Which of the following is an advantage of adjusting compensation based on competencies?

Adjusting compensation based on competencies is advantageous because it directly links pay to an employee's skills and performance. This approach fosters a culture where employees are motivated to enhance their competencies since increases in their skills can lead to higher compensation. By aligning pay with the actual contributions and abilities of employees, organizations can ensure that they are rewarding individuals who possess the necessary skills to drive performance and achieve business goals. This can also promote continuous learning and development, as employees see a clear financial incentive to improve their capabilities.

In contrast to this correct choice, simplifying the pay structure might not necessarily be a direct outcome of competency-based pay, as this system can sometimes complicate how pay is structured due to the need to assess various competencies. Reducing payroll expenses is not inherently a benefit of this approach; instead, aligning compensation with competencies might actually lead to increased payroll costs for higher-skilled employees. While focusing on competencies may help in retention by increasing job satisfaction and engagement, it does not guarantee retention, as other factors also play significant roles in an employee's decision to stay with an organization.