In search of demanded competencies: designing superior compensation systems

Abstract

Employees' competencies are decisive components in a firm's competitiveness. Accordingly, the purpose of this paper is to assess whether differences in strategy influence employees' competencies and how the design of compensation systems may best take into account the competencies required by a firm. An analysis was conducted on a sample of manufacturing firms using structural equation models. The findings support the existence of generic competencies, such as results and customer orientation, which are found in both prospector and defender strategic contexts, while other competencies – such as innovation, technical expertise and adaptability – are specific to the prospector strategy. In relation to compensation, the results show that skill-based pay is more strongly associated with competencies such as innovation, technical expertise and adaptability, whereas performance-based compensation systems encourage result-based competency. Therefore, the design of a compensation system should be guided by the competencies required as part of a firm's strategy.

Keywords:

• firm strategy
• performance-based pay
• personal competencies
• skill-based pay
• structural equations models

Acknowledgement

Financial support for this article was provided by the Ministerio de Economia y Competitividad, Plan Nacional de I+D+I (ECO2010-14939).