Patricia K. Zingheim, Ph.D., Gerald L. Ledford Jr., Ph.D., and Jay R. Schuster, Ph.D. Article published in ACA Journal, Spring 1996, Volume 5 No. 1, pages 56-65
Although competencies are not new, paying for competencies is rapidly gathering attention. In many firms, the rate of change is so great that the individual job has ceased to be useful as the "atom" around which organizations and human resources practices are structured. Job-based pay has outlived its usefulness in such companies. Firms are searching for a new logic to pay and a new basis for salary structures that are better aligned with organizational strategies, structures, cultures and other HR practices. At this point, competency-based pay is the most promising base pay alternative to job-based pay. The naive observer might expect to find a tremendous variety in the competencies that companies are rewarding. The competency-based pay approach is new, and there is no obvious set of "best practices" at this point. Moreover, managers are adopting competency-based pay to meet organizational needs better, and such needs vary from one organization to the next. The seed for this article is an observation that the authors find paradoxical. While it seems there should be great variety in the competencies that are the basis for competency-based pay, the authors' experience suggests that competency-based pay plans look much alike from one firm to the next. In this article, the authors ask why this appears to be happening and whether it is desirable. BUSINESS STRATEGY AND REWARD SYSTEM DESIGN
A strong reason for changing pay processes and systems is to encourage development of behaviors and skills that reflect business strategy and organization design (Lawler 1995). Values, processes and pay structures may vary from organization to organization and influence how pay gets the message across. However, strategic alignment is the goal. Pay systems designed to communicate strong messages of strategy and direction are necessary to generate organizational performance. On the other hand, pay systems that emphasize values such as bureaucracy, entitlement and internal equity may not be practical for organizations that must compete for business and talent (Schuster and Zingheim 1992). Thus, competencies may be considered as talent-based interpretations of business needs. This view defines competencies as demonstrable characteristics of the person, including knowledge, skills and behaviors, that enable performance (Ledford 1995b). Based on this definition, competencies add value by © 1996 Patricia K. Zingheim, Gerald L. Ledford Jr. and Jay R. Schuster - 1 - communicating what people must know to help the business succeed. This is imperative during competitive times. Challenged organizations commonly need to get attention for new solutions because existing approaches, while comfortable, no longer add value. If competencies and a competency model are to support new directions, the source of competencies may include the following: • Strategy, structure and culture. Organizations need to respond to continuous changes in the business environment and the challenge of seeking competitive advantage. To help implement new strategic direction, people should expect to be made aware of how they can help. • Best practice of market leaders. Human resources practices may be emulated from organizations that have enjoyed success realigning people processes and systems to support business change. Successful organizations tend to have experience in interpreting and communicating new human resources directions.
Emphasis on strategy may eliminate internal sources of competencies from consideration if they sustain the no-longer-functional status quo rather than communicate necessary new directions. THE STRATEGIC DEFINITION OF COMPETENCIES
Competency- and performance-based pay are necessary partners in...