What is a competency-based performance management system?

A competency-based performance management system is a set of processes and frameworks organizations use to assess and manage employee performance based on specific competencies required for their roles.

Competencies are the skills, knowledge, abilities, and behaviors that contribute to an individual's effectiveness in their job. For each role, specific competencies relate to completing job responsibilities and achieving business goals.

Rather than just focusing on output or results, this type of performance management system emphasizes the processes and behaviors employees engage in to achieve those results. It enables a more holistic, balanced assessment of employee performance, incorporating what employees accomplish and how they do it.

What are the key components of a competency-based performance management system?

A competency-based performance management system typically includes the following components:

• Competency framework(s): A structured set of competencies required for various organizational roles—they include a mix of core, functional, technical, and leadership competencies 
• Competency-based performance appraisal: Regular assessments of employee performance against predefined competencies (competency frameworks set the expected level of mastery for all relevant competencies) 
• Competency-based development plans: Personalized plans to help employees improve their competencies
• Feedback mechanisms: Processes for providing constructive feedback to employees to support their growth and development 
• Goal setting: Aligning individual competency profiles and goals with organizational objectives 
• Training and development: Organizational programs designed to enhance employee competencies

Additional resources: 

• Competency framework template with core, functional, and technical competencies
• Leadership competency framework template with leadership-specific competencies

How does a competency-based performance management system differ from traditional performance management systems?

A traditional performance management system typically focuses on assessing employees based on their job performance and achieving predefined objectives. In contrast, a competency-based performance management system evaluates employees based on their proficiency in specific competencies essential for their roles. 

This shift emphasizes developing skills and behaviors that contribute to long-term success rather than short-term performance metrics.

Traditional performance management

• Setting goals: Goal-setting typically happens annually, and goals are mostly task-oriented
• Focus: The focus is primarily on achieving specific job-related targets and outcomes 
• Appraisals: Typically focus on past performance and outcomes
• Behavior change: Behavior change is often secondary, focusing more on end results
• Growth: Growth is typically a function of job performance and achievement of targets
• Check-ins: Performance reviews are often conducted annually or biannually, with few to no check-ins between appraisals

Competency-based performance management

• Setting goals: Goals target job-specific tasks and development of specific competencies
• Focus: The focus is on developing a broad range of competencies and skills alongside achieving job-related targets
• Appraisals: Emphasize both past performance and future competency development
• Behavior change: Competency-based performance management emphasizes behavior change through the development and reinforcement of key competencies
• Growth: Growth results from both job performance and improvement in key competencies
• Check-ins: Regular check-ins (quarterly or more frequently) take place throughout the year to assess competency development and performance

What are the benefits of implementing a competency-based performance management system?

Standardize performance evaluations

Competency-based performance management standardizes the evaluation process by providing clear criteria for assessing employee performance. This approach:

• Reduces subjectivity and bias in performance reviews 
• Ensures fair and consistent evaluations across the organization
• Helps employees understand role expectations and how you will measure their performance

For example, a financial services firm implements a competency-based performance evaluation system. All employees are assessed based on standardized competencies such as analytical thinking, customer service, and regulatory compliance. 

Managers use these criteria to conduct performance reviews, leading to more objective and transparent evaluations. This standardization ensures fair employee evaluations, regardless of department or job level.

Enable clear career development paths for employees

Competency-based performance management helps define career development paths, outlining the specific competencies needed for various roles and career progression. Employees can see the skills and behaviors they need to advance in their careers, fostering motivation and engagement.

Competency-based performance management enables:

• Skills gap analysis: Helping employees understand their strengths and areas for improvement
• Personalized development plans: Creating tailored development plans based on individual competency assessments
• Career pathing: Providing clear career progression paths aligned with competency development
• Continuous learning: Encouraging ongoing learning and development through training programs and resources
• Mentorship: Facilitating mentorship and coaching opportunities to enhance competencies
• Alignment: Helping employees set personal development goals aligned with their career aspirations

For example, a large consulting firm uses competency-based management to outline career paths for its employees. Each role within the firm has a defined set of competencies required for progression. 

Employees can see what skills and competencies they need to develop to move from an associate to a senior consultant and eventually to a partner. This clear roadmap helps employees focus their development efforts and prepares them for future roles within the company.

A senior marketer aiming to become head of marketing will know they must develop analytical skills to interpret the data from different marketing channels and learn to make strategic decisions.

Additional resources:

• Career discussion template
• Individual training plan template
• 70-20-10 employee development plan template

Create a high-performance organization

Competency-based performance management fosters a culture of continuous improvement and excellence. By focusing on developing specific competencies, companies encourage employees to enhance their skills and performance continually. This growth-focused culture leads to higher productivity, innovation, and organizational performance.

For example, a manufacturing company adopts a competency framework emphasizing innovation, quality control, and teamwork. It regularly trains and assesses workers on these competencies, improving product quality and production efficiency. This high-performance culture gives the company a competitive edge in the market.

Enable strategic succession planning

Organizations can create targeted development plans for high-potential employees by understanding the competencies required for key positions, ensuring a solid talent pipeline for critical roles.

For example, a healthcare organization uses a competency-based approach to identify future leaders. They assess current employees against leadership competencies such as strategic thinking, decision-making, and empathy. High-potential employees can develop these competencies through mentorship programs and leadership training, ensuring they are ready to step into leadership roles when needed.

Additional resource: Free 9-box grid template to identify top performers and potential successors in your organization.

Improve organization-wide alignment

Competency-based performance management aligns individual performance with organizational goals and values. By establishing a standard set of competencies across the organization, employees at all levels understand the behaviors and skills the organization values and expects. This creates a unified approach to achieving business objectives and promotes a cohesive organizational culture.

For example, a retail company implements a competency framework emphasizing customer focus, communication, and adaptability. Based on these competencies, they evaluate all employees, from sales associates to senior managers. As a result, the entire organization aligns around providing exceptional customer service, leading to increased customer satisfaction and loyalty.

Facilitate better hiring decisions

By clearly outlining the specific skills, knowledge, and behaviors required for each role, hiring managers can effectively identify candidates with the necessary attributes to succeed. This leads to better hiring decisions, as candidates are evaluated not just on their experience and qualifications but on their ability to meet the competency requirements of the job.

For example: A tech company needs to hire a software engineer. Using a competency-based approach, the hiring manager identifies critical competencies such as problem-solving, teamwork, and proficiency in specific programming languages. 

During the hiring process, they assess candidates on these competencies through targeted interview questions and coding tests, selecting a candidate who is technically proficient and a great fit for the team dynamic.

Additional resource: Learn how to implement a competency-based performance system with this step-by-step guide. 

How can organizations identify the right competencies for their performance management system?

Organizations can identify the right competencies through the following methods:

• Job analysis: Conducting a thorough analysis of job roles to determine the necessary skills and behaviors
• Benchmarking: Comparing with industry standards and best practices
• Employee input: Gathering feedback from employees and managers on essential competencies
• Strategic goals: Aligning competencies with the organization's long-term strategic goals
• Expert consultation: Seeking advice from HR experts and consultants

Additional resources:

• How to Create a Comprehensive Competency Model From Scratch 
• 9-Step Guide to an Effective Competency Mapping Process

Enable seamless competency-based performance management with Deel Engage

Deel Engage offers a solution to the biggest challenge many organizations face when starting competency-based performance management: integrating competencies into the entire employee lifecycle.

With Deel Engage you can: 

• Easily define competencies across levels and roles with AI
• Enable transparency with competency-based career paths for all roles in your organization
• Conduct fairer and more actionable competency-based performance reviews
• Develop growth plans for each employee and competency 
• Create and assign courses to help employees ace each competency

Learn more about Deel Engage and how to use it for seamless competency-based performance management.