Competency-Based Pay

What Is Competency-Based Pay?

Most employees are paid by the hour or are salaried, but there are other ways that you can be paid. One of the most interesting ways is competency-based pay.

Competency-based pay is an entirely different kind of pay structure, based on the employee’s skill set, the knowledge that they have, and – crucially – their experience.

By encouraging the employee to take control of their skills and carving their own work path, it can bring out the best in employees.

Advantages and Disadvantages of Competency-Based Pay

There are several pros and cons that come along with competency-based pay; let’s take a look at some of them.


  • It helps staff retention. Keeping staff turnover low is very important as it can hurt your bottom line. With competency-based pay, employees feel that their skills and knowledge are appreciated and that the company values them.
  • It empowers employees’ self-motivation. Employees are rewarded for the skills and knowledge they have rather than their job title and how long they have been in a particular profession. This can also lead to team-wide motivation as employees find ways to help each other improve their skill set.
  • It leads to improved transparency in the business. One of the most significant issues that many employees have is that they often can’t see what they need to do to improve. With competency-based pay, they have it within their control.


  • It can lead to questions of favoritism. If some team members think they have been overlooked in pay compared to others, it can start to cause tension. You must remain impartial and be aware that this can become an issue.
  • Subjectivity issues – with traditional pay plans, it’s easy to structure the pay grades. Competency-based pay can leave itself open to subjectivity, so proceed with caution.

Why Use Competency-Based Pay?

If you want a self-motivated team that can improve their skill set autonomously, then competency-based pay could be right for your business.


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