Theories of Remuneration

MBA(SEM)-HR
CDAC-NOIDA
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
 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

Internal Equity Motivation

Perceptions of
External Equity Commitment
Fairness

Individual Equity Performance

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