What competency based pay is
Competency based pay (الأجر على أساس الكفاءة), also called competency based compensation, is an arrangement that sets where an employee’s pay sits within the range of their grade according to their level of proficiency in competencies that have been described and measured, rather than by seniority alone or by job title.
Two parts of that definition carry its weight. The first is the range: competency based pay moves pay inside a grade that already exists, and it says nothing about which grade a job belongs to. The second is the pair of words described and measured. A competency that has not been described cannot be measured, and a level that has not been measured cannot be priced.
Where competency based pay operates
Job evaluation (تقييم الوظائف) measures the job, whoever holds it. An employee’s experience and performance are dealt with in the performance appraisal and in the pay set within the range, not in fixing the level of the job itself. The order in which job evaluation, pay ranges and grade placement follow one another is described under internal pay equity. Competency based pay works at exactly one point in that order: inside the range.
So competency based pay does not raise the level of a job because its holder has become more proficient. Where it does, it slips into the fault that job evaluation is designed to prevent: a level that rises when its holder is promoted and does not fall when they leave, so that the structure breaks down gradually.
The position of pay within the range can be expressed in a single figure, the compa ratio, which is pay divided by the midpoint of the range. How the span of that ratio depends on the width of the range is explained under range spread.
What competency based pay requires of a competency framework
A competency description, as set out under competencies, needs three elements: an observable behaviour rather than a trait, a defined proficiency level that separates basic from advanced performance, and relevance to the role, meaning that the absence of the competency would have a visible effect on the work.
The output of a competency framework is put to use in four places: the structured interview, performance review, skills gap analysis and career path design. Pay is not among them. Linking pay to competencies is a fifth use, and it carries the heaviest burden of proof of the five, because its output is an amount that is paid and that employees compare.
A framework written to describe can support a conversation about development, but it cannot price a difference unless its proficiency levels are written in terms that distinguish one level from the next and can be applied to a particular case.
What makes competency based pay workable
- Proficiency levels that are enumerated and described. Each level has evidence by which it can be recognised.
- An announced rule. It states how far pay moves when each level is reached, and it is announced before the assessment, not after it.
- Assessment calibrated across assessors. Unless the assessors have agreed the rating scale in performance calibration, a recorded proficiency level says as much about the assessor as about the employee.
- The ceiling of the range kept in place. Competency moves pay within the range of the grade, and it does not take pay outside that range.
What undermines competency based pay
- Competencies described as general qualities. Pricing then becomes a judgement of the person rather than of an ability that can be observed.
- Competency and performance paid for in the same year. The organisation then pays twice for one thing.
- Competency proven by a certificate or a course. A competency shows in behaviour that can be observed in the work, not in a certificate, so its evidence is its effect on the work.
- A framework that is not reviewed. Competencies the role no longer needs go on being priced, while what the role now needs carries no price.
How competency based pay differs from variable pay
Variable pay is a part of income that depends on a result and has to be earned again in every cycle. A rise in pay through competency based pay raises the fixed base, and that base does not return to its earlier level in a cycle whose results were weaker.
Confusing the two produces a permanent commitment on a base that was written for a temporary reward. The question to settle before anything is announced is therefore whether the amount is earned each cycle, or whether it is a new position in the range that stays. The split between the fixed and the contingent parts of target pay is a separate measure, described under pay mix.
How competency based pay differs from skills based hiring
Skills based hiring is the selection of a candidate on the basis of what they can actually do, rather than on a qualification, a previous job title or a number of years of experience. Its place is the point of entry. Competency based pay comes after that point: how much is paid to the person who has joined, and how that amount moves as they progress. The two tools share the same logic, but they do not share the same decision.
Competency based pay and the wage provisions of the Labor Law
What is paid under competency based pay is tested against Article 2 of the Saudi Labor Law (نظام العمل) as soon as the first entitlement calculated on the wage falls due. Article 2 of the Labor Law defines the basic wage (الأجر الأساسي) as everything given to the worker in return for their work under a written or unwritten contract, whatever the kind of wage or the method of payment, plus periodic increments. It defines the actual wage (الأجر الفعلي) as the basic wage plus the other due increases that the article describes, and where the Labor Law says wage without a qualifier, Article 2 of the Labor Law gives it the meaning of the actual wage.
So where any element paid under the arrangement belongs, in the basic wage or in the actual wage, is determined by the employment contract, the work organisation regulation (لائحة تنظيم العمل) and the text of Article 2 of the Labor Law, not by the name the organisation gives the element internally. The requirements that apply to that regulation are covered in our guide to the work organisation regulation.
Article 95 of the Labor Law provides that where neither the contract nor the work organisation regulation states the wage, the pay assessed for work of the same kind in the establishment applies. Failing that, it is assessed according to the custom of the trade in the locality, and failing that, the labour court assesses it according to the requirements of justice.
Royal Decree M/44 of 1446H amended Article 2 of the Labor Law by adding other definitions. That decree did not change the definitions of the basic wage and the actual wage in Article 2 of the Labor Law, and it did not amend Article 95 of the Labor Law.
Competency based pay and pay equity
Pay equity rests on every difference in pay having a reason connected to the work that can be stated and checked. A difference built on a documented proficiency level is a reason of that kind, provided the documentation comes before the difference and does not follow it.
This is an explanation of the concept and of the statutory provisions cited, not legal advice.
A standalone Saudi HR system
One employee file holding the contract, the documents and their expiry dates, the attendance record, leave, salary and end-of-service entitlements. End-of-service, overtime and leave-balance calculations are built into the system.
A standalone system on its own subscription. The connection to Qoyod Accounting is now available.