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However, this article deals with just the common compensation and benefits theories, which are in practice in various organizations today.
Compensation and Benefits Theories:
Equity Theory: According to this theory, employees who see themselves as being under-rewarded or over-rewarded will experience distress and this distress in turn leads to efforts to restore equity within the relationship.
This theory, primarily, focuses on ensuring that the distribution of compensation and benefits is fair to both partners. Further, the theory also stipulates that partners do not receive equal benefits or make equal contributions but the ratio between the benefits and contributions is similar. This theory is quite similar to Maslow’s Hierarchy of Needs.
Equity Sensitivity Construct: This theory proposes the individuals have different preferences for equity and therefore, react differently to what they perceive as equity and inequity. This theory has three types of individuals, which are as follows:
- Benevolent: These are people who prefer to be under-benefitted.
- Equity Sensitive: These people expect their benefits to be equal to those of their relational partner.
- Entitled: These are people who prefer to be over-benefitted.
Fairness Model: According to this theory, an individual judges the overall fairness of a relationship by comparing inputs and outputs with standards that are internally derived. This allows perceived equity or inequity of the overarching system to be part of the individual’s evaluation of his or her relationships.
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Every organization keeps wondering whether its compensation plan is working. The employees are responsible for driving a business to success or failure depending upon the service they offer clients. The overall quality of service ultimately depends on the type of compensation plan an organization offers its employees. 
