Compensation Theories: Reinforcement & Expectancy

• Compensation theories provide frameworks for understanding how and why organizations compensate employees.

Reinforcement Theory

• Based on B.F. Skinner's work, behavior is a function of its outcomes.
• Positive outcomes encourages behavior and negative outcomes discourages it.
• Rewarded behavior is likely to be repeated.
• Employees are likely to repeat an action if previously acknowledged for it.
• Positive reinforcement is providing rewards to desired behaviors.
  • Example: Manager praises an employee.
• Negative reinforcement is removing aversive stimuli to reinforce behavior.
  • Example: Eliminating tedious tasks when employee starts meeting deadlines.
• Punishment is to deliver aversive stimuli to change behavior.
  • Example: Criticism or demotion.
• Extinction is to withhold valued consequences to lower negative behavior over time
  • Example: Manager ignoring the unwanted behavior.

Expectancy Theory

• Introduced by Vroom.
• Employees are motivated to do things that lead to performance followed by a definite reward or outcome.
• Expectancy theory has three components, expectancy, instrumentality, and valence.
• Expectancy is the belief that effort will result in the intended performance goals.
  • Relates to the idea of "I can do this."
  • Based on a person's past experience, self-confidence, and perceived task difficulty.
• Instrumentality is the belief that meeting performance expectations will lead to a desired outcome.
  • Relates to the concept of "If I accomplish this, I will get that" or "What is in it for me?"
  • Common outcomes include pay raises, promotions, recognition, and personal fulfillment.
• Valence is concerned with the unique value a person places on a particular outcome.
  • Relates to "I find this particular outcome desirable.”
  • Key factors of valence are needs, goals, preferences, values, motivation, and passion for an outcome.

Equity Theory

• Proposed by John Stacey Adams.
• Pay structures should be equitable or uniform.
• Employees seek equity between job inputs and received outcomes compared to others' inputs and outcomes.
• Perceived unfair pay leads to lower productivity, increased turnover, and absenteeism.
• Inputs: Hours worked, experience, education, work performance.
• Outcomes: Recognition, promotions, salary, bonus

Referent Groups

• Referent groups are used by employees to make compensation comparisons.
• Self-inside refers to experience within the current company
• Outside of the self refers to interactions with other organizations
• Others-on-the-inside refers to individuals in the current workplace
• Others-outside refers to individuals not affiliated with any specific group

Agency Theory

• Deals with the agency relationship, where principals delegate work to agents.
• An "agency problem" is a conflict of interest when the agent's incentives do not align with the principal.
• Employers are the principals, and employees are the agents.
• Employers expect employees to work hard and contribute to the company's success.
• Employees expect fair compensation and treatment for their efforts.

Case Study Example

• In 2007, an Indian subsidiary of a multinational refinery became a Government of India company.
• The company announced an expansion program to double the workforce in under four years.
• During the wage revision in 2007, the union and management agreed on a two-tier pay structure.
• Higher grades for existing employees, lower grades for newly recruited employees, despite similar job skills, responsibility, and effort.
• The union and management justified this as an innovative practice in deregulated companies, especially airlines in North America.
• Questions raised include whether it is fair and whether it conflicts with the principle of equal pay for equal work.