Skills-, competency-, and capability-based pay: the magic bullet to solve public sector pay (and UK productivity) problems?

Blog posts

15 Aug 2018

Jim Hillage

Duncan Brown, Head of HR Consultancy 

'Going forward...Departments may, subject to approval by Cabinet Office and HM Treasury, introduce arrangements that enable capability-based reward for growth in competence through development in role, as a way to achieve higher workforce productivity.'
HM Treasury (25 June 2018) Civil Service Pay Guidance 2018 to 2019

The announcement just before MPs went off on their holidays last month of the largest pay rises in almost a decade for one million public sector workers has produced an unusual level of activity and debate over the normally somnolent summer period. Following a decade of pay freezes, and then capped one per cent awards, recommendations from the independent Pay Review Bodies were announced at the end of July, with increases ranging from two per cent for police and GPs, through 2.75 per cent for prison officers and 2.9 per cent for soldiers, and up to 3.5 per cent for teachers.

Beyond the perhaps predicable trade union responses, along the lines of ‘too little, too late’, after ten years of falling real earning and living standards, and pay competition against the private sector; much of the debate has centred around how to fund the estimated £800 million per annum that the new increases will cost. Public sector pay is the second largest item of government expenditure, after social security costs, representing some 9% of GDP. The increases are, we learned, to be funded from within existing department budgets, prompting Labour leader Jeremy Corbyn to claim that ‘this can only be paid for by cuts within the public services’; and Unison’s Christina McAnea to describe them as ‘robbing Peter to pay Paul’.

So, here we have the UK’s public sector pay dilemma: we need to increase pay to recruit, retain and motivate staff; but how can we fund it without increasing the government deficit?

Yet that opening sentence on pay progression, hidden away on page five of the Civil Service Pay Guidance 2018 to 2019 (which sets the rules on how departments have to actually spend that money and manage their pay) could hold the key to squaring the circle of making higher awards without further increasing government budgets (and debt), while also helping to address the UK’s lamentable rate of productivity growth.

Pay progression reborn

Growth in skills and capability lies at the core of the government’s national productivity agenda and the more ‘inclusive growth’ and industrial strategy, strongly supported by the Prime Minister, Theresa May. While unemployment has fallen to remarkably low levels in the UK at four per cent, a significant portion of this growth has been in low-skill work. The UK now resembles Portugal’s low skills economy more than Germany’s high skills one in this regard, with 20 per cent of the workforce in low pay/skills work. Economists attribute a significant portion of the UK’s national productivity deficit to our low-skill economy. As a nation, the reason a majority of UK public and private sector workers have suffered real pay cuts over the last decade is essentially because we haven’t been productive enough to fund higher awards. To boost growth and earnings, the OECD recommends that the UK should promote lifelong learning and better skills utilisation.

Government research on high-performance working suggests that HR and reward management practices which encourage and reward skills growth enhance employee engagement and productivity. As we heard at our recent IES HR Network event on HR and productivity, fears are also evident that technology will unduly impact on low-skilled and low-paid work, evidenced, for example, by the recent major redundancies in retailing, providing further impetus to upskill the UK workforce.

The announcement late last year of the lifting of the one per cent pay cap was already leading departments and agencies to consider pay progression mechanisms, after a fallow period for many when a decade of the cap had encouraged widespread moves to ‘narrow-banding’, ‘spot’ market rates and common, general pay awards. Skills-, competency- and contribution-based pay progression had already been used in some bodies to demonstrate enhanced productivity and secure additional pay bill funding. The Treasury’s new guidance will further encourage this trend, which has already been evident in some of the current pay remits submitted by departments which IES has supported.

The latest CIPD Reward Management Survey (2017) highlights that the most popular approach to determining pay progression in the UK is the use of a number of factors, with skills and competencies prominent in the mix (used by 57 per cent and 61 per cent of employers respectively). Whilst individual performance remains the most common determinant of pay progression, competencies and skills have steadily increased in importance in recent years.

Competency-based and capability-enhancing pay progression also plays to the government’s (and many employers’) fair pay agendas. Low pay has been a high priority for this government and in the civil service, with the National Living Wage increasing at more than twice the rate of average earnings. This is leading some employers, such as those in the NHS and local authorities, to review job definitions and engage in multi- and up-skilling at the bottom end of their pay structures to get a return on the higher costs involved.

Yet according to D’Arcy (2017),‘Pay progression is not a reality for most low-paid workers and opportunities are unequally shared, with just one in six low-paid employees moving onto consistently higher wages over the course of a decade’. I participated in an excellent seminar last month in Cardiff organised by the Welsh Centre for Public Policy, focused on answering this question and considering how employers and governments can work together to foster (and fund) job and pay progression in low-paying sectors in Wales. Cardiff University’s Skills and Employment survey (2017) shows more productive employers allow employees more job autonomy, listen to their ideas and have more supportive line managers.

Given that women form the majority of low paid employees (22 per cent of women compared to 14 per cent of men), issues have also been raised about the lack of opportunities for, and fairness of, pay progression for women. An IES research study as early as 1992 highlighted that performance-based pay progression tended to favour males unduly, and the publication of gender pay reports over the past year suggests that this bias continues to be widespread in performance pay and bonus plans.

The Pay Review Bodies have commissioned various research studies in recent years to explore effective pay progression mechanisms and IES has contributed to this work (Brown et al, 2017; Rickard et al, 2013). Many departments are therefore looking at what are felt to be more objective and relevant methods of assessing progression than the service- and performance-based methods that prevailed in the past, such as skills- and competency-based determination. To help improve career and pay progression for teachers, for example, the Department for Education (DfE) introduced skills assessment between the two main teacher pay scales; IES is currently surveying teachers’ views on this process on behalf of DfE. 

Establishing best fit pay progression

Whatever the method, we know that pay progression is difficult to do well. Almost nine in 10 organisations (88.2%) report that they have encountered a problem with their pay and grading structures and the most common problem is inadequate scope for progression or to recognise contribution (cited by 43.6%). Skills- and competency-based pay progression appears from an IES meta-analysis (Brown et al, 2010) to have a reasonably strong record in academic research studies, in terms of bringing about enhanced employee engagement and higher productivity. International comparisons highlight the widespread use of these mechanisms in some countries, for example within the national occupational wage structures evident in France and Germany.

However, research also shows that these pay progression methods are no universal magic-bullet and they appear to be effective on a ‘best fit’ rather than ‘best practice’ basis (Brown and Armstrong, 2006). Factors impacting on effectiveness appear to include: the use of skills and competency frameworks which are more measurable/objective; approaches that have been used in the organisation for other purposes prior to linking them to pay (eg for recruitment and training purposes); and their use for professional and knowledge workers and in already higher margin/value adding employers.

Nonetheless, linking pay awards and increases to skills, capability and competence does appear to have significant potential as a method for public sector employers to try to resolve the current dilemma; adhering to still tight, if slightly more flexible, pay budget remits, whilst motivating and engaging staff to perform, after a decade of real pay cuts for many of them. Thereby they will also be enhancing their own, and the overall UK economy’s, productivity.


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Any views expressed are those of the author and not necessarily those of the Institute as a whole.