The compensation an employee receives in return of his or her contribution to the organization.
Remuneration is the reward for employment in the form of pay, salary, or wage, including allowances, benefits (such as company car, medical plan, pension plan), bonuses, cash incentives, and monetary value of the non cash incentives.
Components of Remuneration: An average employee in the organized sector is entitled to several benefits such as salary and wages, incentives, fringe benefits etc. following are the major components of remuneration:
Wages and Salary: Wages represent the hourly rates of pay whereas salary represents the monthly rates of pay regardless number of hours put in by an employee.
Incentives: incentives are basically “payment by results”. Incentives depend on productivity, sales, profits or cost reduction efforts. There are two types of incentives schemes:
Individual Incentive Scheme: Applicable to specific employee performance.
Group Incentive Scheme: It is applicable where a given task demands group efforts for completion.
Fringe Benefits: It includes PF, gratuity, medical care, hospitalization, accident relief, health & group insurance, canteen, uniform and recreation etc.
Prerequisites: These are allowed to executives and include company car, club membership, paid holidays, furnished house, stock option schemes etc.
Non Monetary Benefits: These include challenging job responsibilities, growth prospect, competent supervision, comfortable working conditions etc.
Theories of Remuneration: In order to understand which components of remuneration are more effective, we can look at theories of remuneration-
Reinforcement & Expectancy Theory
Reinforce theory suggests that behavior which has a rewarding experience is likely to be repeated. Implication of remuneration in this theory is that high employee performance followed by a will make future employee performance more likely.
Expectancy theory is link between rewards and behavior. According to this theory, motivation is product of valance, instrumentality and expectancy. Remuneration system differs according to their impact on these motivation components. Pay system differ most in their impact on instrumentality-the perceived link between behavior and pay. Valance of pay outcomes remains the same under different pay system. Expectancy perceptions often have more to do with job design and training than pay system.
Equity Theory: Equity theory emphasis in pay structure of employee remuneration. It suggests that an employee who perceives inequity in his or her rewards seeks to restore equity. When employee perceives inequity it can result in lower productivity, higher absenteeism or increase in turnover.
Remuneration system needs to meet three types of equity which directly impact motivation, commitment and performance:
Internal Equity: Perceived fairness of pay differentials among different jobs with organization.
External Equity: Employees’ perception of fairness of remuneration relative to those outside organization.
Individual Equity: Employees’ perception of pay differentials among individuals who hold identical job in the same organization.
Agency Theory: Focuses on the divergent interests and goals of the organization’s stakeholders and the way that employee remuneration can be used to align these interests and goals. This theory talks about two important stakeholder i.e. employer and employee. Employer plays a role of principal whereas employee plays a role of agent. Remuneration paid to employee (agent) is called agency cost. Agent wants high agency cost whereas principals want to minimize it.
Agency theory says that principal must choose a contracting schemes that helps align the interest of agent with the principal’s own interest.