Does competency-based performance management really work ?

Does competency-based performance management really work

About 2 years ago there was an interesting question on LinkedIn : “Does competency based approach at performance management really work ? Why ?”.

It did not gather many responses, yet this is a question that arises in many organisations when they decide that their performance management system does not really live up to their expectations. Competencies are en vogue as a softer model in the organisation, and many consider tying them to the performance appraisal system.

Leanne Markus provided an excellent comment on the link between competencies and performance management :

Competency and performance should not be confused. Competency is a requirement for successful performance – it is not performance. Performance management should be based on expected results. There is an argument that competency can be regarded as the “how” and results the “what” of performance. By definition professional people are those who have autonomy and discretion in the way they work – so a prescriptive competency based approach to performance management is not appropriate for this group.

I fully concur with the idea that competencies represent the how of performance, not performance itself. At the end of the year, what matters most ? If an employee did not reach his objectives at the end of the year, it is a negative result for the company – you may want to recognise the effort (the how) but you can’t say that it’s the most important aspect of performance.

I also believe that a competency model can work, but not in all cases – and most probably not as the main component and objective of performance management.

The competencies need first to be clearly identified and mapped to each role in the organisation. Will you apply the same competencies to all positions in your organisation (less valid approach). Will you have competencies tied to job families ? Competencies identified for each job separately ? Or will you give some form of common competencies and a degree of choice between additional competencies for each role ? In other words : are all jobs tied to the same competencies throughout the organisation ? Are all people on the same job tied to the same competencies or not ? Do people in the same function share a minimum of core competencies or not ?

Then, each degree of performance in your system (for example “excellent”, “average”, “poor”) needs to be defined for each competency with clear, unambiguous behavioural definitions.

And finally, as for any performance management system, manager and employee need to agree at the beginning of the period on what level of performance will be expected on each competency (depending on the job some competencies are core and some are not. Depending on the seniority level, the performance expectation will be higher or lower).

As you can see from these 3 simple points, developing a competency-based system requires huge technical expertise in identifying and defining the competencies and associated performance levels, and an excellent understanding of all the roles in your organisation.

I would suggest a performance appraisal system to be based on competencies when you also have a strong need to tie the performance appraisal to the skills development and career management systems in your organisation.

A pure competency-based performance management system does not lend itself easily to a “pay for performance” approach. How do you translate competencies into financial rewards ? So, if the focus of your performance management system will be on compensation, you will need to find a way to translate the assessment of competencies into a clear financial impact for the employee.

Also, the issue with basing performance management only on competencies, is that employees need to understand how their job contributes to the success of the organisation, how it “fits”. This is called line of sight. Compentencies do not allow easily for that, while a more traditional approach with clear objectives gives more of an opportunity to understand this line of sight. And a Management By Objectives approach makes it easier to tie performance and rewards for example.

In short, it depends what the ultimate and primary goal of your performance management system is. If you want to focus performance management on growth and development, then a focus on competencies will help. If you want to implement a pay-for-performance culture, then the primary focus should be on the deliverables assessed through objectives being reached or not. Not two companies can have the same system in place, nor do they get the same results.


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  1. Yes, Competency development program can fully worked and its result are very clear and measurable. It can be easily measurable through the time which is compress to hire new employees, empower leader to become more effective coaches, last but not the least is that it ensures effectiveness of team working together to serve the clients. And that is the way to get earn success in any business.

    • I agree that competencies are a useful tool for managing an organisation. The results are “clear and measurable” depending on what you decide to measure. For example, how do competencies “compress time to hire new employees” ? They certainly contribute, but the link does not appear to be direct but rather indirect to me.
      My point is around using competencies in the performance appraisal system. As I say at the end of my post, if your objective is to measure the growth and development of your employees, then by all means integrate competencies in your performance management system, and make them the core of the PMS. But if you aim to reward and pay-for-performance based on achievement of outcomes (not always on achievement of the process, which is what competencies are often linked to), then competencies should be used as a qualitative support to the evaluation of performance, but not its main driver.

  2. I was directly involved in the late 90’s in the implementation of a competency model from the former merit pay system. The company had many employees that had been there for over five years. They were quite happy and had just gone through a merger into a much larger company. The new company that formed was very interested in changing the ‘entitlement’ culture. Looking back, I do think it was the correct approach. It makes sense to reward top performers who are driving results for your organization.

    But, as we learned recently in banking, doing the things that make the shares grow in value, may not be the right direction. I do think a company needs to be very careful about what it ‘incentivizes’ as there may be downstream impacts. In other words, if your employees are rewarded for the number of loans signed – how do you measure the quality of those loans – on the surface, you see that your returns will be huge IF all those loans are paid back. Maybe you’re projecting huge returns by lending to people who will accept high interest rate loans.

    I didn’t seem like companies measured the quality of those loans in building their incentive programs. Rewards for performance are relatively immediate – but the downstream impacts may not be faced until years later. So while the financial industry was imploding, the bonuses had already been paid out. The employees had reached the company’s objective, but not really in the long-term.

    I have also thought about the impact of the competency model on workers who are not in management positions that can be measured against company-wide objectives. It seems like there is no value placed on the workers who do the more administrative tasks and are doing it really well. From my stand-point, those workers are the go-to people. The ones with lots of experience about how the company ‘really’ works. Is there a way to measure their contribution and ensure that they are valued/compensated for it?

    • Sandrine says

      Thanks for your comment Lauren. It is true that employees at all levels will focus on what is tracked, and so if the KPIs are poorly designed, unfortunately this will have a direct impact on the organisation.

      As far as the more administrative-oriented positions are concerned, I actually believe that competence-based approaches are more suited for them as their individual contribution may be a bit more difficult to track from a traditional performance management standpoint if they don’t work on projects for example (imagine for example secretaries). In banks though, at least in the GCC, I believe that a lot of these positions are actually not eligible for short-term incentive payouts. They however can be valued through career progression, skills development etc, whih is well served through competence approaches.

      Are there any readers from the financial services industry that could shed some light on this point ?

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