Abstract (Article Summary)
Person-based pay is replacing job-based pay. This contention is supported with 10 lessons about person-based pay derived from research on established skill-based pay systems. But companies interested in person-based pay increasingly are turning to competency models as a foundation for determining pay in person-based pay systems. If competencies are taken beyond skills and knowledge to include measurement and pay for an individual's personality traits, there is a major problem with the idea of paying for competencies. Individuals should be paid for what they can do that is related to task performance, not for their potential.
Full Text (2515 words)
Copyright American Management Association Nov/Dec 1996
It may be a bit premature to declare job-based pay systems obsolete. It is not too early, however, to note that these systems are on their way to being replaced by person-based pay plans. I expect this development, which began with the use of skillbased pay for production employees, to take 10 or more years to complete and to be marked by the successful development of organization-wide person-based pay systems. But before this can happen, we need a
great deal of additional research on how to pay the person in a nonmanufacturing job. Indeed, the person-based pay approaches that I have seen some organizations use to pay their managers give me considerable concern.
Let me put this observation into a historical perspective.
Phase One of Person-Based Pay
Phase One of the move from job-based pay to person-based pay began in the late 1960s when "greenfield" (start-up) plants began using skillbased pay for production employees. The key features of the management systems in these plants--as well as their successes--are wellknown and thus need no discussion here.l What is worth discussing, however, is the results of the research on these plants and their pay systems and what it shows about paying the person instead of the job. These lessons can be summarized in ten points:
1. Paying for skills is an effective approach to determining the base pay of individuals.
2. Skill-based pay seems to fit particularly well in those team-based environments that require individuals to learn multiple skills.
3. Skill-based pay systems are relatively complex to develop and require a solid understanding of the organization's management style and the tasks that need to be performed.
4. Skill-based pay systems are relatively "high maintenance." They require continuous updating as an organization's technology changes and as individuals change in their ability to perform tasks.
5. Individuals generally like skill-based pay systems better than job-based pay systems, in part because they gain a feeling of greater control over their pay--and because they often end up making more money.
6. Skill-based pay systems have their greatest impact during the first few years they are in place; during this period, they provide strong motivation for individuals to increase their skills.
7. Skill-based pay systems are often more effective when combined with pay-for-performance systems that reward team, group, or plant performance.
8. It is critical to pay individuals only for those skills that they are willing to perform and that the organization determines it needs them to have.
9. Skill-based pay systems are effective only when an organization can develop reliable and valid measures of a person's ability to perform key tasks.
10. Skill-based pay systems are most successful when those employees who will be affected by the system participate in designing the plan.
In plant after plant that I
studied during the '70s and '80s, a person- or skill-based pay plan was used for production employees but a traditional job evaluation-based pay plan was used for the rest of the organization's employees. I have long argued that this is an undesirable inconsistency because it creates a "seam" in the organization between production employees and others, and because it misses the opportunity to apply a very successful pay approach to nonmanufacturing employees.
Recently, an increasing number of organizations--Polaroid was a pioneer--have attempted to develop person-based pay systems for other than production employees. I expect this second phase in the development of person-based pay to continue until person-based pay is used throughout most large organizations.
Building the Right Foundation
Most person-based pay systems for exempt employees start with the premise that, particularly in knowledge work situations, there are tremendous potential gains to be had from paying the person rather than the job. Gains are said
to include a better strategic focus and the development of superior organizational capabilities and competencies. This should lead, ultimately, to competitive advantages.
It's hard to argue with this point. But it fails to answer the key question: How do you pay the person? That is, what characteristics of the person do you focus on to determine that individual's market value and his or her value to the organization?
These elements--market value and value to the organization--are, of course, the two factors on which any pay system needs to focus. Market value is critical in attracting and retaining individuals; what a person can do, and how an organization can use the person, are critical to determining whether the person's worth to the organization is what the market says his or her value is.
Organizations increasingly are choosing to use competency models to determine individual pay. Not surprisingly, there is general agreement that "more competent" individuals should be paid more highly than "less competent" individuals. The challenge is to convert the idea of competencies into measurable characteristics that allow for the reliable and valid determination of pay rates.
This is precisely where many of the competency models I have seen fall short.
As a recent article by Patricia Zingheim, Gerry Ledford, and Jay Schuster points out,2 the list of competencies developed by McBer has been widely adopted. Many organizations have used this list as the foundation for competency-based pay. As a result, these firms end up with very similar sets of competencies--hardly a way to gain competitive advantage!
My concern with this approach, however, is not just with the fact that it is bland and fails as a strategic differentiator. My concern is more fundamental and begins with the underlying definition of competencey.
Agreeing on the Terms
As Spencer and Spencer3 note, the McBer approach defines a competency as an underlying characteristic of an individual that is causally related to effective and superior performance in a job. They add that "underlying characteristic" means that a competency is a fairly deep and enduring part of an individual's personality.
Spencer and Spencer provide a dictionary of competencies, including definitions of such
characteristics as leadership, adaptability, innovation, team orientation, communication, customer focus, achievement orientation, and flexibility. For each of these characteristics, they provide scales that describe different levels of competency.
They also present an "iceberg model." Interestingly, this model shows competencies as below the water line--and thus hard to see and measure--and knowledge and skills above the surface--and therefore more readily measurable. Spencer and Spencer advise, somewhat briefly, that individuals should be rewarded for the development of competencies by "merit pay for skill."
This raises an obvious point. Given that organizational effectiveness is about task performance, why try to measure and pay for something that is below the surface and, as a result, difficult to measure and relate to actual task performance? It is likely to be more effective, for pay purposes, to focus on what is most easily measurable and directly related to organizational effectiveness (i.e., knowledge and skills that are taskperformance related).
In a recent article, Hofrichter and Douglas4 argue that Hay Group
research has shown that in complex jobs, competencies are more likely to determine success than are skills or knowledge. But they go on to say that competencies represent a set of skills and knowledge, abilities, behavioral characteristics, and other attributes that predict superior performance.
I don't know about you, but I find all this very confusing--perhaps even an exercise in semantic obfuscation.
At times, it sounds as if competencies are actually nothing more than skills and knowledge. If so, there is a direct parallel between paying for competencies and the pay-for-skills systems that are used with production employees. At other times, however, particularly in the writings of Spencer and Spencer, it appears that paying for competencies is much more about trying to measure and pay for an individual's personality traits. If the latter is true, I have a major problem with the idea of paying for competencies.
Why Repeat Our Mistakes?
In the 1960s and 1970s, a popular practice was for organizations to rate individuals on such traits as leadership, cooperation, and reliability, and to use these ratings as a basis for determining merit pay. I was studying performance appraisal and pay systems at this time, and thus I am all too aware of the many measurement problems associated with this approach. Unfortunately, some organizations still use trait-rating scales as part of their performance appraisal process. They ask managers to rate individuals on innovation, dependability, communication skills, and other traits to determine favorable appraisals and "merit" pay increases.
Some organizations have made the trait-rating approach a bit more sophisticated by adding descriptive anchors to different points on the scales (instead of just using high/low or good/bad). But in my mind this does not address the fundamental problem. Rating individuals on traits is an extremely subjective process. Over the years, a great deal of research has shown that it tends to lead to unfair, invalid, and discriminato
ry outcomes. It was for this very reason that, during the 1960s, numerous studies were highly critical of the use of personality tests for selection purposes and of trait-based performance appraisal forms.
Subsequent legislation and numerous court cases have led to the development of specific standards concerning both the validation of tests and what should be contained in a performance appraisal form. These standards particularly emphasize the importance of measuring only the job behaviors that are related to successful task performance.
This brings us back to the research cited at the beginning of this article, and what that research shows about effective skill-based pay plans in plants.
Applying What We Have Learned
Recall that skill-based pay plans work best when they are tied to an individual's ability to perform a particular task and when there are valid measures available of how well an individual can perform a task. Only when these are available can an organization develop effective skill-based pay systems. Competency-based systems that pay for generic personality traits not clearly related to task performance neglect this critical point.
I do not intend to completely dismiss the use of competencies in human resources management. If, indeed, a competency is a basis for successful task performance because it relates to the development of the skills and knowledge that are needed to perform the task, measuring it may be helpful as a way of determining who should be hired and assigned to a particular job. Many tasks involve a learning curve, and competencies may provide important predictors of future performance. However, this use of competencies does not mean that they should be the basis for pay once an individual has started performing a job.
We learned with person-based pay in manufacturing organizations that you should pay individuals for what they can do that is related to task performance, not for their "potential." Once an individual has performed a job, we can identify and measure the person's task-related skills and knowledge. At this point, I believe that the taskrelated skills and knowledge, not underlying competencies, are the most useful basis for setting pay because they most directly determine what work an individual can do. Incidentally, these skills and knowledge are also likely to be the key determinant of market value.
The idea of paying only for the ability to perform a task is considerably easier to apply in production jobs than in managerial and knowledge work situations. In production work, the tasks are simpler to define and the set of tasks often is more limited. This is undoubtedly one of the main reasons it has taken so long for the approach of paying the person to move from the shop floor to the office. Despite the fact that in some situations specifying the skills and knowledge needed to do work can be complex and difficult, I find it neither acceptable nor desirable to rely on generic competencies. Generic competencies not only are hard to measure, they are not necessarily related to successful task performance in a particular work assignment or work role.
Defining a "Person Description"
In most knowledge work, what is needed "to pay the person" is a "person description" rather than a "job description." This is a description of what the person needs to be able to do. It includes specifications of the task or tasks the individual should be able to perform and of what performance or mastery level is required. This description can be used as the basis for determining whether individuals have the necessary work-related skills.
For example, instead of saying the person needs to have "effective communication skills," the person description should specify exactly what kind of communication tasks the individual needs to engage in as well as what level of performance on each of these tasks represents an acceptable level of mastery. It should establish measures that distinguish between successful and unsuccessful task mastery so that individuals can be certified as having the necessary communication skills. These same measures may be use
ful, of course, in measuring an individual's ongoing job performance. But that is not what we are talking about here; in a person description, the focus is on what a person can do, not on what they do day in and day out.
Admittedly, creating person descriptions that specify how to measure task performance mastery is likely to be considerably more work than simply picking competencies from a list or dictionary. But, I believe it is the only effective way to pay the person in knowledge work situations. Again, the alternative--paying for underlying competencies--is likely to produce invalid measurements and discriminatory decisionmaking. Ultimately, it may lead to the downfall of the idea of person-based pay.
It is critical for organizations to get on with the challenging work involved in specifying what they expect people to be able to do and how well they expect them to be able to do it. Only if they are able to do this can they reasonably expect to create high performance organizations that provide a competitive advantage. I believe that the lessons from skill-based pay systems are clear in this respect. They work best when individuals are paid on the basis of their willingness and ability to perform specific tasks that are critical to organizational effectiveness. This golden rule of person-based pay, I believe, is as applicable in offices
as it is on the shop floor.
1. E.E. Lawler, High Involvement Management (San Francisco: Jossey-Bass, 1986). 2. PK. Zingheim, G.E. Ledford, and J.R. Schuster, "Competencies and Competency Models: Does One Size Fit All?", ACA Journal, 1996, Vol. 5, No. 1, pp. 56-65. 3. L.M. Spencer and S.M. Spencer, Competence at Work: Models for Superior Performance (New York: Wiley, 1993). 4. D. Hofrichter and K. Douglas, "Tapping Star Quality with Competency-Based Pay," ACA News, March 9-11, 1996.
Edward E. Lawler III is a professor of management and organization in the business school at the University of Southern California and director of the university's Center for Effective Organizations. He has consulted with more than 100 organizations and four national governments on employee involvement, organizational change, and compensation. The author of more than 200 articles and 25 books, his works have been translated into seven languages. His most recent books include Strategic Pay (Jossey-Bass, 1990) and From the Ground Up: Six Principles for Creating the New Logic Corporation (Jossey-Bass, 1996).