REMUNERATION THEORIES

There are various theories in understanding remuneration out of which three different theories will be discussed as follows:

1.     Agency theory;

2.     Motivation theory and;

3.     The psychological contract theory.

1.     Agency theory

In this theory one party (the principal) hires another (the agent) who possesses specialised skills and knowledge. The proponents of this theory assumes that each party acts in its own self-interest, this give rise to one of the problems of agency theory as the interest of these two parties may not coincide in some cases. If the agent has a high level of autonomy and independent the risk of moral hazards may increase, this occurs when the agent engages in activities that are not in the interest of the principal, such as using working hours or organisational resources for personal gains. As a result of this the principal develops mechanisms to minimise the moral hazard, the may include the system of rules introduced to monitor the behaviour of the agent which can be introduction of incentives or the agent having to provide certain information to the principal which can be geared towards supervising the input or behaviour of the agent while the first can be inform of profit or growth in the market share.

Most research in the agency theory has looked at senior managers in private sector companies in the context of corporate governance. This theory has been criticised because it fails to take into account the difficulty in setting a meaningful measures for employees with complex and intangible roles. Furthermore, organisational behaviourists query its inability to deal with the political and behavioural aspects in setting and monitoring performances. Others have warned of the dangers associated with concentrating managerial attention on a limited range of factors, which might lead them to neglect important areas of organisational effectiveness.

2.     Motivation Theory

Content and process are the two distinct types of the motivation theory. Content theories are interested in the “what” of motivation, using Abraham Maslow’s hierarchy of needs to identify that are most important to individuals. This theory suggests that the needs of human have an order of hierarchy of needs ranging from physiological needs like food, shelter, water etc. up to what Maslow termed as “self-actualisation” which relates to personal fulfilment through work. This theory is been criticised for its strong normative bias and there are facts that individuals do not see their needs in hierarchical and sequential way because, individual can neglect basic needs like safety and be motivated by higher order needs like esteem. Process theories are concerned with the “how” of motivation and it is the most widely accepted and utilised.

This theory is broadly divided as follows:

                    i.            Expectancy theory;

                  ii.            Instrumentality theory;

                iii.            Valence theory;

               iv.            Goal theory;

                 v.            Reinforcement theory and;

               vi.            Equity theory.

        i.            Expectancy theory: refers to the employee’s perception that a certain level of effort will lead to a certain level of performance.

      ii.            Instrumentality theory: is based on the fact that the level of performance achieved will in turn leads to required outcomes. i.e. reward.

    iii.            Valence theory: is the perceived attractiveness of the rewards are of low value to individual they are unlikely to exert more effort.

The expectancy theory is the most widely used in other to understand the design and outcomes of performance pay system. The theory is based on an economic model of human behaviour and also assumes that individuals have preferences regarding the rewards they will receive in exchange for their investment of time and resources. It recognises the difference between individuals in the valence of rewards and helps to explain why some workers are more highly motivated when certain rewards are provided and others are not.

   iv.            Goal theory: is the joint setting of objectives, feedback and involvement which are part of managerial approach and can improve motivation. The theory places particular emphasis on goal setting behaviour and stipulates that the goals needs to be clear, specific and achievable if they are to motivated.

     v.            Reinforcement theory: suggests that behaviour can be modified if individuals receive the reward at the time they exhibit the desired behaviours. The important assumption of this theory is that rewards can become an acquired right id they are delivered on a regular basis.

   vi.            Equity theory: posits that employee in organisations expects to be rewarded like other employees for similar levels of input, this makes the distribution of reward important. This theory implies that it is not necessarily the level or type of reward that is important but, the extent of equity among the employees. If they feel that the rewards are not equitable, they can reduce their effort, absenteeism or minimal involvement in certain activities.

Adinofi (1998) states that “many of the problem in the operation of pay schemes were due to deficiency in performance related design and implementation”. i.e. the process aspects.

Some of the problems of performance pay scheme are:

v    Measurement problems which ranges from political manipulation of measurement data, rating errors etc.

v    Resistance to change in payment.

v    Lack of control over performance.

3        Psychological Contract Theory

Rousseau (1995) states that “the understanding people have, whether written or unwritten regarding the commitments made between themselves and their generations”. This is what psychological contract theory is all about; it is the changing nature of the employment relationship which is an important contextual feature that shapes individual responses to the rewards offered by organisations. This can also influence the overall levels of motivation and commitment of employees. The psychological contract theory can manifests in two distinct employment relationships, these are:

        i.            the transactional relationship and;

      ii.            the relational relationship.

                    i.            The transactional relationship: is based on a clear statement of the expectations of both parties to the employment relationship, the exact requirement may be specified in a written contract with a finite end. A fixed term temporary employment contract to provide specific service is an example of the transactional relationship.

                  ii.            The relational relationship: is based on a long term relationship between the employer and the employee and the organisations requirements of the employee are more open-ended and continually negotiated.

Researchers in this field argued that employer desires the transactional model because of the environmental context of heightened uncertainty in which organisation must function. They argued that this will provide greater flexibility and make the contribution of individual workers to the organisations performance to be more explicit.

In practice of the transactional model, job security is not emphasised and career horizons may be limited and the balance of reward to risk is more heavily weighted with high level of remuneration in form of incentives and performance payments, these payments are likely to be short term in nature and linked to specific short term goals and objectives. But, in relationship model long term incentives and deferred payments are used in order to align individual interest with the long term performance of the organisation. Structured internal labour markets with career ladders, promotions criteria and “feel-fair” transparent process for determining progression can be achieved. It has been argued that the introduction of new reward systems can severely damage the psychological contract in organisations particularly in public sector.

GET YOUR FREE GIFTS NOW!

PLEASE CLAIM YOUR FREE GIFTS BEFORE YOU LEAVE