Final answer:
The statement that skill-based pay systems base compensation on the skills or knowledge an employee possesses is true. These systems incentivize employees to develop a wider range of skills that are valuable to their employer, and thus can lead to higher pay.
Step-by-step explanation:
True, skill-based pay (SBP) systems base compensation on the skills or knowledge an employee possesses that are valued by the employer. SBP systems are designed to reward and motivate employees by providing higher pay for those who have acquired certain valuable skills or knowledge that the employer deems essential. This type of compensation is directly tied to the individual's ability to perform a variety of tasks or functions that benefit the employer, rather than just paying for the job title or position. It encourages employees to continue learning and developing new skills that can contribute to the company, making them more versatile and adaptable in the workplace.
Compensation in skill-based systems is influenced by the market's supply and demand for certain skills. If an employee's skills are in short supply but high demand, they're likely to be compensated more generously. This reflects the general principle that wages are influenced by various factors including competition, scarcity, and the level of skill, training, or education required for a position. Businesses may also use this system to maintain a competitive edge by recruiting and retaining the most skilled workers, especially those with transferable skills, which are applicable across a range of settings. While there are merits to the SBP system, it also comes with potential drawbacks, such as the possibility that permanent employees become less responsive to political or strategic shifts within an organization or that their long-standing expertise creates biases.