Chapter 5: Person-Focused Pay:

Defining Person-Focused Pay: Competency-Based, Pay-For-Knowledge, and Skill-Based

Pay:

- Person-focused pay plans generally reward employees for acquiring job-related competencies,
knowledge, or skills rather than for demonstrating successful job performance.

- Competency-based pay often refers to two basic types of person-focused pay programs: pay-
for-knowledge and skill-based pay. These competency-based pay programs sometimes
incorporate a combination of both types or a combination with merit pay programs. Pay-for-
knowledge plans reward managerial, service, or professional workers for successfully learning
specific curricula. Skill-based pay, a term used most for employees who do physical work,
increases these workers' pay as they master new skills. Both these two types of person-focused
pay reward employees for the range, depth, and types of skills or knowledge they are capable of
applying productively to their jobs.

- The term person-focused pay refers to both pay-for-knowledge and skill-based pay programs in
this chapter.

- HR professionals can design person-focused pay plans to reward employees for acquiring new
horizontal skills, vertical skills, or a greater depth of knowledge or skills. Horizontal skills refer
to similar skills or knowledge. This could include an employee who is trained to perform several
kinds of record-keeping tasks. Vertical skills are those skills traditionally considered supervisory
or administrative (coordinating, training, leading others). Depth of skills refers to the level of
specialization or expertise an employee brings to a particular job.

What is "Competency"?

- Many HR professionals typically refer to competencies as uniquely combined characteristics of

the person, including personality, attitudes, knowledge, skills, and behaviors that enable an
employee to fulfill job requirements. Others simply use the terms knowledge and skills as
synonyms for competencies.
Reasons to Adopt Person-Focused Pay Programs:

- Advocates (supporters) of person-focused pay programs offer two key reasons that firms
seeking competitive advantage should adopt this form of compensation: technological
innovation, increased global competition.

- Technological Innovation: in an age of technological innovation in which robots,

telecommunications, artificial intelligence, software, and lasers perform routine tasks, some
skills have become obsolete. Jobs therefore require new and different worker skills. As
technology leads to the automation of more tasks, employers combine jobs and put more
responsibilities on workers. Employers now rely on working teams' technical and interpersonal
skills to drive efficiency and improve quality.

- Increased Global Competition: increased global competition has forced companies to become
more productive. To sustain competitive advantage, companies must provide their employees
with leading-edge skills and encourage employees to apply their skills proficiently. To establish
and maintain competitive advantage, companies should carefully consider person-focused pay
systems.

Varieties of Person-Focused Pay Programs:

- A step-step model actually resembles a flight of stairs, much like the arrangement illustrated in
figure 1 (Page 101). The steps represent jobs from a particular job family that differ in terms of
complexity. In terms of the stairs, higher steps represent jobs that require more skills than lower
steps. Compensation specialists develop separate stair-step models for individual job families
(accountants, etc). Everytime an employee completes the competencies needed in a set of stairs,
he/she moves up to the next level.

- The skills blocks (Page 103) model also applies to jobs from within the same job family just as
in the stair-step model. The difference is that in skill blocks programs, skills do not necessarily
build on each other. An employee may jump two or more steps if he/she learns the skills required
for a high level, earning the pay that corresponds with each step. The difference is that the stair-
step model addresses the development of knowledge or skills depth.
- A job-point accrual model encourages employees to develop skills and learn to perform jobs
from different job families. A company would benefit if its employees were proficient in a small
subset of jobs. Companies usually limit the number of jobs employees are allowed to learn in
order to avoid having someone who can do "everything". Job-point accrual methods create
organizational flexibility and promote company goals by assigning a relatively greater number of
points to skills that address key company concerns. The higher the points the higher the
compensation.

- Although the job-point accrual model and the cross departmental model are similar, there are
differences. The job-point accrual model encourages employees to learn skills and acquire
knowledge that bear directly on companies' attainment of competitive advantage. Cross-
departmental models promote staffing flexibility by training employees in one department with
critical skills they would need to perform effectively in other departments. This method can help
production environments manage staffing shortages.

Contrasting Person-Focused Pay with Job-Based Pay:

- Companies institute job-based pay plans or person-focused pay plans based on very different
fundamental principles and goals. Job-based pay compensates employees for jobs they currently
perform.
Advantages of Person-Focused Pay Programs:

- Although no large-scale studies have clearly demonstrated the benefits of person-focused pay
programs, case studies suggest that employees and companies enjoy advantages from person-
focused pay programs that provide employees and employers with distinct advantages over
traditional pay systems.

- Advantages to employees: Person-focused pay systems provide employees with both job
enrichment and job security. Job enrichment refers to a job design approach that creates more
intrinsically motivating and interesting work environments. Companies can enrich jobs by
combining narrowly designed tasks so that an employee is responsible for producing an entire
product or service. Employees are more motivated to perform jobs that contain a high degree of
core characteristics such as skill variety (degree of different tasks in a job), task identity (degree
of being able to finish a job from start to finish), autonomy (amount of freedom in how to do the
job), and feedback (degree of clear feedback on performance). Evidence suggests that person-
focused pay plans lead to increased commitment, motivation, and satisfaction. It is also said that
they create better job security.

- Advantages to employers: Employers like person-focused pay systems because when properly
designed and implemented, these programs can lead to enhanced job performance, reduced
staffing, and greater flexibility. Person-focused pay can influence both the quantity and quality
of an employee's work. Companies that use person-focused pay systems can also rely on
multiskilled employees to cover for absenteeism. Person-focused pay systems also provide
companies with greater flexibility in meeting staffing demands at any particular time.

Disadvantages of Person-Focused Pay Programs:

- Person-focused pay programs have the following four limitations. First, employers feel that the
main drawback of person-focused pay systems is that hourly labor costs, training costs, and
overhead costs can all increase. Secondly, person-focused pay systems may not connect well
with existing incentive pay systems. When both person focused and incentive pay systems are in
operation, employees may not want to learn new skills when the pay increase for learning a skill
is less than the incentive reward. Third, effective person-focused pay programs depend on well-
designed costly training programs. Fourth, companies struggle with determining the monetary
value of skill and knowledge sets. Compensation surveys report the monetary value of entire jobs
rather than individual skill sets.