Competency-based pay is a compensation system that rewards employees based on their demonstrated skills, knowledge, and abilities, known as competencies, rather than solely on their job title or seniority. This is designed to align pay with an individual's proficiency and contribution to the organization. Competencies can include a wide range of skills, such as technical expertise, problem-solving, leadership, communication, and teamwork.

Example
In a software development company, instead of solely basing pay on job titles or years of experience, the organization implements a competency-based pay system. Employees are assessed on specific competencies relevant to their roles, such as programming languages, software development methodologies, and project management skills. Based on their demonstrated proficiency and the level of competency achieved, employees are assigned corresponding pay scales or salary bands. This approach encourages skill development, provides incentives for continuous learning and improvement, and recognizes and rewards employees based on their actual capabilities and contributions.