Growing Great Companies


Choosing an Effective Compensation Plan

Looking to drive your business to the next level? Then it’s time to start thinking about how an effective compensation plan may be the key to jump-starting your staff, increasing performance, and creating a ”buzz” that will make you an employer of choice.

As the chemical industry grows, corporations must work harder to attract and retain top talent, as well as continue to provide an environment in which its employees and business can thrive. In an increasingly competitive market like the chemical industry, one way of doing this is by taking an “out of the box” approach toward issues such as compensation and incentive plans.

The following outlines the pros and cons of four of the most popular rewards based compensation plans. Three of these plans offer compensation that is based on the skills and performance of an individual employee, and the fourth examines the concept of a profit sharing plan that is based on the company’s overall success.

Skill-Based Pay

As implied by the name, skill-based pay rewards employees for improving their proficiency in essential job skills. Widely used in manufacturing, skill-based pay is now becoming increasingly popular in other work environments. The basis behind this pay structure is that employees are paid based on their skill level—not the position they hold.

Managers start by developing a list of skills needed to excel in a specific position. Each skill is then ranked by importance. As employee gains mastery of these skills, their compensation is increased accordingly.


  • It creates a strong incentive for employees to improve their skills and master their job duties.
  • It leads to higher productivity rates and improves quality.
  • Companies usually find a higher commitment to organizational goals.
  • Employees’ self-management skills are improved.
  • Employees adapt to changes in work environment and technology quicker.


  • After an employee reaches the top of the skills chart, their compensation reaches a plateau, which may result in morale issues.
  • It can sometimes be difficult to develop skill charts in non-manufacturing work environments.
  • If technology and skill sets change frequently, you will need to continually update your skills assessment.
  • A large amount of time may be needed to accurately assess the skills of employees.
  • Some skills are difficult to objectively measure.

Competency-Based Pay

Competency-based pay is similar to skills-based in that it focuses on what the employee brings to the table. However, competency-based pay looks at general attributes of the employee as opposed to specific skills.
In this compensation plan, the employer develops a list of important characteristics (detail-oriented, strong leadership, ability to handle multiple tasks, etc.) and bases compensation on the extent to which the employee displays these skills in their daily job activities.


  • Gives employees a reason to show consistently high performance.
  • Encourages employees that wish to be paid for their contributions, not simply based on the number of years with the company.


  • It can be very difficult to generalize what employee attributes actually result in increased productivity and job competency.
  • Competency can be very difficult to measure and is often seen as subjective.
  • Employees may see this form of compensation as favoritism, which may cause morale problems.

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