What describes capability-based pay?

Capability-based pay refers to a reward system that adjusts compensation based on an employee's skills, competencies, and overall capabilities rather than solely on their job title or time spent with the organization. This approach aligns compensation with the value that an employee brings to the organization, recognizing that different skills contribute differently to organizational success.

In this framework, employees who possess specialized or advanced skills may receive higher pay to incentivize them to use those capabilities effectively, fostering a more dynamic and adaptable workforce. This method not only motivates employees to develop their skills but also supports the organization’s goals by advancing a culture of learning and continuous improvement.

By contrast, a compensation system based solely on seniority, a flat structure for all employees, or methods focusing on job duration do not consider the individual contributions and capabilities of employees, making them less effective in maximizing employee potential and organizational performance.