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Compensation Theory and Practice

Compensation Theory and Practice

Reinforcement and expectancy theory

The reinforcement & expectancy theory is based on the perception or belief that a behaviour has a positive reward and a high likelihood of repetition. As regards employee compensation, the high performance of employees, which is rewarded by a monetary reward, is likely to reoccur in the future. Similarly, high performance among employees that is not rewarded may reoccur (Pellegrini, 2008). The theory emphasizes the need for a person to experience a reward. Employees are likely to engage in behaviours that earn them the desired reward.

Agency theory

The agency theory, which was developed in the late 20th century, emphasizes the firm’s style of managing relations. The contractual agreements that firms enter with their employees or managers are important. Both employers and staff members are stakeholders of an entity with different interests. The remuneration of employees is the cost that the agency must incur for employees to carry out their roles as agents. Employees wish to increase this at all costs, while employers seek to minimize it (Pellegrini, 2008). The agency theory’s role is to create a contract-based method that ensures the alignment of both stakeholders’ interests. The contracts can be based on merit and outcome.

Equity theory

The equity or justice theory posits that an employee’s motivation is dependent on perceived justice. Naturally, people make a comparison of their inputs and outcomes to others. The perception of unfairness in the workplace can negatively affect the employee’s performance. These effects can be demonstrated in increased absenteeism or a high rate of attrition. The theory may depend on distributive or procedural justice. Distributive justice is more concerned with the employees’ beliefs regarding the fairness of their compensation package. Procedural justice relates to the procedures that determine the allocation of different compensation packages (Pellegrini, 2008).

Application of theories in practice

In an actual human resource management setting, the equity theory allows employees to determine their worth in comparison to rewards and input. Employees who believe that they are insufficiently rewarded or overrewarded are likely to experience distress. The distress leads to efforts to ensure equity is attained in the relationship. Studies confirm that organizations that reward their employees for their input in the best ways possible ignite motivation, which leads to better job performance. An organization’s ability to outdo others in the market is largely dependent on the performance of its employees (Balassiano & Salles, 2012). For this reason, employers commit significant resources to the creation and implementation of reward and motivation systems through the human resource department.

The HRM department relies on rewards to motivate employees and promote high performance, which is desired in every entity. This technique agrees with the reinforcement and expectancy theory, which highlights the importance of desired rewards in maintaining good performance. This reason ensures that most, if not all, HRM departments consistently use financial and non-financial rewards to motivate their workforce. Other modes of motivation that are utilized today include engagement, involvement, increased autonomy, information sharing, flexible work plans, career development opportunities, training, non-financial perks, bonuses, profit sharing, and recognition, among others. In addition, organizations also seek to actively establish the most desired reward for each employee (Mawere, Mubaya, & van Reisen, 2016). The rationale behind this practice is that motivation through rewards works if the employee desires the reward.

Finally, the application of the agency theory is apparent in organizations because a contract governs all relationships between employers and employees. For instance, the employment contract states specific aspects of the relationship. The contract highlights the employees’ roles, the rules they should observe, their remuneration and benefits, and any consequences that may be expected for indiscipline, failure to provide notice upon resignation, and dismissal, among others. These aspects of the contract set the employees’ and employers’ expectations clearly (Varma, 2017). They are important in ensuring that a clear course of action exists in case either party breaches the agreement.

Individual or simultaneous application?

The three theories can be applied simultaneously because they all address different elements that are important for compensation. The agency theory is important in the management of the employer-employee relationship through contractual agreements. This theory is enacted at the beginning of employment and remains till termination. The equity theory influences the process of determining the compensation package for any employee. This theory ensures that compensation matches the employees’ expected input. It, therefore, explains the different packages for executive and lower-level managers. Fair treatment continues during employment to ensure that employees feel fairly remunerated compared to their efforts and their colleagues.

The reinforcement and expectancy theory crowns the application because of the main principle that guides its operation. There is a need to motivate employees constantly to gain high performance. The rewards that employees access determine whether they remain motivated to fulfil their responsibilities. If they are motivated, they keep putting in their best effort, expecting to access the reward again (Varma, 2017). In addition, when employers learn that the reward system is working through the staff’s performance, they retain it and ensure constant access. The cycle is maintained, which leads to exemplary organizational performance.


Balassiano, M., & Salles, D. (2012). Perceptions of Equity and Justice and Their Implications on Affective Organizational Commitment: a Confirmatory Study in a Teaching and Research Institute. Brazilian Administration Review, 9(3), 268-286.

Mawere, M., Mubaya, T. R., & van Reisen, M. (2016). Maslow’s Theory of Human Motivation and its Deep Roots in Individualism: Interrogating Maslow’s Applicability in Africa.

Pellegrini, M. (2008). Motivating Employees through Compensation.

Varma, C. (2017). Importance Of Employee Motivation & Job Satisfaction For Organizational Performance. IJSSIR, 6(2), 10-20. Retrieved from


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Do people behave differently when they are working to meet a need than when they are working due to some other motivation? Maslow’s hierarchy of needs might explain the need to establish base pay guidelines from an employee perspective. Still, it rarely addresses the need employers have to enhance employee job performance. When potential employees can audition for prospective employers, it rarely comes down to “base pay,” and crafting a desirable compensation package requires a greater understanding of motivation and behaviour. President Dwight D. Eisenhower is credited with saying, “motivation is the art of getting people to do what you want them to do because they want to do it.” He understood that motivation is not a carrot on a stick or a stick from behind but an innate desire to accomplish a task and the rewards, whether emotional or tangible, that are received in return.

Compensation Theory and Practice

Compensation Theory and Practice

Expectancy theory, equity theory, and agency theory each attempt to explain the behaviour and motivation of employees and how these impact compensation decisions. HR professionals and the companies they work for can use this knowledge to generate policies and programs to meet the motivational needs of their workers. In this Assignment, you will examine the three theories of compensation and how these apply in practice. In addition, you will determine if the theories can be used simultaneously to drive compensation decisions.
To complete this Assignment, review the Learning Resources for this week and other resources you have found, then respond to the following bullet points in a 3- to 4-page paper:

*Explain the three theories of compensation: Reinforcement and expectancy theory, agency theory, and equity theory.
*Describe how these theories apply in practice.
*Could these theories be applied simultaneously, or are they too diverse and must be applied individually?

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