Pay plans that reward employee achievement

HR Magazine, July, 1995 by Gail Grib, Susan O'Donnell

This surge in interest, indicated by three-fourths of the TP survey respondents, has occurred because companies view competency-based pay plans as a way to develop the critical behaviors and abilities employees need to achieve specific business results. By linking compensation directly to individual contributions that make a difference to the organization, a company also can maintain the highest caliber of workers, regardless of their particular specialty or role. Equally important, competency-based pay plans provide a mechanism for cross training employees to ensure that people in different functional areas have the needed behavioral attributes or technical skills to take on new responsibilities or tasks as needed.

THE CASE OF COMPANY X

The experience of a relatively small service organization provides an example of how well competency-based pay can work in practice. This company of about 1,000 mostly professional and technical employees recently modified its business strategy to reflect changes in market demands and expectations. Competition in its core businesses required broadening its focus to previously ignored markets and de-emphasizing short-term, largely one-time sales to build longer-term relationships with key customers.

Management began by identifying the organization's critical capabilities - the broad, collective abilities needed in sufficient quantity and quality to execute the revised strategy. Chief among these were:

* Pursuing new markets aggressively.

* Building and sustaining long-term relationships with customers.

* Developing the required technical knowledge to penetrate new markets.

* Using a team approach to serve customers and help solidify strong relationships.

After analyzing the company's strengths and weaknesses in each of those areas, the broad capabilities were translated into seven basic areas of competency for individual employees - also required by the new business strategy and critical capabilities for the organization. These individual competencies are customer focus, teamwork, leadership, accountability, business acumen, communication, and technical expertise. The following four stages were then defined in terms of expanding levels of employee contribution:

1. The learning stage. Employees are essentially apprentices at their given responsibilities and depend heavily on others for guidance.

2. The applying stage. Employees begin working collegially with others, structuring their own work and solving problems independently.

3. A guiding stage. Employees have the expertise and experience to coach others.

4. A shaping stage. Employees exercise power and influence on behalf of the organization and help steer its strategic direction.

The company's management defined specific behavioral and skill requirements for each competency at each stage. For example, Stage 1 teamwork competencies include developing rapport with other team members and learning team effectiveness skills. Stage 2 competencies include fully understanding team dynamics and structure, while Stage 3 competencies include teaching others to work in teams. After every competency was defined, several employee focus groups were held to test and validate these definitions. A management team then began assessing employees against the definitions and assigning them to an appropriate stage.

Along with these competency requirements, management then developed a relatively flat, team-oriented culture, with employees taking on a range of activities needed to pursue new market opportunities and manage new and developing customers. Because the competency approach seemed to meet the company's needs most directly, management decided to implement a two-phase program, beginning with performance management and training and development, then applying the competency approach to pay in the second year of implementation.

NEW APPROACH TO COMPENSATION

Clearly, a complex, multigrade pay structure was totally inappropriate for this new approach. As the organization began to apply the competencies to its compensation plan, it implemented a broadband pay structure that corresponded with the four stages of employee contribution. In deciding to use broad pay bands, the company was not alone. About half of the respondents to the Towers Perrin survey are already using or considering a broadband pay structure. As with competency-based pay itself, this interest is spurred largely by the flattening of traditional organizational structures and the need for flexibility in managing people in a nonhierarchical environment. Because these bands are typically quite wide, they allow employees to remain in a given stage for a considerable amount of time, yet continue to grow, develop and receive commensurate rewards.

To set initial pay ranges, Company X developed a matrix combining contribution stages with broad organizational roles (for example, professional, manager, executive) for which market-based pay rates were established. For subsequent annual pay increases, the company used a combination of individual competency growth and business results as reflected by specific financial measures. To evaluate competency growth and performance, the company adopted a performance rating system that collects, analyzes and reports feedback from supervisors, peers, subordinates and even external customers, if desired.