I disagree with this. If someone is doing level 3 work, they should be compensated and recognized as a level-3.

What if instead, you identify candidates who show promise for the next level and put them in an “acting” role?

At the end of some trial period, decide whether or not they lived up to the new role and if so, promote them with a raise retroactive to the start of the trial period, to reflect that they actually were performing at the higher level.

If during the trial period it becomes evident that they aren’t ready for the next level, they stay at their previous level and pay, with first hand experience of what’s required for the next level, and a specific set of areas to work on in order to get there.