Traditional pay structures within companies have traditionally been focused on the assigned job. Wages have been based on position and seniority and influenced by factors like the minimum wage and negotiation. Although skills and competence have been reflected indirectly, pay systems have not been designed to encourage the development of individuals. With technological advancements and the focus on productivity and quality, many companies now recognize the need to focus on individual contributions.

Skill-based Pay

Skill-based systems have long been used to define jobs within the trades. Increasing skill levels are the determining factor in describing positions like apprentice, journeyman and master craftsman. Other examples of skill-based pay systems can be found among white-collar jobs where the company is providing a career progression based on increasing technical skill as an alternative to being promoted through various management levels.

Competency Based Pay

The term competency based pay describes a system where rewards are based on the use of competence without consideration for results. The premise is that individual performance depends on having relevant competencies and higher levels of competence will produce superior performance. A competency base pay system focuses on individuals. In practice, competency-based systems are seldom used in a pure form. Competency may be one of the factors determining pay, but performance may also be a factor.


While both skill- and competency-based pay systems are focused on individuals rather than jobs, how the individual is evaluated for pay purposes is different. Skill-based systems are better defined having been used for years as the basis for defining certain jobs. Pay is based on skills verified by some type of assessment or certification. These pay systems have been applied both to blue-collar and white-collar jobs. In contrast, competency-based pay systems have been applied as components of a pay system and so far have been applied to individuals at professional or management levels.

The tendency toward leaner organizations over the past few decades has contributed to the development of pay systems that favor employees with a broad base of skills and competencies. Some of the results related to this trend include reduced staffing levels and expectations of higher performance by individuals.