What is competence-based pay based on?

Competence-based pay, often known as skill-based pay, ties compensation directly to the skills, knowledge, and competencies that an employee possesses and demonstrates on the job. This approach recognizes that employees who have a higher level of competence can add greater value to the organization.

By focusing on specific job-related skills and knowledge, competence-based pay encourages employees to acquire new skills, further their education, and improve their performance, ultimately benefiting both the individual and the organization. This pay structure can motivate employees to develop and enhance their capabilities, leading to a more skilled workforce.

In contrast, other options like employee tenure, performance reviews, or market demand do not intrinsically focus on the skills and competencies that individuals possess. Tenure rewards length of service, performance reviews assess past performance without necessarily linking it to the specific competencies, and market demand typically relates to the labor market's influence on wage levels rather than individual skill sets.