Theories of Remuneration

MBA(SEM)-HR

CDAC-NOIDASchool of management

What is Remuneration???

Remuneration is the compensation an employee receives in return for his or her contribution to the organization.

The Theories

Reinforcement Theory

A theory that says that behavior is a

function of the consequence.

Features-Reinforcement Theory

Predictions

• Performance based payment must follow closely behind performance.

• Rewards must be tightly coupled to desired performance objectives.

• Withholding payouts can be a way to discourage unwanted behaviors.

Timings of payments is very important!!!!

Equity Theory

A theory that states that individuals compare their job inputs and outcomes with those of others and then respond to eliminate any inequities.

Dimensions Of Equity

Perceptions of Fairness

Motivation

Commitment

PerformanceIndividual Equity

External Equity

Internal Equity

Features-Equity Theory

• Employees are motivated when perceived outputs(i.e., pay) are equal to perceived inputs (e.g., effort, work, behaviors).

• A disequilibrium in the output-to-input balance causes discomfort.

• If the employees perceive that others are paid more for the same effort, they will react negatively to correct the output-to-input balance.

Equity Theory

• I/O < I/O (Underpay)• 5/10 10/10• Inequity

• I/O = I/O (Equity)• 10/10 = 10/10

• I/O > I/O (Overpay• 5/10 10/10 • Inequity

Predictions

• Performance must be clearly defined and the employees must be able to affect them through work behavior.

• If payouts do not match expectations ,employees will react negatively.

• Fairness and consistency of performance-based pay across employees in the organization is important.

• Since employees evaluate their pay-effort balance in comparison to the other employees , relative pay matters.

Agency Theory

• A theory that states that both sides of the exchange will seek the most favorable exchange possible and will act opportunistically if given a chance.

• Executive/Employee-The Agents• Shareholders-Principals• Remuneration payable-Agency cost

Agency Theory

The Agency Theory says that the principal must choose a contracting scheme that helps

align the interest of the agent with the principal’s own interest.

Agency Theory

• Performance based pay is optimal compensation choice for more complex jobs where monitoring employees work is difficult.

• Performance targets should be tied to organization goals.

• Use of performance-based pay will require higher total pay opportunity.

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CDAC-NOIDA

School of Management