Companies that operate a knowledge-based pay environment reward employees for reaching specific criteria with regard to their professional and personal skills, education and development.
The innate incentive in knowledge-based pay structures are for individuals to improve and master themselves in terms of skills and assessed attainment.
Knowledge-based pay should be contrasted with job-based pay whereby analysis of the demands of the position and job design are used to decide on the level of remuneration offered. Pay will often rise with seniority and there are often very clear pay scales that fit with specific areas of responsibility.
In a results-based pay system the method and skills of the individual are less important than the results and the worker is incentivised to meet a specific target or goal.
Proponents of knowledge-based pay say that it encourages personal growth and development which can lead to performance increases across the whole business, and that it rewards ambitious and motivated staff who are keen to perform at a higher level.
Critics of knowledge-based pay say that it is more likely to result in discriminatory pay practices as some employees may be paid more because of their skills and education even though they are essentially doing the same job as someone else.