What is a significant downside to using capability-based pay?

The correct choice highlights a significant downside of capability-based pay: the challenge it poses in evaluating capabilities. Capability-based pay systems reward employees based on their skills and competencies, which can be subjective and hard to measure accurately. This makes it difficult to determine how much employees should be paid based on their capabilities, leading to potential inconsistencies and perceptions of unfairness in the compensation structure.

In such systems, if employees feel that their capabilities are not being assessed appropriately or that their pay does not reflect their true skill level, it could lead to discontent or disengagement, ultimately impacting motivation and overall productivity. Additionally, if companies are not clear about how they evaluate capabilities, it can create confusion and mistrust among the workforce.

Focusing on capability-based pay often leads to complexity in compensation planning, which can have downstream effects on administrative resources and employee satisfaction. Hence, while the idea behind this pay system is to encourage skill development and reward proficiency, the difficulty in evaluation and potential misalignment can outweigh the intended benefits.