Compensation Theory

Many firms that are operating in a competitive environment have always adopted the

various compensation strategies in an attempt to achieve employee satisfaction. Compensation

strategies only refer to how employers try to ensure that they compensate all their employees for

jobs they have done. The term compensation plan has been commonly described as the pay

market that a given organization has adopted, and it is developed by the top managers and thus it

the process of designing a compensation strategy is one of the managerial roles[ CITATION

Bar03 \l 1033 ]. Compensation strategies have been impacted by various theories, and as HR

Manager, I will examine the various compensation theories outlining how each method can

motivate employees. In the course of my discussion, I am going to discuss specific types of

compensations providing detailed examples of how different compensation theory can

influence employee's performance.

There are many theories that try to explain compensation procedures. These theories

include the economic theory and the behavioral theory. The economic argument is very much

determined by factors that revolve around finances and money. This theory has further been

divided into subcategories which are more specific about how a given economic factor

influences the compensation of the human resource in any organization[ CITATION Irw96 \l

1033 ]. These subdivisions can somehow be referred as branches of the central theory, and to

some extent, they can also be applied as theories. Among the significant division in the economic

theory include the subsistence theory and the wage-fund theory. These two theories have

their origin form great men in history who were either authors or economists.
 The subsistence theory states that if workers are paid more than their current wages, the

number of labors provided will increase due to satisfaction. Increase in energy provided means

that the organization will reproduce more using similar resources which will in turn cover the

compensation costs. Also, further research and practice of this theory showed that decrease in

compensation rates below the subsistence level would reduce the number of employees and

demotivate employees and thus they will be less productive[ CITATION Bar03 \l 1033 ]. The

decline in productivity would be recorded due to disruptions by employees in an attempt to

increase their compensation packages. Employees who are paid substantial compensation

packages are motivated as they feel they are part of the organization.

The other economic theory influencing the compensation package offered to employees

is the wage-fund theory. This theory states that salaries, wages, and compensation packages are

part of the set working capital. The value of these three is determined by the amounts that have

been set aside by an organization that is meant to pay the labor offered by employees. This

theory was propounded by a man named Adam Smith. In his argument, Adam stated that wages

are determined by the working capital set aside for increasing labor and the number of

employees seeking employment. This theory is based on the productivity of labor and

profitability of any organization as a productive organization will offer more to

employees[ CITATION Ale11 \l 1033 ]. As per this theory, the employees should strive hard to

be productive in an attempt to increase productivity and thus receive high compensations.

The behavior compensation theory involves the natural reaction of an individual. These

theory tries to influence how people act when they are around others when offering their services

using motivation. The compensation package of an employee has a behavioral objective which

is to change behavior positively. The compensation procedure is carried out to fulfill the survival
needs of any employee. These needs include both physiological and psychological needs. This

theory demands that employees be compensated for their skills, talent, performance, and efforts

towards the organization's goals.

Both the economic theory and the behavior theory have different origins, but they

both aim at motivating employees. These two theories are instrumental in the establishment of

a compensation plan. The methods discussed in this case aim at ensuring that the human

resources staffed at any institution are productive and that they are fully utilized. The

productivity can only be achieved if the employees are motivated. The economic

compensation theory aims at ensuring that employees are financially well-off and thus able to

cater for their health and also training costs. On the other hand, the behavior compensation

theory concept aims at motivating employees by ensuring they are psychologically and

physiologically satisfied.

Employees are influenced by the different compensation offered by the organization.

Organizations have adopted various forms of payment depending on the operations of their

financial capabilities. Among the most adopted compensation programs approved by most

organizations include overtime pay and commissions or bonuses. These specific types of

compensations influence employee performance as an employee receives payment basing on his

effort. These compensation programs influence the employee's return to a greater good in that

they become more dedicated to their work[ CITATION Ale11 \l 1033 ]. A dedicated employee

will always perform as they are expected to. The performance of any employee will be

influenced by commissions and or bonuses and by overtime as all of them want to enjoy these

packages. Compensation packages motivate employees and thus change their performance
rate in a positive way as they become more productive in attempt to secure compensation

packages.

References

Edmans, A. (2011.). Executive Compensation : A Survey of Theory and Evidence . Dordrecht ; :

New York : Springer, ©.

Gerhart, B. A., & Rynes, S. (2003.). Compensation : theory, evidence, and strategic

implications. Thousand Oaks, : CA : Sage, ©.

Sarason, I. G. ( 1996.). Cognitive interference : theories, methods, and findings . Mahwah, :

N.J. : Erlbaum.