Final answer:
Incentive pay is the compensation type that ties employee rewards to productivity levels; it motivates employees to perform better by offering more pay for higher productivity.
Step-by-step explanation:
The type of compensation that links levels of productivity with employee rewards is C. Incentive pay. This form of compensation is tied directly to the performance and productivity of an employee. The more productive the employee, the higher the incentive pay they may receive. Unlike fixed pay, which remains constant regardless of output, or benefits which are typically standard irrespective of individual performance, incentive pay is designed to motivate and reward employees for their productivity and hard work. In instances where firms raise wages in response to union demands, management might invest in more machinery that could lead to a higher productivity level for union workers, thereby affecting the incentive pay structure.