Theories of Remuneration

School 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 .

‡ Rewards must be tightly coupled to desired performance objectives. Timings of payments is very important!!!! . ‡ Withholding payouts can be a way to discourage unwanted behaviors.Predictions ‡ Performance based payment must follow closely behind performance.

.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 Internal Equity oti ation External Equity Perceptions of Fairness Commitment Indi idual Equity Performance .


they will react negatively to correct the output-to-input balance. . ‡ A disequilibrium in the output-to-input balance causes discomfort.. ‡ If the employees perceive that others are paid more for the same effort. pay) are equal to perceived inputs (e. behaviors). work.g.e.Features-Equity Theory ‡ Employees are motivated when perceived outputs(i.. effort.

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 .

. Employees evaluate the adequacy of their pay via comparisons with other employees. increase in performance must be matched by commensurate increase in pay. Performance inputs and expected outputs must be clearly defined and identified.Predictions The payperformance link is critical .

‡ If payouts do not match expectations . ‡ Since employees evaluate their pay-effort balance in comparison to the other employees .employees will react negatively. relative pay matters.‡ Performance must be clearly defined and the employees must be able to affect them through work behavior. ‡ Fairness and consistency of performance-based pay across employees in the organization is important. .

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 Pay directs and motivates employee performance. . Employees prefer static wages to performance based pay If performance can be monitored then payment should be according to satisfactory completion of duties.

‡ Performance targets should be tied to organization goals. . ‡ Use of performance-based pay will require higher total pay opportunity.‡ Performance based pay is optimal compensation choice for more complex jobs where monitoring employees work is difficult.

Thank You MBA(SEM)-HR CDAC-NOIDA School of Management .

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