Small Business Glossary and Definitions

Competency-Based Pay rewards employees based upon their workplace performance as opposed to their years of experience or position in the organizational hierarchy. Although still relatively rare, the arrangement is regarded as a motivational tool. The employees know their pay is within their control, based upon their performance and contributions. Thus, employees are more likely to show greater initiative. It also encourages self-improvement and productivity and could improve employee retention. Competency-based pay also establishes trust between employees and superiors, since workers know just to get a raise or promotion, versus just putting in their time.