance of other employees Manipulation of targets by employees to ensure that they achieve high levels of performance pay Adverse effects on teamwork of objectives that ignore the need of collaborative working relationships

Ways of linking competence to reward

In a broad banded pay structure, different segments of each band can relate to different levels of overall competence. Competence assessment can be linked with the size of annual pay award.

CBP: Some aspects

Competence assessment can be linked directly to training and development plans. CBP is credible only if employees share the management view of competencies needed in their jobs CBP is more subjective than PRP Its nature is wide ranging, thus it gives a more realistic view of the totality of good performance

Thank You