RESPONSE

Competencies:
The Right Foundation
The Right Foundation
For Effective Human
Resources Management
David A. Hofrichter
Managing Director
Hay Group Mid-West Operations
Lyle M. Spencer, Jr.
Hay/McBer Director of Research and
Technology Worldwide

~~~~~~~~ rofessor Edward Lawler’s article, view of competencies contained in Prof. Lawler’s
~~ ~ ~ &dquo;Competencies: A Poor Foundation article. Although the article ostensibly questions
~~ ~ ~ for the New Pay,&dquo; contains an inter- competencies as an adequate basis for
~~ ~ ~ esting summary of the lessons person-based pay, it ultimately criticizes the
~~ ~ ~ learned in connection with pay-for- effectiveness of competencies as a foundation for
~~ ~ ~ skills in manufacturing, and we find human resources management. This conclusion
~M ~ ~~ many points of agreement. There is based on four important misconceptions:
~~ tt~M are, however, two important areas
1. Competencies are generic and undifferen-
~N that require further comment.
tiated. Although Patricia Zingheim, et al., may
~N The first area that deserves com-
have observed that &dquo;a list of competencies devel-
~t ment is his assertion that job-based
oped by Hay/McBer has been widely adopted,
~N t~~t pay approaches are well on their way and many organizations have used these as the
~~~~9~~~
ttttNNHB~~
to being replaced by person-based foundation for competency-based pay,&dquo; it is not
pay In actual practice, we find orga- correct for any reader to conclude that any ele-
nizations are paying much greater attention
ment of the Hay Group, including Hay/McBer,
today to variable pay tied to company, unit, or recommends or endorses use of generic compe-
team performance. tencies, either across different types of work
Just as important, pay is not a matter of one
within an organization, or across organizations.
right answer, as suggested by pay-for-person We would go beyond Prof. Lawler to say that
replacing pay-for-job. Competitive advantage
comes from strategic differentiation, which itself
&dquo;competency-based systems that pay for generic
comes from the ways that people conduct their
personality traits not clearly related to task per-
formance&dquo; are at best trivial, and at worst very
work. If people in different organizations need to
act differently, then the ways that they are select-
damaging.
ed, trained, organized, managed, and paid need 2. Because competencies include &dquo;below-the-
to be different. It isn’t a matter of finding the sin- waterline&dquo; characteristics, they are not job-per-
gle best system, but of finding a system that sup- formance related. Starting with the pioneering
ports a specific organization’s approach to work, work of Hay/McBer founder Dr. David
strategy, and culture.lI McClelland, our focus in more that 650 consult-
The second area that requires comment is the (Continued on page 22)

21
 OPINION
~
(Continued from page 20)
In plant after plant that I
studied during the ’70s and ’80s, a person- or
skill-based pay plan was used for production
employees but a traditional job evaluation-based
pay plan was used for the rest of the organiza-
tion’s employees. I have long argued that this is an
undesirable inconsistency because it creates a
&dquo;seam&dquo; in the organization between production
employees and others, and because it misses the
opportunity to apply a very successful pay
approach to nonmanufacturing employees.
Recently, an increasing number of organiza-
tions-Polaroid was a pioneer-have attempted
to develop person-based pay systems for other
than production employees. I expect this second
phase in the development of person-based pay to
continue until person-based pay is used through-
out most large organizations.
Building the Right Foundation
Most person-based pay systems for exempt
employees start with the premise that, particular-
ly in knowledge work situations, there are
tremendous potential gains to be had from pay-
ing the person rather than the job. Gains are said
t ) t ~ ~ ) ~ ~ xt r
(Continued from page 21)
ing studies has been to
identify those characteristics that best differenti-
ate between adequate (or typical performance)
and outstanding performance in specific organi-
zations and roles.
Our position, like Prof. Lawler’s, is that what is
important is performance and the results of
work. We go beyond Prof. Lawler to focus on
characteristics other than skills and knowledge-
which may require effort to get reliable measure-
ments for-because they do make a difference,
particularly in &dquo;knowledge work&dquo; and particularly
if you care about superior performance.
For the record, our definition of competencies
includes knowledge and skills as well as other
behaviors that superior performers demonstrate
that reflect &dquo;below-the-waterline&dquo; characteristics,
including motivation, values, and self-image.
The skills and knowledge competencies
emphasized by Prof. Lawler are often &dquo;threshold
competencies&dquo; required to achieve minimum
standards of adequate performance; they are
rarely the characteristics that distinguish typical
from truly outstanding performers. Knowledge
and skills measure what people can do, not what
they will do.
22
to include a better strategic focus and the devel-
opment of superior organizational capabilities
and competencies. This should lead, ultimately,
to competitive advantages.
It’s hard to argue with this point. But it fails to
answer the key question: How do you pay the
person? That is, what characteristics of the person
do you focus on to determine that individual’s
market value and his or her value to the organiza-
tion ?
These elements-market value and value to
the organization-are, of course, the two factors
on which any pay system needs to focus. Market
value is critical in attracting and retaining indi-
viduals ; what a person can do, and how an orga-
nization can use the person, are critical to deter-
mining whether the person’s worth to the organi-
zation is what the market says his or her value is.
Organizations increasingly are choosing to use
competency models to determine individual pay.
Not surprisingly, there is general agreement that
&dquo;more
competent&dquo; individuals should be paid
more highly than &dquo;less competent&dquo; individuals.
The challenge is to convert the idea of competen-
cies into measurable characteristics that allow for
the reliable and valid determination of pay rates.
The below-the-waterline characteristics dis-
paraged in Prof. Lawler’s article are actually the
things that can be used to provide the &dquo;push&dquo;
that cause people to want to display the behav-
iors they are capable of. Individuals with high
achievement motivation, for example, derive
personal satisfaction from exceeding established
performance standards. This is reflected in work
behavior in the competency referred to as
&dquo;results orientation,&dquo; which may include
developing personal measures of progress
against goals even when these aren’t set by man-
agement, taking initiative in one’s own work
methods to improve performance, and setting
and striving to reach challenging goals. Among
MBAs with highly developed (and equal) busi-
ness knowledge and skills, results orientation
is one of the critical competencies that distin-
guishes between typical and high performance
in many job roles.
The below-the-waterline characteristics also
reflect how people will apply the knowledge and
skills at their disposal-that is, whether they will
use them in ways that are appropriate and effec-
tive in their organizational culture. For example,
a Hay/McBer client study showed that business
knowledge and analytical skills were threshold
This is precisely where many of the competency
models I have seen fall short.
As a recent article by Patricia Zingheim, Gerry
Ledford, and Jay Schuster points out,2 the list of
competencies developed by McBer has been
widely adopted. Many organizations have used
this list as the foundation for competency-based
pay. As a result, these firms end up with very sim-
ilar sets of competencies-hardly a way to gain
competitive advantage!
My concern with this approach, however, is
not just with the fact that it is bland and fails as a
strategic differentiator. My concern is more fun-
damental and begins with the underlying defini-
tion of competency.
Agreeing on the Terms
As Spencer and Spencer3 note, the McBer
approach defines a competency as an underlying
characteristic of an individual that is causally
related to effective and superior performance in a
job. They add that &dquo;underlying characteristic&dquo;
means that a competency is a fairly deep and
enduring part of an individual’s personality.
Spencer and Spencer provide a dictionary of
competencies, including definitions of such
requirements for successful strategic planners.
However, those planners who were identified as
really outstanding performers also more often
showed organizational competencies, like the
desire to have a specific impact on others
(&dquo;impact and influence&dquo;) and a superior ability to
understand power relationships (&dquo;organizational
awareness&dquo;). The outstanding planners under-
stood that their job was not only to write excel-
lently conceived strategic plans, but also to
involve key decisionmakers in the planning
process in ways that assured that the plans were
feasible and actively supported.
In the vast majority of the engagements we
have carried out, competencies reflecting the
below-the-waterline characteristics have distin-
guished the outstanding from the typical per-
formers.
3. Below-the-waterline characteristics
more difficult to measure than
knowledge and
skills. Broad competencies reflecting below-the-
waterline characteristics are more difficult to
measure than skills and knowledge alone, but
there are a variety of valid and reliable techniques
for measuring such job-related behaviors,
including multirater feedback, which is widely
characteristics as leader-
innova-
~!Jtn[!J~t
~*~~~MMM
ship, adaptability,
tion, team orientation, communication, cus-
tomer focus, achievement orientation, and flexi-
bility. For each of these characteristics, they pro-
vide scales that describe different levels of com-
petency.
They also present an &dquo;iceberg model.&dquo;
Interestingly, this model shows competencies as
below the water line-and thus hard to see and
measure-and knowledge and skills above the
surface-and therefore more readily measurable.
Spencer and Spencer advise, somewhat briefly,
that individuals should be rewarded for the
development of competencies by &dquo;merit pay for
skill.&dquo;
This raises an obvious point. Given that orga-
nizational effectiveness is about task perfor-
mance, why try to measure and pay for some-
thing that is below the surface and, as a result,
difficult to measure and relate to actual task per-
formance ? It is likely to be more effective, for pay
purposes, to focus on what is most easily measur-
able and directly related to organizational effec-
tiveness (i.e., knowledge and skills that are task-
performance related).
&horba;-~&horba;~&horba;
discussed
important
more
today. Even
from a
business perspective is the fact that it is worth-
while to measure competencies. A recent multi-
year study of the effectiveness of competency-
based human resource programs in a global con-
sumer products company demonstrated that the
company’s executive model predicted superior
operating results by executives 80% of the time.
The use of the same model for selection led to a
50% reduction in turnover among new senior
executives.
4. Generic trait-rating approaches lead to
subjective, invalid, and discriminatory out-
comes. We agree with Prof. Lawler in this regard,
but in criticizing generic trait-rating approaches,
he is criticizing bad behavioral science method-
ology, not competencies.
are Overall, we agree with Prof. Lawler in his insis-
tence on approaches that measure and relate to
actual task performance. We likewise agree with
him that generic competency approaches are inef-
fective and potentially counter-productive. We dis-
agree with his conclusion that, because of sloppy
practice in some quarters, competencies them-
selves should be abandoned as a foundation for
23
 In a recent
Hofrichter and Douglas4
article,
argue that Hay Group
research has shown that in complex jobs, compe-
tencies are more likely to determine success than
are skills or knowledge. But they go on to say that
competencies represent a set of skills and knowl-
edge, abilities, behavioral characteristics, and
other attributes that predict superior perfor-
mance.
I don’t know about you, but I find all this very
confusing-perhaps even an exercise in semantic
obfuscation.
At times, it sounds as if competencies are actu-
ally nothing more than skills and knowledge. If
so, there is a direct parallel between paying for
competencies and the pay-for-skills systems that
are used with production employees. At other
times, however, particularly in the writings of
Spencer and Spencer, it appears that paying for
competencies is much more about trying to mea-
sure and pay for an individual’s personality traits.
If the latter is true, I have a major problem with
the idea of paying for competencies.
Why Repeat Our Mistakes?
In the 1960s and 1970s, a popular practice was for
organizations to rate individuals on such traits as
and reliability, and to
leadership, cooperation,
use these ratings as a basis for determining merit
pay. I was studying performance appraisal and
pay systems at this time, and thus I am all too
aware of the many measurement problems asso-
ciated with this approach. Unfortunately, some
organizations still use trait-rating scales as part of
their performance appraisal process. They ask
managers to rate individuals on innovation,
dependability, communication skills, and other
traits to determine favorable appraisals and
&dquo;merit&dquo; pay increases.
Some organizations have made the trait-rating
approach a bit more sophisticated by adding
descriptive anchors to different points on the
scales (instead of just using high/low or
good/bad). But in my mind this does not address
the fundamental problem. Rating individuals on
traits is an extremely subjective process. Over the
years, a great deal of research has shown that it
tends to lead to unfair, invalid, and discriminato-

~ ~ ~ m! ~ ~ !) -
effective
management.
sources
human re- cies-one of the most powerful approaches at our
disposal to enhance organizational performance.
Our conclusion is to emphasize even more strong-
ly the importance of a rigorous approach to iden- Endnotes
tifying the competencies that distinguish out- 1. For complete discussion of matching
a more

standing performers in an organization. the system to the

organization, see People,
Unfortunately, based on a most cursory examina- Performance, & Pay: Dynamic Compensation
tion, Prof. Lawler would have the human resources for Changing Organizations, Thomas E
community &dquo;throw the baby out with the bath Flannery, David A. Hofrichter, and Paul E.
water,&dquo; and, in the process, discard competen- Platten (New York, N.Y : The Free Press), 1996.

DavidA. Hofrichter, Ph.D., is a managing director with Hay Group, with responsibility for the leader-
ship of the firm’s Mid-West U.S. operations. His consulting includes experience in the definition of
new work cultures and the development of reward programs to support them. Dr. Hofrichter received
his B.A. degree in psychology from Baldwin-Wallace and his M.A. and Ph.D. from Duquesne
University. A member of the American Psychological Association and the American Compensation
Association, Dr. Hofrichter writes and speaks frequently on business and human resource issues.

Lyle M. Spencer, Jr., Ph.D., is Hay/McBer Director of Research and Technology Worldwide. Dr. Spencer
has consulted for major clients in the U.S. and abroad. His books include Reengineering Human
Resources (Wiley, 1995), Competence at Work (Wiley, 1993) and Calculating Human Resource Costs
and Benefits (Wiley, 1986). Dr. Spencer holds a Ph.D. in human development and clinical psycholo-
gy from the University of Chicago and an M.B.A. with distinction from the Harvard School of Business
Administration. He is also a member of the American Psychological Association.

24
ry outcomes. It was for this very reason that, dur-
ing the 1960s, numerous studies were highly crit-
ical of the use of personality tests for selection
purposes and of trait-based performance
appraisal forms.
Subsequent legislation and numerous court
cases have led to the development of specific
standards concerning both the validation of tests
and what should be contained in a performance
appraisal form. These standards particularly
emphasize the importance of measuring only the
job behaviors that are related to successful task
performance.
This brings us back to the research cited at the
beginning of this article, and what that research
shows about effective skill-based pay plans in
plants.
Applying What We Have Learned
Recall that skill-based pay plans work best when
they are tied to an individual’s ability to perform
a particular task and when there are valid mea-
sures available of how well an individual can per-
form a task. Only when these are available can an
organization develop effective skill-based pay
systems. Competency-based systems that pay for
generic personality traits not clearly related to
task performance neglect this critical point.
I do not intend to completely dismiss the use
of competencies in human resources manage-
ment. If, indeed, a competency is a basis for suc-
cessful task performance because it relates to
the development of the skills and knowledge
that are needed to perform the task, measuring
it may be helpful as a way of determining who
should be hired and assigned to a particular job.
Many tasks involve a learning curve, and com-
petencies may provide important predictors of
future performance. However, this use of com-
petencies does not mean that they should be the
basis for pay once an individual has started per-
forming a job.
We learned with person-based pay in manu-
facturing organizations that you should pay indi-
viduals for what they can do that is related to task
performance, not for their &dquo;potential.&dquo; Once an
individual has performed a job, we can identify
and measure the person’s task-related skills and
knowledge. At this point, I believe that the task-
related skills and knowledge, not underlying
competencies, are the most useful basis for set-
ting pay because they most directly determine
what work an individual can do. Incidentally,
these skills and knowledge are also likely to be the
key determinant of market value.
The idea of paying only
for the ability to perform a I!m!III
task is considerably easier to apply in production
jobs than in managerial and knowledge work sit-
uations. In production work, the tasks are simpler
to define and the set of tasks often is more limit-
ed. This is undoubtedly one of the main reasons
it has taken so long for the approach of paying the
person to move from the shop floor to the office.
Despite the fact that in some situations specify-
ing the skills and knowledge needed to do work
can be complex and difficult, I find it neither
acceptable nor desirable to rely on generic com-
petencies. Generic competencies not only are
hard to measure, they are not necessarily related
to successful task performance in a particular
work assignment or work role.
Defining a &dquo;Person Description&dquo;
In most knowledge work, what is needed &dquo;to pay
the person&dquo; is a &dquo;person description&dquo;rather than a
&dquo;job description.&dquo; This is a description of what the
person needs to be able to do. It includes specifi-
cations of the task or tasks the individual should
be able to perform and of what performance or
mastery level is required. This description can be
used as the basis for determining whether indi-
viduals have the necessary work-related skills.
For example, instead of saying the person
needs to have &dquo;effective communication skills,&dquo;
the person description should specify exactly
what kind of communication tasks the individual
needs to engage in as well as what level of perfor-
mance on each of these tasks represents an
acceptable level of mastery. It should establish
measures that distinguish between successful
and unsuccessful task mastery so that individuals
can be certified as having the necessary commu-
nication skills. These same measures may be use-
ful, of course, in measuring an individual’s ongo-
ing job performance. But that is not what we are
talking about here; in a person description, the
focus is on what a person can do, not on what
they do day in and day out.
Admittedly, creating person descriptions that
specify how to measure task performance mas-
tery is likely to be considerably more work than
simply picking competencies from a list or dictio-
nary. But, I believe it is the only effective way to
pay the person in knowledge work situations.
Again, the alternative-paying for underlying
competencies-is likely to produce invalid mea-
surements and discriminatory decisionmaking.
Ultimately, it may lead to the downfall of the idea
of person-based pay.
25
 Concluding Thoughts
It is critical for organizations to get on with the
challenging work involved in specifying what
they expect people to be able to do and how well
they expect them to be able to do it. Only if they
are able to do this can they reasonably expect to
create high performance organizations that pro-
vide a competitive advantage. I believe that the
lessons from skill-based pay systems are clear in
this respect. They work best when individuals are
paid on the basis of their willingness and ability
to perform specific tasks that are critical to orga-
nizational effectiveness. This golden rule of per-
son-based pay, I believe, is as applicable in offices
as it is on the shop floor.
Endnotes
1. E.E.Lawler, High Involvement Management
(San Francisco: Jossey-Bass, 1986).
Zingheim, G.E. Ledford, and J.R. Schuster,
2. P.K.
"Competencies and Competency Models:
Does One Size Fit All?", ,ACA Journal 1996,
Vol. 5, No. 1, pp. 56-65.
3. L.M. Spencer and S.M. Spencer, Competence
at Work: Models for Superior Performance
(New York: Wiley, 1993).
4. D. Hofrichter and K.
Douglas, "Tapping Star
Quality with Competency-Based Pay,"
ACA News, March 9-11, 1996.

Edward E. Lawler III is professor of management and organization in the business school at the
a

University of Southern California and director of the university’s Center for Effective Organizations.
He has consulted with more than 100 organizations and four national governments on employee
involvement, organizational change, and compensation. The author ofmore than 200 articles and 25
books, his works have been translated into seven languages. His most recent books include Strategic
Pay (Jossey-Bass, 1990) and From the Ground Up: Six Principles for Creating the New Logic
Corporation (Jossey-Bass, 1996).

26