Rewarding contribution
KEY POINTS
Individual performance-related pay typically rewards people on the basis of an assessment of how well or otherwise they have achieved agreed objectives. Competency-based pay (CBP) generally rewards people for the level of competence they demonstrate in performing their roles. Contribution-related pay is essentially a mix of the two: rewarding people for the results they attain and the skills and competence they use to achieve them. It recognises that both outputs (results) and input (competence) are crucial to performance. According to pay guru Michael Armstrong, contribution pay is "not so narrowly focused on one aspect of performance (outputs or inputs) as are both [I]PRP and competence-related pay. It takes a more rounded view of what constitutes good performance and, therefore, of how it should be rewarded."1
Contribution-linked pay motivates employees by recognising and rewarding their achievements, not by providing a direct incentive. The emphasis is on development so employees acquire the skills and competence on which future corporate and individual success will depend. In essence, it rewards past performance and future success. Basing rewards on contribution rather than solely on predetermined objectives or demonstration of behaviour, provides a "clear line of sight" of what is expected of individuals in terms of both outputs and inputs. It is about what individuals and teams do to add value and achieve the desired outcome. Duncan Brown and Armstrong, who developed the concept of contribution pay, explain that in financial terms contribution is the difference between sales revenue for a product or service and its directly attributable marginal or variable cost - that is, the change in total costs resulting from an increase in output.2 As such, contribution reveals what income a product or service generates towards achieving profit and covering fixed costs.
Contribution pay arrangements are typically aligned with broadbanded or job family pay structures, ensuring that the pay flexibility necessary today is achieved and effectively rewarding the acquisition of skills and competencies.
THE NEXT STEP?
Contribution-related pay is a step up from either IPRP or competency-based schemes. Brown and Armstrong describe contribution pay as a mixed model, meaning it encompasses both IPRP and CBP.2 It attempts to vanquish some of the problems associated with IPRP, such as focusing effort on the few objectives that attract a financial reward, and the potential limitations of competency-based arrangements that do not encompass hard productivity or other targets.
Contribution-related pay seeks to overcome some of the problems of IPRP (see below and figure 4.1 for a comparison between the two approaches). For example, because contribution-related pay focuses on inputs as well as outputs, there may be greater scope to allocate higher rewards to those individuals developing their level of competencies and skills, enabling rewards to reflect overall contribution better. Also, the inclusion of competencies that are related to activities that are generally neglected, such as innovation and creativity, or are discouraged, such as teamwork, under IPRP arrangements, means that important behaviour necessary in today's workplaces is supported. In addition, rewarding the acquisition of knowledge, competencies and skills that can enhance career development and on which future individual and corporate success largely depend might be a better motivator than IPRP that generally assesses only past performance.
Figure 4.1: Paying for performance and paying for contribution compared
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Pay for performance |
Pay for contribution |
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Organising philosophy |
Formulae, systems |
Processes |
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HR approach |
Instrumentalist, people as costs |
Commitment, people as assets |
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Measurement |
Pay for results (the "whats"), achieving individual objectives |
Multi-dimensional, pay for results and how they are achieved |
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Measures |
Financial goals; cost efficiency |
Broad variety of strategic goals; balanced scorecard; added value |
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Focus of measurement |
Individual |
Multi-level: business, team, individual |
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Design |
Uniform merit pay throughout organisation |
Diverse approaches, wide variety of reward methods to meet different needs |
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Time-scales |
Immediate past |
Past performance and contribution to achieving future strategic goals |
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Performance management |
Past review and ratings focus; top-down; quantitative |
Mix of past review and future development; 360-degree feedback; quantitative and qualitative |
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Pay linkage |
Fixed formulae; matrix |
Looser, more flexible linkage; "holistic" approach to pay review; pay "pots" |
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Administration |
Controlled by HR |
Owned/operated by line managers |
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Communication and involvement |
Top-down; written |
Face-to-face; open; high involvement |
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Evaluation of effectiveness |
Act of faith |
Regular monitoring against clearly defined success criteria |
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Changes over time |
All or nothing |
Continuous improvement |
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Source: Employee reward, Michael Armstrong (1999) |
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Contribution-related pay tackles the inherent subjectivity that is often present in the assessment of behavioural competencies by including the evaluation of more quantifiable measures of performance. A decision to increase pay based on an assessment of a combination of objectives, technical competencies and behavioural competencies might be complex, but is more likely to be perceived by employees as fairer than one that is exclusively based on managers' judgment of the demonstrated behaviour. Contribution pay will also provide pay flexibility, so that the relevant importance of either objectives or competencies can be fairly rewarded.
Brown and Armstrong believe contribution-based pay combines the following three principal justifications for IPRP or competency-related pay:
It can motivate people to achieve higher levels of performance, competence or skill and thus improve organisational performance. Its proponents argue strongly that contribution-related pay motivates by recognising and rewarding achievement, not by providing a direct incentive. The fundamental basis of the process - the agreement of expectations in terms of results and competence together with the preparation of joint plans for their achievement - is a powerful motivational factor on its own, irrespective of the financial element.
It can communicate organisational performance and competence requirements, priorities and values. This is particularly the case when individual objectives and competencies are aligned to corporate objectives and core competencies, as they should be.2
In practice?
Some employers looking to revamp their existing IPRP arrangements by also including a measure of how an individual performs his or her tasks but not convinced that a wholly competency-based arrangement is the best approach have, to a greater or lesser extent, sought to combine the two. Examples of firms that have adopted the mix-method approach include:
American Express UK, which employs a 6,300-strong workforce, operates a merit pay system with individual awards based on three factors, one of which is a ratings score given in respect of the employee's achievement of individual goals and demonstration of a leadership competency.3
Individual pay awards at HSBC Bank, formerly Midland Bank, are determined by three separate elements, one of which measures performance against objectives (areas of special focus) and assesses behaviour and contribution to team effort.4
Senior managers at Littlewoods Retail have since November 1998 been rewarded under a new pay system that stresses the importance of individual contribution and gives employees the opportunity to develop new knowledge, skills and competencies.5 The new scheme focuses on rewarding contribution and outputs and how managers meet the changing needs of the company, says director of remuneration Rod Rees.
Xerox (UK) introduced a new competence-related pay and career structure for all 4,500 staff in January 1999.6 The system consists of "accreditation matrices", which define the levels of competence (defined in terms of activities and role objectives), skills and performance. Although the company has for some time used "softer" behavioural competencies, the matrices focus on "harder competencies that we can measure objectively. They have a pretty close link to outputs like profit and revenue targets, hitting margins, time-scales and customer-satisfaction levels", explains compensation and benefits manager James Bray.
MOVE OVER IPRP
As chapter two explained, IPRP flourished during the 1980s and early 1990s as firms, squeezed by growing competition, sought to establish a closer link between remuneration practice and organisational objectives, and public sector organisations adopted a more "business-like" approach which made productivity and performance the key drivers of pay.
Generally, the moves to merit pay replaced pay progression systems based on length of service with advancement based on some measure of assessed performance. An IRS survey of merit pay schemes covering 85 separate employee groups found that in the vast majority of cases (78%), the merit award was based on individual appraisal, with the level of payment linked to an overall performance rating, or a series of performance categories.7 Most appraisal systems tended to use between three and six ratings (more than 90% of the sample), depending on the level of analysis required. The most common number was five (used for almost 40% of employee groups) and more appraisal schemes operated an odd number of ratings (59%) than an even number (41%).
Figure 4.2: Individual performance pay arrangements in 20 organisations
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Organisation |
System summary |
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Abbey National |
All jobs are allocated into "job families". The main job elements are described in "job statements", which typically have three levels ("core", "central" and "comprehensive") tied to individual accountabilities, skills and knowledge. Each job has its own salary range and mid-point (salary anchor) based on market comparisons. The salary anchor is defined as the market rate for "sustained fully competent performance". There are four performance categories and managers allocate the levels of individual pay award from a budget. |
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Alliance & Leicester Bank |
Merit increases are based on the company's pay matrix, with the level of individual payment determined by an employee's position in the salary band (of which there are 11) and their performance rating (ranging from "A", the highest, to "E"). Any increase or proportion of the increase that takes the salary over the maximum of the pay range is paid as an unconsolidated lump sum. |
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American Express UK |
Company operates a merit matrix and managers have considerable discretion over the level of individual award based on guidelines recommending the maximum pay rise for different levels of performance. The manager's decision is based on three factors: how the employee's existing salary compares with an external benchmark, the ratings given in respect to the achievement of individual goals and the demonstration of a leadership competency. |
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Anchor Trust |
Performance management system for office-based staff and managers of housing schemes provides each employee with a rating assessment, arrived at by agreement with their line manager. The rating covers their attainments throughout the year. Assessments range from "unacceptable" to "outstanding" performance on a five-point scale. All ratings are then collated centrally for analysis. A cash award is attached to each rating within each of six salary bands, such that the defined award "pot" is allocated but not overspent. Payments are worth a fixed multiple of the mid-point payment for the band. These cash awards are consolidated into basic pay, except for staff already near the top of their salary band, for whom any portion of the merit payment which exceeds the upper limit of the salary band is paid as a non-consolidated sum. |
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Axa Sun Life |
Departmental managers are responsible for determining the size of individual awards subject to a guideline performance matrix. This sets out the recommended pay increases for employees based on their performance ratings (which range from "unacceptable" to "outstanding") and their position in the grading structure. |
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Barclays Bank |
Salary matrix covering the lowest grades (B1, B2, B3 and B4) in which an individual's rise is linked to their performance assessment rating (exceed, succeed, developing or fail) and current basic salary. Higher grades (B5, B6, B7, team leaders/line managers) receive salary uplifts from a devolved pay pot based on a wide set of factors - "performance, potential, current salary level and similar jobs in the external marketplace". |
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BBC |
Eleven broad salary bands contain no fixed scale points, and pay rates can be set at any level between the minima and maxima with progress based on performance. Only individuals who have been assessed as consistently high performers receive merit increases. An underpinning general rise, negotiated with the trade unions, is applied to all salaries each year. |
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Cabinet Office |
Individual increases are calculated using a cash-based equity share system. People with higher box markings receive more shares, and the value of shares rises according to seniority. For example, in August 2000, a box 3 mark is worth £344 to a C1 band employee compared with £856 for someone in band A. To speed up pay progression, a standard reference point (SRP) applies at the 70% level of the pay range. Staff whose pay, after receipt of their equity share, is below the SRP receive a further award dependent on their box marking. Those with a box 1 mark are paid 30% of the difference between the SRP and their base pay, while those with a box 2 or 3 mark receive 20% of the difference. |
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Department for Education and Employment |
Individual performance-related increases are calculated using a cash-based equity share system, under which the budget available for pay awards within each of the department's grade groups is divided as follows: box A = nine shares; box B = seven shares; box C = six shares; and box D = four shares. The shares pay more for higher grades. In 1999, for example, a box C marking was worth £390 to a grade one employee working outside London compared with £654 to an individual in grade three. |
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Foreign and Commonwealth Office |
Performance-related awards are distributed by means of a merit grid which allocates shares to staff depending on their box marking (one, two or three) and their position in their pay range (bottom, middle or top third). A box one marking is for outstanding performance; a box two marking for performance significantly above requirements; and a box three marking for satisfactory performance. The cash value of each share is influenced by: the total amount of money available for the pay award; the distribution of box markings; the mid-point of the pay range (the value of a single share goes up in successively higher pay ranges in proportion to their mid-points). |
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Halifax Bank |
Reward structure consists of five pay bands, each with a number of target salaries. Each member of staff has a personal target salary related to their job reflecting their personal contribution and job accountabilities. The target salary represents the maximum salary for staff who maintain an effective level of performance. |
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HM Customs and Excise |
Individual performance measured against a performance agreement. A new appraisal system was introduced in June 2000, replacing the previous five-box marking system with three performance categories: top, good and less effective. Each pay range has a top progression point for a fully competent performer, based on skills and experience deemed necessary for the band and type of work. Employees whose performance is rated good or top will - after the range has been uprated each year - receive an annual progression award worth 10% of the difference between the range minima and its top progression point. Top performers, and those staff who obtain certain qualifications, will be eligible for higher progression awards, ensuring faster movement through the range, or consolidated awards above the top progression point. |
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HSBC Bank |
Salary structure is based on five clerical grades with the salary scale for each centred on a 100% grade, called the rate for grade "good" (G) performance maximum. There are two other maximum rates within each junior clerical scale - "high achievement"(H), set at 104.5% of the rate for grade, and "outstanding" (O), pitched at 109%. For the top two clerical grades, the maximum rates for H and O are 106% and 110.5% respectively. Staff on salaries below the maximum for their grade and rating progress up the salary scales according to performance. Employees' performance ratings are tied to an annual appraisal system, which is based around core standards for each grade, with minimum benchmarks linked to skill and competencies. The system uses a five-point scale, ranging from "unacceptable" to "outstanding". |
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MANWEB Energy Supply |
Automatic incremental pay progression replaced by an annual performance appraisal system in April 2000. Advancement through the spinal grading structure is determined as follows: "excellent" performers enjoy an increment plus a bonus worth 100% of that increment; "very effective" performers get an increment plus a bonus worth 50%; "effective" performers receive a standard increment; staff rated as "not fully effective" get an increases worth only 50% of their increment; and "poor " performers receive no rise. |
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National Grid |
Four-grade reward matrix provides for a range of salary increases at each level of performance for employees in each of five salary bands. At the lower end, for "less-than-acceptable" performance, individual rises range from nil to the basic award in 2000, while rewards for an outstanding year's work start at least at 4% plus the basic award, with no upper limit. Staff progress along their salary ranges until they reach their salary reference point, which is determined by market comparison in the process industry. Movement above reference point is different from that below it. For instance, someone rated as "outstanding" would receive the settlement plus an increase between 2% and 4% in 2000. Some salary ranges (A and C) cover more than one job group, so have two salary reference points. |
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Natural History Museum |
Own pay and grading system, introduced in 1996, combines annual cost-of-living rise with performance increases. Performance awards are based on an equity share scheme. Overall appraisal marks of one to three result in the award of a fixed number of shares: 10 "equity shares" for a "box 1", eight shares for "box 2" and seven shares for a "box 3". The value of the share in monetary terms is weighted according to the employee's salary band. There are seven salary bands and, for the 2000/01 pay year, the value of each share allocated ranges from £33, for the lowest salary band, to £132 for an employee positioned within the highest salary band. Therefore, the maximum performance award payable to an employee would be around £1,320. |
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Severn Trent Water |
Previous eight-pay band system was replaced in July 2000 by a personal salary scheme, within an indicative pay range and based on appraised performance. |
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ScottishPower Customer Services |
Pay linked to annual performance appraisal introduced in April 2000, replacing the previous system of automatic incremental pay progression. Under the scheme, employees receive increases based on their individual performance rating as follows: "effective" performers receive a standard increment; "very effective" performers get an increment plus a bonus worth 50% of that increase; "excellent" performers receive an increment plus a bonus worth 100% of that rise; staff rated as "not effective" get an increase worth only 50% of their increment; and employees requiring "significant improvement" receive no uplift. |
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Thames Water |
Employees are allocated to one of four merit ratings, following a performance review. In 2000, the range of salary increases for each performance category was as follows: assessment rating 1 = 4.25%; rating 2 = 3%; rating 3 = 2.2%; rating 4 = nil. Employees who fall above the pay range maximum are dealt with at the discretion of their local manager, but the facility exists to pay unconsolidated non-pensionable lump-sum payments for the excess. |
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Toyota Motor Manufacturing (UK) |
Staff at the firm's Burnaston site in Derbyshire and its engine-making plant at Deeside in North Wales receive across-the-board pay rises, and potentially performance-related awards. "Effective" performers receive a standard increment; "very effective" employees get an increment plus a bonus worth 50% of that increment; "excellent" performers receive an increment plus a bonus worth 100% of that increment; staff rated as "not effective" get an increase worth only 50% of their increment; and employees requiring "significant improvement" receive no increase. |
A third of employee groups (35%) were awarded a set cash or percentage rise for each performance category, with the remaining awards determined by line managers' discretion. However, managerial autonomy over pay decisions varied: some managers were given complete discretion to determine the size of individual merit rises within an overall percentage award, while others had to follow strict guidelines and seek higher-level final approval.
The findings also revealed that a variety of measures were used to evaluate staff. Respondents were asked to specify whether assessment was based around the achievement of preset objectives, the "whole job" performance of the employee, an aggregated result of ratings for different factors, or based on competency or skills acquisition. Specifically, the survey revealed the following:
over three-quarters of schemes (78%) were found to appraise performance against preset objectives, and nearly half (44%) used whole-job assessments;
almost a quarter were subject to an aggregated result of ratings for different factors (23%), or used an assessment of competency/skills acquisition (22%);
just over half of schemes assessed employees using only one of these methods, with the remainder most likely to have their appraisal based on two;
in only 7% of schemes were employees subject to a combination of all four assessment methods before a decision on their merit award was made.
The survey results indicate that, while predetermined objectives retain their prominence as the most popular method against which to assess individual performance, the use of behavioural indicators and the acquisition of new skills and competence is growing. Almost one in three (29%) of survey participants that had recently made changes to their performance appraisal structures had done so to reward competencies and/or skills, and 56% of all respondents said they planned to make this shift.
Problems and issues
Criticism of IPRP has been widespread and its credibility among private and public sector organisations alike has been continually falling. The IRS survey referred to above reported that three organisations (all in the public sector) had recently suspended or abandoned their merit pay arrangements, while a further four public bodies were considering taking the same action. The DSS, for example, suspended its performance pay arrangements in 2000 to tackle the problem of a lack of progression.8
Why has IPRP received such bad publicity? Quite simply it has failed to motivate employees. Some reports suggest that it has had the opposite effect, causing disruption and resentment (see Civil Service, for example, within Trends in reward management).
Although there is evidence to indicate that employees generally agree with the principle of paying for performance, many question the practice, especially whether it provides a real incentive to work beyond the requirements of the job. In many schemes, and in the context of the current low inflationary climate, performance differentials have been narrowed and the link between pay and performance has become increasingly blurred. Brown and Armstrong have pointed to the problems that have resulted from "applying a uniform merit pay, objective-based appraisal system throughout the organisation" leading to the following outcomes:
there is a lack of strategic approach to performance pay, with unclear objectives and an absence of HR-related activities;
inflexible design of such systems, particularly in a low inflation environment, means that differentials between high and low performers have been small; and
shortcomings, in relation to performance management and communication, have led to schemes characterised by low levels of management involvement and staff communication and understanding.2
The difficulties outlined by Brown and Armstrong were confirmed by the findings of the IRS merit pay survey, which identified a range of problems associated with merit schemes relating to issues of motivation, training, communication, appraisal and administration.7 In almost two-thirds of schemes (65%) employees suffered because the pay awards were too small to motivate them to make any significant changes to the way they worked. The role of line managers in determining merit awards was also raised. In 52% of schemes, employees have questioned their line managers' judgment, and in 38% cases, staff perceived that line managers were inadequately trained for the job. A quarter of performance pay schemes were said to take up too much management time, and suffer from poor communication (27%) and employees believed pay awards were limited by a quota system. The survey also revealed that problems were more prevalent in schemes covering staff groups and among those operating in the public sector.
The main criticisms of IPRP are as follows:
there is no evidence that it acts an effective motivator;
people are not homogeneous. While financial incentives may motivate some staff - usually the best performers, anyway - others may be demotivated by a system that never rewards their contribution. In addition, the good performers will do well whatever the system and may improve their performance simply because their objectives have become clearer;
pay increases are usually quite small and, therefore, have little influence on changes in performance. This goes back to expectancy theory and the idea that people will change only if they regard the potential reward as sufficient;
teamwork suffers due to increased competition between employees, because the emphasis is on individual performance;
it encourages people to focus on the activities that will bring reward, to the detriment of innovation and creativity;
subjective assessment means that pay linked to performance is rarely consistent or fair; and
the level of pay rise may not adequately reflect individual contribution or meet the expectations of the employee.
The arguments for and against IPRP are outlined in figure 4.4, below.
Figure 4.4: Pros and cons of individual performance-related pay
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Pros |
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Cons |
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provides a direct incentive |
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reduces pay equity |
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tangible means of recognising achievement |
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contaminates development aspects of performance reviews |
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generates a "performance" culture |
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may be discriminatory |
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improves goal setting |
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demotivates if goals are too hard to achieve |
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improves individual performance, productivity, quality of work etc |
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relies on quality of line managers' assessment |
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focuses employees on improvement |
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undermines cooperation and teamwork |
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rewards best performers |
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focuses attention on activities (often short-term quantifiable goals) that attract financial reward |
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can support organisational change |
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raises expectation of continual payout |
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identifies poor performance |
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does not work well (in terms of motivation) in low inflation climate |
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flexibility may help retain valued staff |
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awards may be seen as arbitrary |
Competencies have been defined as the personal characteristics that make an individual effective in a role. Competencies include generic behavioural attributes, such as whether an individual is a skilful decision maker, a reliable team member or exhibits a capacity for creative and innovative thought, together with specific job-related skills (commonly referred to as technical or functional competencies), including knowledge, customer awareness and quality of output. The annual Competency & Emotional Intelligence benchmarking survey in 1999 found that behavioural competency - that is, the behaviour that determines competent performance - is the most common form.9 Around 87% of the 145 organisations surveyed used behavioural competencies on their own or alongside other forms, while 66% of respondents had developed their own technical and functional competencies, outlining some of the job-related, non-behavioural skills required of employees. Almost 32% of organisations used externally developed technical competencies, such as National Vocational Qualifications.
Competencies may also be developed for the whole organisation. These are often called core competencies and refer to what the organisation has to be good at in order to succeed. Organisations usually identify between five and 10 competencies that reflect its corporate objectives. Essentially competencies describe what organisations and people need to do to perform well.
A competency framework should provide the definitions of performance that everyone in the organisation can understand and accept as relevant to their own circumstances and the needs of the business.
Alan Fowler in an article in People Management suggests that the "holistic nature of CBP" avoids some problems associated with performance-related pay:
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 a single rating needed for calculating IPRP;
difficulties in assessing the impact on target achievement of unexpected events or the performance of other employees;
manipulation of targets by employees to ensure that they achieve high levels of performance pay; and
adverse effects on teamwork of objectives that ignore the need for collaborative working relationships.10
Competencies can be linked to rewards in one of four ways:
grading structure design - jobs are assigned to grades according to the competencies required;
promotions/demotions - employees are moved between job grades according to an assessment of their competencies;
pay rises/cuts - employers move within their pay band according to an assessment of their competencies; and
annual pay rise allocation - an overall pay rise is divided among employees according to their assessed competencies.11
In respect of the different ways that competencies and pay can be linked, a 1999 survey by the IRS journal Competency & Emotional Intelligence found the following:
over three-quarters of companies surveyed (76%) used competencies to design the grading structure (only 8% used competencies exclusively for this purpose, mixing them with elements such as job complexity or size and/or level of responsibility);
80% used competencies to determine promotions or demotions (only 12% used competencies exclusively for this purpose, although in two-thirds of cases, competencies had equal weight to any other factors);
88% used competencies to determine pay rises or cuts (only 28% used competencies exclusively for this purpose, with 60% also basing a salary uplift on the achievement of objectives and 44% making market comparisons); and
just over half (56%) used competencies to determine how an overall pay rise was divided into pay shares (only 8% used competencies exclusively for this purpose, with the achievement of objectives and market comparisons being at least of equal importance).11
In addition, the survey findings revealed that 10% of respondents used all four methods of linking competencies and pay, and 25% used three. Also, just over half of those with competency pay operated a broadbanded salary structure and one third used CBP along with a job-evaluated grading structure.
Armstrong and Angela Baron believe CBP differs from IPRP in the following ways:
CBP is based on an agreed framework of competencies or capabilities, some of which are generic (applicable to a number of roles), some of which are specific to particular tasks;
CBP is not based on the achievement of specific results expressed in the form of targets or projects to be completed, although it can be said that it is concerned with the continuing attainment of agreed standards of performance.
CBP looks forward in the sense that it implies that, when people have reached a certain level of competence, they will be able to go on using it effectively into the future; conversely, IPRP looks backwards - "This is what you have just achieved, this is your reward for achieving it"; and
CBP is (or should be) based on agreed definitions of competence requirements expressed in the language of role-holders and on agreements about the evidence that can be used to assess levels of competence. In contrast, IPRP is often, although not always, based on managerial judgments that the individuals concerned may find difficult to accept.12
Problems and issues
There are potential difficulties with objectively measuring competencies. One commentator has claimed that managers find it difficult to make complex assessments across multiple competencies, so the number needs to be kept to a minimum.13 Others have stated that "assessment of results or, in the case of CBP, competencies is often where otherwise well-designed systems break down".14 Competency & Emotional Intelligence's annual benchmarking survey in 2000/01 reported that 59% of the 105 participating employers experienced difficulties with assessing competencies.15 Assessment needs to be based on evidence of what the individual has accomplished and how he or she has achieved it. More objectivity and less subjectivity is possible if people (both line managers and employees) are clear beforehand about how competence is going to be assessed and what evidence is required to illustrate each level of attainment. It could be that basing assessment on what people are capable of achieving (competence) rather than how they behave (competency) is a better approach because it can be more easily quantified.
Other problems experienced by employers' use of competencies reported by the Competency & Emotional Intelligence's survey were: time/resources/costs (53% of respondents); defining competencies (48%); and complexity/paperwork (42%).
It can be argued that CBP has a shelf life. Although it is very good in the short-term at encouraging employee development, once everyone has improved for two or three years there may be little scope for further improvement. Even if it is accepted that some updating of competencies will still be needed to keep pace with business objectives and the changing market, the question arises: is it necessary for all employees? Another potential problem associated with CBP is that costs can get out of control because people may be paid for competencies they may not use indefinitely. VAG UK, a subsidiary of Volkswagen AG, used three control mechanisms to prevent its CBP system creating upward drift:
individuals were unable move to the next rung, even if they had developed the competencies, unless there was a real requirement for them to work at that level;
budget constraints on salary increases were set for each business area; and
pay increases could only be implemented on two occasions each year. Typically, individuals received one increase annually.16
Equality issues, as with other individualised payments systems, may also present problems. A study of performance-related pay by the Institute for Employment Studies (IES) found that managers of both sexes tended to make gender distinctions between different behaviours, such as intelligence and dynamism (male) and organisation and honesty (female).17 If there is bias in the design, interpretation or assessment of competencies, then organisations run several risks:
treating individuals unfairly;
wasting the talents of groups in the organisation; and
exposing themselves to legal action, particularly equal value claims.18
Some of the problems with CBP have led to changes to how companies link competencies to pay. IT service provider ICL is one organisation that has re-thought its CBP arrangements, having been one of the first UK companies to pay employees for their competencies.19 In its original form, CBP at ICL was found to be time-consuming and it put too much emphasis on reward when the company wanted to focus on using competencies to develop people to aid lateral job moves. There was also the danger of CBP being perceived as elitist (non-graduates and secretaries were excluded from the job families on which CBP was based) and divisive, which contradicted the aim of encouraging people to work with others in different parts of the business. Also, there was an irresistible drift back to the old concept of grading. Now ICL has reinforced the link between competencies and development and the number of job families (professional communities) has been reduced and reformed. In terms of pay decisions, competencies still have some effect on salaries: reward is now tied more closely to market norms. According to Jeremy Webster, ICL's director of employee development: "Job families are a good idea if they're developmentally based. But pay has to be driven by the market; it has to be objective, and CBP is too subjective. With just 300 HR people, it's too time-consuming to define and measure pay for 19,000 staff in this way."
The AA also dismantled its reward system linked to a combination of competencies, performance and labour-market comparisons in favour of an approach that relies on labour market information and performance outputs to determine pay.13 The general feeling at the company was that competencies were too complex to link to pay.
The arguments for and against CBP are outlined in figure 4.5 (below).
Figure 4.5: Pros and cons of competency-based pay
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Pros |
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Cons |
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facilitates employee development |
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too complex to link with pay |
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appropriate in flatter organisations because |
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costs may escalate if employees are paid CBP facilitates lateral career moves for competencies they rarely, if ever, use |
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can boost cooperation and teamwork |
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assessment and documentation of competency levels is difficult, time-consuming and expensive |
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focuses more on the totality of the job, rather than just what is achieved |
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assessment, especially of behavioural competencies, is too subjective |
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provides a framework for salary progression |
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implementation can take time due to competencies validation etc |
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greater employee satisfaction derived from development opportunities |
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requires adequate resources, in terms of training and support |
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provides a link between reward, HR strategies and overall corporate objectives |
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possible bias, in terms of equal value legislation |
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encourages staff to take ownership of their own development |
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has a finite shelf-life, because there is eventually little scope for further improvement |
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appropriate if staff need to develop competence/skills quickly |
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relies on quality of line managers' assessment |
COMPETENCY OR CONTRIBUTION?
Pure CBP - that is where competencies inform the whole reward system, from the design of the grading structure through to the allocation of awards - is rare. The Competency & Emotional Intelligence survey of CBP found that 60% of companies operating some form of competence-related pay system base individual assessment for pay purposes on a mix of competency evaluation with other elements such as achievement of targets or objectives and market comparisons.11 Because these other factors are often of equal or more importance in determining pay levels than competencies, Armstrong has suggested that it is better to refer to such arrangements as competence-related rather than competence-based.1
It is also worth noting that CBP is concerned with behaviours that deliver performance rather than the behaviours themselves, and that demonstration of competence can only truly be assessed by the impact on people's performance, not by observing how they do their work.
Hence, many competency-based arrangements could in reality also be described as contribution-linked systems because although the achievement and demonstration of desired competencies is of prime importance, quantitative measures of performance also determine the level of reward (see figure 4.6 for examples of CBP arrangements in 20 organisations).
Figure 4.6: Competency-based pay arrangements in 20 organisations
|
Organisation |
System summary |
|
Abbey Life |
First introduced in 1994, the structure involves a system of "job ladders" - a series of incremental steps, commonly five to seven per ladder, each of which is between 3% and 7% higher than the last. Each post is assigned to its own "job ladder", with employees' upward progression linked to regular performance reviews (at three-monthly, half-yearly or yearly intervals) in which they are appraised on the achievement of relevant competencies, knowledge, skills and experience and attainment of targets. The top salary for a job ladder ranges between 115% and 140% of starting salary. |
|
Adams |
Competency-based pay-for-skill scheme introduced in 1998, with managers receiving their first increase under the arrangement in February 1999. Managers are assessed against a combination of personal and technical competencies and agreed work objectives. Each competency has three levels, with level one being the lowest level of performance and three the highest. The amount to be paid, as a percentage award on top of salary, for each competency level is determined when all appraisals have been completed. To avoid having a large reward gap between the different levels of competency the company put in place extra stages within each level. This means that someone who is deemed to be working towards a level two, but has yet to attain it, receives more than an individual who scores a straight level one. |
|
Anglia Housing Association Group |
Competency-based pay system in place since 1996/97. Pay decisions occur at twice-yearly appraisals. Employees and their managers rate the employee against each competency listed in the job profile on a scale of one to five. These scores are given values and weighted according to the importance of each competency for the role, resulting in an overall "personal competency score", expressed as a percentage. The final score determines the employee's position on the salary band. Apart from a separate cost-of-living increase, competencies are the sole determinant of individuals' salaries. |
|
Bank of Scotland |
Competency-based pay structure established in January 1999. System consists of a framework of 18 competencies, six of which - including "communication", "customer focus" and "drive for results" - are core and apply to all employees covered by the scheme. Individuals are assessed on six of the remaining 12 competencies, the specific selection depending on which aspects of the role their line managers view as most important. All but one ("valuing people") of the 18 competencies operates at four levels, based on complexity in the demonstration of the competency, and individuals can be rated as possessing these competencies as "expected", or in a way that is "outstanding". Pay progression through the four-band structure ("entry", "competent", " and "advanced") can take place in several ways: meeting annual individual objectives; acquiring competency; or promotion. The expectation is that individuals will move through the four levels of competency in a band in three to five years for bands D to F, and up to six or seven years in bands B and G. |
|
BASF |
Competency-based appraisal and pay system first used in 1996. A framework of 18 competencies is defined at up to five levels, with behavioural indicators at each. Six to eight competencies are selected for each job, and the level of performance at which the competency should be demonstrated is defined. Individuals' performance is assessed against the competency levels specified in the appropriate job profile. Achievement of "improvement objectives" and job contribution also influence the individual's overall rating, which is based on a six-point scale. The rating score plus an person's position in their grade determines the annual pay increase. |
|
Boots Opticians |
Since 1998, pay for all staff in the company's stores has been linked to competencies. Pay increases are determined following the performance review, which looks at the individual's achievement of the competencies (and, in the case of managers, of hard targets such as sales, customer service and stock loss). |
|
Fine Tubes |
Competency-based "role profiles" with associated broad pay ranges introduced for 2001 pay reviews. Each of the nine profiles has an associated set of behavioural competencies drawn from a menu of 28. Nine overlapping pay bands are attached to the profiles, and each band has three entry points: "entry", "competent" and "exceptional". Managers assess individuals against the role profiles to decide whether to recommend progression to the next pay point at the annual performance review (job results and company performance also influence the decision). |
|
GEC Marconi Marine |
Annual movement through the 13 pay points that apply to each grade of technicians and planners is via a competency-based assessment. Skills profiles, based on National Vocational Qualifications, occupational standards, and behavioural and leadership competencies, provide the benchmarks for managers to assess whether a member of the technical or planning staff has the competencies required to be judged "improvable", "satisfactory", "good" or "outstanding". Those assessed in the last two categories, and who have the correct skills, will move up a pay point. Promotion between grades is also driven by competency assessment. |
|
Information Technology Services Agency |
Competency-based pay system introduced in 1998 to help overcome the chronic shortage of information technology specialists by aiding progression. Four "competence points" were added to each of the existing pay bands: the lowest some way above the minimum pay rate, the highest some way below the maximum. In addition to 13 core competencies that had been established earlier to facilitate staff development, further job-specific competencies were developed to aid the link to pay. |
|
UK Passport Agency |
Competency-based role profiles have been used to help determine pay for the agency's staff since October 1998. Competency framework consists of eight competencies, each with a general definition, plus indicators of both "expected" and "outstanding" behaviour at five levels, and a list of negative indicators. Managers assess their staff using a three-point rating scale. Assessment is against specific targets linked to the main tasks of the job, as well as individual behaviour against competencies listed in the relevant job profile. |
|
Reebok UK |
Performance management system incorporates three elements: 1. SMART-based objective/target-setting; 2. competency profile and assessment for the role; and 3. a development plan directly linked to the outcomes of 1 and 2. Competency assessment gives staff one of four ratings: "rarely", "inconsistent", "frequently" or "exceeded". Assessment for objectives and competencies feeds directly into bonus plans and salary progression, respectively. An overall performance category for the individual leads to ratings as follows: unsatisfactory/unacceptable; fair/not fully effective; meets standards/fully effective; or exceeds standards/superior performance. The overall score links into the annual salary review where people failing to meet standards may receive a reduced, or even no, increase and those who achieve superior performance may receive more. |
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ScottishPower Generation Division |
Each of the six grades introduced in 1995, covering all staff from shopfloor employees to senior managers, has five salary points from A to E. Individuals move through the points by demonstrating skills, knowledge and evidence of competence. The demonstration comes through completing Scottish Vocational Qualifications where relevant, and portfolios of evidence otherwise. Staff are assessed by one of their peers, drawn from a group of 50 who have specially trained as assessors. |
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Severn Trent Water |
Pay progression through the company's seven-band salary structure is based on the achievement of increased responsibilities and demonstration of defined skills - normally National Vocational Qualifications - and competencies required for each grade. |
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South Staffordshire Water Group |
Competency framework developed in association with consultants from Mercer/HR-BC and job profiles for the basis of the pay arrangements. Each competency is defined at up to three levels, with indicators for both "expected" and "outstanding" performance within each level. Each band in the grading system corresponds to a broad pay range, and there are two or three pay zones within each band. Within each zone, there are four progression points: "entry", "trained and proficient", "advancing" and "advanced". Formal reviews rate individuals' competencies on a five-point scale ("must improve", "inconsistent", "consistently displays", "exceeds" and "outstanding"). This rating is the sole determinant of an individual's progression along the pay scale: individuals who have achieve the first two ratings, for example, may be on the "entry" pay point within the relevant pay zone, while "constantly displays" equates to the "trained and proficient" pay point. Achievement of targets is rated on the same five-point scale, and determines, in certain group companies, the individuals' annual non-consolidated bonus. Both payments are in addition to any negotiated annual pay rise. |
|
Specsavers Optical Group |
Competency-based appraisal system determines quarterly performance bonuses. Competency framework developed for each staff group, including directors, managers, secretaries, IT specialists and sales staff. Some competencies, such as communication, are common to all groups; others are group-specific. Individuals first assess their own competencies, using a specially designed form, and then meet their manager to agree the assessment. They also discuss their achievement of both business and personal objectives before agreeing an overall rating. A five-point rating scale - "competent", "approaching competent", "developing", "not performing" and "no evidence" - is used. Each rating corresponds to a percentage bonus, up to a maximum of 17% of total salary. An appraisal is carried out twice a year with interim reviews to coincide with quarterly bonuses, giving staff access to bonuses four times a year. |
|
Swallowfield Consumer Products |
Competency-related pay and grading structure consisting of five broad, overlapping bands each with a series of "anchor points", starting at 95% of the "competent rate" and rising in percentage increments to 135%. In 1999, the band for junior clerical and technical staff, for instance, ran from £8,500 to £12,000. A competency framework consists of six "core" competencies needed by everyone, plus 16 role-specific competencies from which a maximum of six is selected for each role. Each competency is described at two or three levels, with "expected" and "superior" performance defined for each level. Each competency also carries a list of negative indicators to help describe poor performance. Pay progression is determined through annual appraisals that evaluate performance against agreed objectives and competencies. |
|
Reigate and Banstead Borough Council |
New performance appraisal and pay scheme launched in 1997, with a combination of self-assessment and managers' assessment used to rate each person "unsatisfactory", "good", "outstanding" or "supremely competent" against their task performance and relevant benchmark profile (there are eight and each defines the level at which competency is required). While staff receive an annual cost-of-living award, "good" performers also get a pay increment within their grade, and "outstanding" performers receive an increment plus a non-consolidated bonus. In addition, two extra increments are available to "supremely competent" performers - these staff who attain the benchmark competency profile and whose task performance is consistently at least "good". Such "supremely competent" performers accelerate by two increments a year, provided they continue to perform at the same level, until they reach this extra pay band. |
|
Royal Bank of Scotland |
Competency-related pay structure introduced for the group's marketing managers in 1998. The corporate and commercial "relationship" managers moved on to a single broad pay band (ranging from £15,000 to £100,000) broken up by six market-related "spine points". Each spine point corresponds to a job level, and the job level is defined by the degree of attainment in each of eight "role competencies". Movement towards or above the spine point for a given job level is determined by annual appraisal based on assessment against role competencies (each of which has nine gradations with a behavioural statement attached to every second gradation) and a set of extra "performance competencies". The assessment translates into an overall rating of 1 to 5, which managers can then translate into a pay rise after taking into account the individual's position in the pay spine and the overall paybill budget for the department. |
|
Xerox (UK) |
CBP scheme introduced in 1999, featuring 20 job families, each corresponding to a "pay curve". The curve typically incorporates "career points", and is associated with a 40% pay band. Generic competencies developed by a high-tech industry consortium form the basis for the whole apparatus. Each career point corresponds to a pay band centred on a "midpoint" aligned to a market median. Each overlapping pay band will typically run 20% either side of the midpoint, with the lower 10% assigned to those who are "learning"; the middle 20% to those who are "proficient"; and the top 10% to "experts/role models". People progress through the structure by way of "accreditation matrices", which define the levels of competence (defined in terms of "activities" and "role objectives"), skills and performance that are required at "learning", "proficient" and "expert/role model" levels in each of the six pay bands in the sales job family, for example. |
|
Yorkshire Water Services |
Individuals receive a supplementary pay increase - called "pay for significant development" - in recognition of significant or rapid development of competencies, as defined by a competency framework. |
Anglia Housing Association Group is one of the few UK organisations to base pay progression entirely on competency scores decided at twice-yearly appraisals.20 CBP has been in use at the group since 1996/97 when it replaced a "fairly unsuccessful" IPRP scheme, which corporate services director Jenny Manser says was unpopular with staff because "some people were being highly paid while not performing very well, while others lower down the scale were getting frustrated". Under the CBP system, individuals and their managers rate the employee against each competency listed in the job profile on a scale of 1 to 5. These scores are given values and weighted according to the importance of each competency for the role, resulting in an overall "personal competency score", expressed as a percentage. The final score determines the employee's position on the salary band. Each salary band includes two "know-how points", with a market-adjusted mid-point, and extends 15% either side. Each band is divided into increments, each worth 3%. There is a slight overlap between bands so the highest end of one band is marginally higher than the bottom end of the next. Apart from separate cost-of-living rises, competencies are the sole determinant of individuals' salaries.
By contrast, there are numerous examples of CBP systems that also qualify as contribution-style schemes:
Adams Childrenswear established a competency-related pay system for its 320 store managers in 1998.21 Salary increases are based on an assessment against a combination of personal and technical competencies and agreed work objectives.
Bank of Scotland is often described as operating a CBP system.4 Annual salary increases for 3,000 "appointed staff" - team leaders, managers and specialists up to the equivalent of area director level - are indeed linked to the competencies, but meeting annual individual objectives forms the greatest part of pay movement for most staff under the new arrangement.
Professional services firm KPMG operates a reward system for individuals based on an assessment of performance that also includes a rating of their use of personal competencies.22 The personal competency framework underpins the company's "global values", and uses seven separate headings, including business skills, personal effectiveness and people development. At the annual appraisal, individuals discuss their performance in relation to the competencies with their manager and come up with an overall score ("outstanding", "very good", "good", "some development needs", "significant development needs" or "not applicable"). The same scale is also used to rate people's overall performance. As well as competencies, this final score also takes into account individuals' achievement of their objectives, and any special features such as personal or client circumstances. The overall performance score helps to determine the individual's pay.
The CBP system operating at the Registers of Scotland (RoS) is another that could be classed as a contribution- style arrangement.23 One of the Government's executive agencies, RoS compiles and maintains 15 public registers, including a computerised map- based Land Register. In 1998, it introduced a new "performance and development system" (PDS) for its 1,150 staff, which eventually replaced the previous appraisal-linked pay arrangement. Under the new system, individuals and their line managers jointly identify three competencies that are critical to the role and the level of each competency, as well as personal objectives, including three critical ones. At the annual review, staff and managers jointly rate the individual's performance against each competency and objective using a five-point scale. The link to pay works in the following way: the overall percentage increase is calculated in terms of the total paybill for each grade. So, for example, a grade with 120 employees earning an average of £15,000 (total paybill £1,800,000) - and getting, say, a 3.5% award - would provide a "pay pot" of £63,000. This pay pot is then divided into "equity shares", and the value of each share depends on how many shares are earned by all employees in the grade.
Cosmetics and toiletries manufacturer Swallowfield Consumer Products operates a CBP system that also resembles the mixed-model approach combining competencies and performance.24 CBP was installed in 1998 and the new structure has five broad, overlapping bands, each with a series of "anchor points", staring at 95% of the "competent rate" and rising in percentage increments to 135%. Progress up the new pay structure is based on a combination of objectives and competencies, which are agreed and reviewed annually.
Zurich Financial Services International, formed in 1997 following the merger of Allied Dunbar International and Eagle Star International Life, uses competencies to help determine rewards for all employees.25 Zurich's competency framework consists of nine headings, three of which apply to all employees. For each of the nine competencies, a description is provided of what it is, why it matters and "what it isn't". Each competency has between two and six different behavioural indicators, graduated on a seven-point scale, where each one is linked to one of the seven specific grading levels within the business. The competency framework and achievement of objectives have a bearing on rewards in the following way: 70% of remuneration is linked to achievement of stated objectives and 30% to competency development.
Problems and issues
Contribution pay arrangements potentially
suffer the same problems as IPRP and CBP, especially in terms of individual
assessment. Line managers must have the ability to evaluate contribution fairly
or the inconsistency and inequity that plagues many IPRP and CBP arrangements
will undermine the process. Also, it can be complex, as managers have to assess
and measure both outputs and inputs. As with all reward strategies, transparency
is crucial to success.
1Employee reward, Michael Armstrong (1999), Chartered Institute of Personnel and Development, ISBN 0 8529 2820 3.
2Paying for contribution: real performance-related pay strategies, Duncan Brown and Michael Armstrong (1999), Kogan Page, ISBN 0 7494 2899 6.
3"American Express: 3% merit budget", Pay and Benefits Bulletin 498, June 2000.
4"Performance management", IRS Management Review 20, January 2001.
5"Recognition and reward at Littlewoods Retail", Pay and Benefits Bulletin 482, October 1999.
6"Hard competences for career structure, pay progression: Xerox (UK)", in "Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
7"The truth about merit pay", Pay and Benefits Bulletin 501, August 2000.
8"Public sector pay in 2000/01", Pay and Benefits Bulletin 510, December 2000.
9Competency, benchmarking 1999/00.
10"Measure to measure", Alan Fowler, People Management, 1 October 1998.
11"Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
12Performance management: the new realities, Michael Armstrong and Angela Baron (1998), Chartered Institute of Personnel and Development, ISBN 0 8529 2727 4.
13"Too good to be true", Paul Sparrow, People Management, 5 December 1996.
14"Paying for competencies: rewarding knowledge, skills and behaviours", James Kochanski and Howard Risher (1999), in Aligning pay and results: compensation strategies that work from the boardroom to the shopfloor, Howard Risher (ed), American Compensation Association, ISBN 0 8144 0458 8.
15Competency & Emotional Intelligence, benchmarking 2000/01.
16"Rewarding competency", Competency, vol 3 (1), Autumn 1995.
17Merit pay, performance appraisal and attitudes to women's work, Stephen Bevan and Marc Thompson, Institute for Employment Studies, report 234 (1992).
18"Competency: discrimination by the back door?", Competency, vol 3 (4), Summer 1996.
19"Rethinking competency-base pay: ICL", Competency, vol 6 (1), Autumn 1998.
20"Anglia Housing Association Group gets commercial with the help of CBP", Competency, vol 5 (4), Summer 1998.
21"Retail rewards: competency-based pay at Adams", Pay and Benefits Bulletin 480, September 1999.
22"Linking competencies to company values: KPMG", Competency, vol 6 (4), Summer 1999.
23"Performance, development and reward at the Registers of Scotland", Competency vol 6 (3), Spring 1999.
24"Competencies help to rationalise pay: Swallowfield Consumer Products", Competency, vol 6 (4), Summer 1999.
25"Tugging a spider's web: Zurich
Financial Services International", Competency & Emotional Intelligence,
vol 8 (2), 2001.
