Rather than basing promotions and their associated salary increases on acquired knowledge and certifications, says Epps, who is managing partner of EP2S Compensation Solutions, LLC, base them on competencies.
A competency-based job evaluation system is a method of structuring and evaluating broadly defined jobs based on a demonstrated level of job complexity and job accountability, he explains.
Such a system also serves to enhance the company’s ability to manage employee career growth and administer pay.
Epps’s competency-based job evaluation system requires that employees demonstrate a grasp of the next level of job complexity and job accountability before they are promoted.
Using this kind of system, he believes, meets the four goals of management mentioned in yesterday’s Advisor. And it contributes to a perception of HR as a strategic business partner, rather than merely administrative support.
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The Example of Sara and John
Contrast these two examples, says Epps. Sara received a promotion last year, based on the fact that she had been in her job for 8 years. An 8% pay increase accompanied the promotion. This year, Sara is anticipating another promotion, because she will have earned a certification in her field.
According to the pay system the company uses, the promotion will bring with it an additional 8% pay increase.
When combined with the automatic 2% cost-of-living adjustment granted during each of the last 2 years, Sara will soon be earning 20% more than she was earning 2 years ago. Can she do the job two levels up from the one she held for so long? No one really knows.
On the other hand, John’s company bases promotions on performance rather than time, degrees, and certifications. His promotion comes when, recognizing his potential, his manager assigns him some higher-level work over a period of 2 months.
Having performed well at these senior-level tasks, John receives the promotion and the accompanying 8% salary increase. He and his management are confident he will perform well in his new position. (And they’ve saved considerable compensation dollars along the way.)
Using his competency-based pay system company-wide, Epps says, companies can save significant amounts of money, which they can then use to increase pay-for-performance rewards. As an example, he cites a 2,600-employee company with a $135 million payroll.
They expect promotions to increase their payroll by $2.7 million for the year. After analyzing their jobs, Epps found that increases based on competency would cost the company just $700,000 for the year, saving them $2 million.
Savings to Spot Bonuses
The CEO agreed to use $400,000 of the savings to fund spot bonuses and outstanding achievement awards, driving desired behavior and thereby benefiting the company’s bottom line.
While revamping the company’s compensation philosophy is no small task, Epps believes the return on investment to be well worth the effort. That’s the kind of thinking that pleases the CFO and CEO, he says.
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It’s sad but true that compensation bumps are too often based on external things like certifications rather than internal things like competencies. Perhaps companies don’t feel qualified to assess competencies without evidence like certifications.