Which compensation strategy emphasizes rewarding employees based on their performance?

The compensation strategy that focuses on rewarding employees for their performance is performance-based pay. This approach directly links an employee's compensation to the results they achieve, making it a powerful motivator for enhancing individual productivity. Performance-based pay often includes salary increases, bonuses, or commissions based on specific performance metrics, such as achieving sales targets or meeting project deadlines. By aligning compensation with performance, organizations can encourage a high level of achievement and accountability among employees, fostering a competitive environment aimed at increasing overall organizational effectiveness.

While merit pay and incentive pay are similar in that they also aim to reward performance, the term "performance-based pay" more broadly encompasses all forms of compensation tied directly to performance assessments. Merit pay typically refers to salary increases granted based on an individual's performance evaluations over time, while incentive pay often refers to additional compensation, such as bonuses, tied to short-term performance objectives. Skill-based pay, on the other hand, rewards employees based on the skills and competencies they possess, rather than their performance outcomes. Therefore, the most fitting strategy that emphasizes rewarding employees based on their performance is performance-based pay.