Question

Question: How does compensation differentiation affect per capita productivity in organizations?

Answer 1

Compensation is the remuneration an employee receives for his or her contribution to the organization. It plays an important role in determination of standard of living, societal status, motivation, loyalty and satisfaction of an employee. There exists differences in the compensation packages of employees.It has been observed that it is reasonable to have differences in compensation of the employees at different levels of the organization. Employees who are higher in the hierarchy generally gets more benefits and a higher pay package as compared to the employees who are lower in the ranks. Such differentiation exists and is reasonable and also leads to increase in productivity.

However, it is seen that large differences in the pay packages of the employees working at the same level leads to fall in productivity of the employees and also increases the drop out rate of the employees. This is because it increases disparity among the employees. Thus, it is advisable not to have large compensation differences of the employees working at the same level in the organization.