Which theory encompasses ideas about how compensation can motivate employees?

Compensation Theory specifically focuses on how various forms of compensation can influence employee motivation and organizational effectiveness. This theory posits that different compensation structures, including salary, bonuses, and benefits, can be strategically designed to enhance employee performance and satisfaction. It illustrates the relationship between the compensation provided to employees and their subsequent motivation to achieve higher performance levels. A well-structured compensation system is seen as a critical factor in driving behavior and meeting organizational goals.

While other theories like Equity Theory and Incentive Theory also address aspects of motivation and compensation, they do so within broader frameworks. Equity Theory examines fairness and how perceptions of equitable compensation affect motivation, while Incentive Theory focuses on the role of external rewards in driving behavior. In contrast, Compensation Theory provides a more direct and comprehensive approach to understanding the exact mechanisms by which pay influences motivation, making it the most relevant choice in this context.