The Effect of Compensation and Benefits on Employee Performance

TheEffect of Compensation and Benefits on Employee Performance

Abstract

Oneof the most crucial organizational resources is the human resourcesince employees are the critical cog that keeps the wheel of allorganizations spinning. Staff members direct and control theactivities and operations of any given firm. The realization of theimportance of human resource has mobilized organizations to activelyseek out and implements effective measures that ensure maximumemployee performance. Compensation and benefits have been widelyarticulated as effective ways of improving the productivity ofemployees. The aim of this paper is to investigate the effect ofcompensation and benefits on employee performance. To accomplish thisobjective, a meta-analysis of previous research was carried out. Itwas established that components of compensation and benefit such assalaries, incentives, bonuses, and rewards have a direct impact onemployee motivation, satisfaction, and, ultimately, performance.

Organizationsand organizational operations and structures have undergoneconsiderable transformations starting from mid-twentieth century toearly 21stcentury. One of the areas that have substantially evolved within thisperiod is the area of human resource. To understand the crucialimportance of employees today, it is integral that a person firstunderstands the foundations of human resource. Prior to, and duringthe industrial revolution, organizations were primarily concernedwith how to maximize the output and productivity of otherorganizational resources other that the human resource. During thesetimes, employees were often neglected, and majority of them usuallyworked under extreme working environments characterized by longworking hours, low wages, and poor living conditions. Many factoriesmushroomed during the industrial period, and more and more peoplewent to work in the industries.

Personnelmanagement was birthed after numerous riots erupted as a result oflow wages and deplorable conditions. Labor unions emerged to fightfor the fundamental rights of employees and governments introducedrules and regulations to better the working conditions of the factoryworkers (Mujaheed, Sameen, Naz, Nazir, &amp Manzoor, 2014).Gradually, the welfare of employees and other labor related issuesbecame a centerpiece of personnel management, and many organizationsimplemented measures to ensure that they keep up with the emergingtrends. However, personnel management was mainly concerned with thestaff and bordered on administrative duties with regulatorycompliance and employee record keeping as the main responsibility.However, during the last few decades of the 20thcentury, the winds of change finally caught up with personnelmanagement and real shifts in the profession began taking place.

Theintroduction of scientific theories such as Abraham Maslow`shierarchy of needs and Douglas McGregor`s Theory X and Y provided newinsights into the real nature of human resource. There was anunderstanding that individuals aspire for self-actualization and,therefore, workers were given more rights to increase theirproductivity. This shift from passive management to the more dynamicHR culminated with the creation of strategic human resourcemanagement which is the major cause of the current dilemma and thefoundation of this research study. Globalization coupled withtechnological advancements and knowledge management promoted theimportance of employees as core organizational resources.

Asa result of the increase in value ascribed to the human resource,competition for employees emerged as each organization rushed toensure that they have the best qualified and highly skilledindividuals within their ranks. Hence, employees became as source ofcompetitive advantage for the organizations, and, therefore, manyenterprises aligning individual goals with the goals and objectivesof the organization became a new management frontier. In addition,the recognition that employees hold the key to organizationalsuccesses pushed organizations to start looking for new and betterways of ensuring that their employees maximize potential. Althoughinnumerable measures and approaches have been implemented to increaseemployee productivity and performance, one question still lingers on?Are these approaches effective in practice or are they justtheoretical hoaxes? Compensation and benefits is an example of suchmeasures to enhance employee productivity. This paper seeks toexamine the exact impact of compensation and benefits on employeeperformance.

Meta-AnalysisApproach

Researchis a progressive discipline implying that each and every day scholarsand researchers are conducting new studies and deriving freshconclusions. Numerous research studies have been carried out in thearea of compensation and benefits and their effects on overallemployee performances. Each study has adopted a different researchapproach from the other studies and brought forth unique andinsights. Albeit, relevant, some of the studies have led toconclusions that beg more questions, and, therefore, are partiallyconclusive and need more research to be carried out to address thelimited areas.

However,a meta-analysis aims to fill this research gap by examining relevantpast studies on the topic under study and then conducting acomprehensive analysis of existing research with the primaryobjective of deducing a superior conclusion than the individualconclusions of the examined studies. Therefore, this paper aims tocreate superior conclusions on the real impact of compensation andbenefits on employee performance through an extensive evaluation ofexisting body of research related to the topic under study. Themeta-analysis will develop more accurate conclusions by looking atboth the homogeneity and heterogeneity of results and conclusionsfrom a large consolidated body of literature (Haidich, 2010). Ameta-analysis is, therefore, a sensitive literature search that leadsto the derivation of evidence-based conclusions which are desirabledue to the need integrate findings from various studies so thateffective and informed organizational decisions can be made.

Ameta-analysis is an important tool that can be used to review,cumulate, and evaluate empirical research. Many research studies onthe topic under research are collected and evaluated with regard tothe methods used in the studies as well as the conclusions derivedand the recommendations advanced. Then the impact of the variousmethodologies employed in the individual studies, as well as theresults, are analyzed, and relevant conclusions derived from theanalysis. These conclusions contain integrative perspectives from theexamined studies and are arrived at after a quantitativeinterpretation of the meta-data that consolidates the individualresearch data sets.

Literaturesearch

Bearingin mind the fact that a concrete meta-analysis derives itsfoundations from a comprehensive, thorough, and disciplined searchfor literature, an extensive database search was conducted toidentify articles that meet the inclusion criteria. Also, with theneed to analyze only credible and current academic sources, thedatabase search was limited to peer-reviewed journal articles andbook chapters from 2010-2016. Credible academic sites such as googlescholar and google books were extensively used to search for thearticles. The search entailed searching online for relevant keywordsthat relate to employee compensation and benefits and aspects ofperformance improvement and productivity. Examples of keywords thatwere looked for in the article’s titles include “compensation”,benefits”, “Employee Performance”, “productivity”,“rewards”, “satisfaction”, “motivation”, “incentives”,“Pay”, “income.” The aim was to identify at least sevenrelevant articles which will then be evaluated in the meta-analysis.

Onlinesearches alone were used for this study. Despite the fact thatcomplementing the database searches with other library resources andhand searches for books, conference proceedings, papers, andabstracts further strengthen the credibility of the study, timeconstraints prevent a comprehensive physical search. However, theinternet has grown tremendously, and innumerable and relevant studieson the topic can be found online. Also, most organizations nowadayshave online presences in the form of websites and journalpublications. Therefore, it was determined that the sufficientresearch studies could be found online to facilitate an unbiasedmeta-analysis.

Inclusioncriteria

Utilizationof the search criteria above led to the identification of manyresearch studies, but not all the identified studies met the minimumrequirements for inclusion in the study. Some metrics were pre-set toact as the inclusion criteria. First, all studies used in themeta-analysis should be published. Many useful sources wereidentified in .gov websites, but majority of these studies wereunpublished and so had to be excluded from the study. Also, studieswere reviewed to ensure that they all included primary data such asreviews and qualitative studies. Also, studies that did not appear todirectly measure the relationship between compensation and benefitsand employee performance were excluded from the study. Other studiesthat met these requirements and were published within the last sixyears were included in the study.

Reviewof studies

Aslam,Talha, Ghaffar, &amp Mushtaq (2015) conduct a study of the Pakistanbanking sector to establish the relationship between compensation andreward systems and the performance of employees. The two variablesthat were considered during the study are compensation andmotivation. Motivation was defined as the level of commitment,energy, and creativity that staff members bring to the workplace.Compensation and rewards increase the level of motivation ofemployees and encourages them to work harder and diligently.Motivation increases the morale of the employees, and they will,therefore, carry out their duties more productively. Benefits such asbonuses and pay rises and reinforcements such as sales commissions,promotions, and achievement awards act as incentives to boost themorale of the employees and increase their motivation. Increasedmotivation, on the other hand, pushes employees to perform at higherlevels hence employee performance is also increased.

Theresearchers concluded that reward and compensation are among theintegral variables that influence employee performance and raisestheir efficiency. The table below shows the ANOVA (Analysis ofvariance) results of Aslam, Talha, Ghaffar, and Mushtaq`s study.

Model

Sum of Squares

Degree of freedom

Mean square

F

Significance

Regression

Residual

total

0.455

1.044

1.499

1

38

39

0.455

0.027

16.557

0.000

Themodel indicates that compensation and benefits which are theindependent variables are contributing factors to employeeperformance which is the dependent variable since the significance(0.000) is less than 0.05.

Anotherstudy conducted by Ibojo &amp Asabi (2015) evaluated the effect ofcompensation management on the performance of employees within themanufacturing sector. Compensation management is one of the mostessential and dynamic areas of modern human resource management. Employees are the important organizational resource, and in order tomotivate the staff members and enable them to perform beyond theirexpectations, managers should implement effective compensationalpackages. The purpose of the study was to establish how welfareservices and working conditions influence employee performance,examine the relationship between compensation and benefits andemployee productivity, and analyze whether effective compensationalstrategies helps reduce employee turnover.

Bothprimary and secondary sources of data were used in the study. The useof questionnaires to collect data from the respondents eliminateddifficulties in the data gathering process and ensured that resultsare bias free and visible. The collected data was later analyzedusing both descriptive and inferential statistics, and the hypothesistested using ANOVA. The results of the study indicated an f-statisticof 32.220 which implied that the model used was statisticallysignificant. According to the results, welfares services influencesemployee performance (f-statistic 12.005). Also, it was determinedthat compensation management (with an f-statistic value of 11.237)greatly affects employee management. Therefore, it was concluded thatcompensation management and welfare services positively influencesemployee performance and retention.

Table4.2d ANOVA

Model

Sum of squares

Degree of freedom

Mean square

F

Sig

Regression

Residual

Total

0.008

12.070

12.078

1

59

60

0.008

0.161

Organizationstoday operate in environments that are highly competitive. Therefore,to remain relevant and ensure that the organization can effectivelymeet and respond to the diverse and dynamic needs of the customers,it is critical to have suitable employees who improve theirperformance from times to time. One of the ways to ensure that theorganization attracts the and retains the best talent in the marketis through proper compensation and benefits. Njanja, Maina, Kibet, &ampNjagi (2013) conducted a study to investigate the effect of rewards,particularly cash bonuses, on employees at Kanya Power and LightingCompany (KPLC). KPLC is the major distributor, transmitter, andretailer of electricity throughout the Republic of Kenya. Data wasgathered by use of questionnaires, and the correlation researchdesign included both descriptive (tables and frequencies) andinferential statistics (Chi-square).

TheStatistical Package for Social Sciences (SPSS) was utilized in dataanalysis and the findings indicated that cash bonuses have no effecton employee performance (p=0.8). No statistical differences inperformances were noted between the employees who received cashbonuses and those who did not. Therefore, the study concluded thatmore research should be done on other compensatory means to determinewhether they have an impact on the performances and productivity ofthe employees.

Chi-squaretests for effect of cash bonuses on employee performance

Receive cash bonus

Low

Moderate

High

Total

No

0

2

6

8

Yes

1

10

44

55

Total

1

12

50

63

Harunamavamwe&amp Kenengoni (2013) conducted a research study to investigate theimpact of both monetary and non-monetary compensation on themotivation of employees. The research focused on lower levelemployees working within the retail industry. The major aims of thestudy were to investigate the efficiency of financial incentive onthe motivation of employees, examine the significance of non-monetaryrewards on motivational levels of lower level employees, and todetermine the best forms of rewards that enhance employee motivation.Questionnaires were used to collect data from a random sample of 50employees and the analysis of the results showed no significantrelationship between employee motivation and monetary rewards(r= .161, p &gt0.01). However, it was established that non-monetaryrewards had a positive influence on the motivation of lower levelemployees (r = .607, p&lt 0.01).

Guidedby the increasing recognition that organizations have to strike adelicate balance between the contribution of employees to theorganization and the organization`s contribution to the employees,Pratheepkanth (2011) conducted a study on employee reward system. Thestudy examined the effect of reward system, which encompassesbenefits, compensation, and recognition, in making employees feelvalued and appreciated. If employees feel that the organizationvalues their input, they will have more confidence and self-esteemand will be encouraged to be more innovative and to take on freshchallenges. The results of the study indicated that there exists apositive relationship between employee motivation and rewards andrecognition. However, more research was proposed to provide moreinsight into the nature and extent of the relationship.

ExtrinsicRewards and employee motivation

Indicator

Value

Regression

Y = 16.45x + 1.34

Correlation

0.7280

R Square

0.53

F Value

96.24

T value

8.634

IntrinsicRewards and employee motivation

Indicator

Value

Regression

Y=18.57x + 1.34

Correlation

0.5831

R Square

0.34

F Value

92.36

T value

7.632

Anotherstudy by Terera &amp Ngirande (2014) investigated the impact ofrewards on the satisfaction and retention rates of employeesspecifically nurses. As a result of increased competition for limitedtalent in the job market, attracting and retaining top talent hasbeen the biggest challenge in human resource management. Compensationand benefits has been touted as appropriate means through whichorganizations can be able to increase the satisfaction levels of thestaff and in doing so reduce employee turnover. In the study,self-administered questionnaires were administered to a randomlyselected sample of 180 nurses. Data was collected and analyzed usingthe Statistical Package for the Social Sciences (SPSS) and theresults showed that rewarding employees leads to increased retentionrates, but there was no significant relationship between rewards andemployee satisfaction.

Mean retention

Mean Job Satisfaction

Mean Turnover intentionsPearson correlation

Sig. (2 tailed)

N

20000

180

0.002

0.007

180

Mean Job SatisfactionPearson correlation

Sig. (2 tailed)

N

0.002

0.007

180

1

180

Tessema,Ready, &amp Embaye (2013) analyzed the effect of pay, recognition,and benefits on employee job satisfaction. Regardless of theemployees’ culture and income levels, the study found out thatemployee recognition, benefits, and pay on job satisfaction.Therefore, the study concluded that both monetary and non-monetaryforms of compensation influence job satisfaction which eventuallyinfluences the performance of employees. The study analyzed surveysfrom respondents in the US, Vietnam, and Malaysia.

Meta-analyticprocedures

Theanalytic procedures entailed the examination of the results anddiscussions of the individual studies and ascribing percentage valueson a Likert scale based on the strengths and limitations of thestudy`s results, discussions, and assumptions. The Likert scale willbe divided into five parts with percentages from 0-100 whichrepresent how strongly the individual research results depict theimpact that compensation and benefits have on employee performancewithin the organization. Finally, a mean will be calculated torepresent the cumulative views from all the studies reviewed. Thefive parts of the Likert scale are 0-20% (greatly reduces employeeperformance), 20-45% (reduces employee motivation), 45-55% (no impacton employee performance), 55-80% (increases employee performance),and 80-100% (greatly increases employee performance).

Resultsand discussions

Aslam,Talha, Ghaffar, &amp Mushtaq (2015) study focused on the effect orrewards and compensation on the performances of employees withinorganizations. The three variables investigated were motivation,incentive, and compensation. It was established that all three booststhe efficiency of employees but rewards and compensation had thegreatest positive effect on employee performances. Therefore, theeffect of compensation and rewards on employee motivation can beranked in the 80-100% category of the Likert scale. However, bearingin mind that motivation and incentive are also crucial pathwaysthrough which compensation and benefits influence employee efficiencyand that the study was only conducted in the banking sector whilesome employee variables were excluded from the study due to shortageof time, the overall study ranking was reduced to 65%. This indicatesthe compensation and benefits increases employee motivation.

Ibojoand Asabi (2014) investigated the importance of compensationmanagement on employee performances in the manufacturing sector.After testing the hypotheses, the results indicated that good workingconditions are closely related to employee performance and so doesgood welfare. Therefore, since welfare and good working conditionsare important aspects of compensation management, the productivityand retention of employees if significantly influenced by goodcompensation. Hence, the study concluded that employee performancedepends on effective compensation management. The more effective thecompensation, the higher the performance. The study was ranked 85%,but this value was reduced to 75% since the study only focused on themanufacturing sector and cannot be generalized for all otherindustries.

Njanja,Maina, Kibet, &amp Njagi (2013) conducted a study on only one aspectof compensation and benefits. They investigated the effect of cashbonuses on employee performances. The analysis of the resultsindicated that cash bonuses did not have any significant impact onemployee performance. The cash bonuses only seemed to make theemployees happier and more satisfied but did not really affect theirperformance. Therefore, the study was given a 50% Likert scaleranking, but this was revised upwards to 55%. Both values fall withinthe ‘no impact` range. However, the fact that the study establishedthat cash bonuses make employees happier and more satisfied inessence means that it has a slight positive impact on employeeperformance. Past researches have shown that happy and more satisfiedemployees are more productive that unhappy, less satisfied employees.

Harunamavamwe&amp Kenengoni (2013) examined the impact of both monetary andnon-monetary rewards on employee motivational levels. The studyrevealed that lower levels employees’ performance was positivelyaffected by non-monetary compensation. However, non-monetarycompensation has no impact on the performances of lower levelemployees. Cash incentives and wage increases do not boost employeemotivation, but merit pay, recognition, and flexible pay enhances theemployees’ motivation levels. Sufficiently motivated employees aremore productive than employees who lack morale. Therefore, the studywas given a Likert Scale ranking of 68% but scaled down to 60% due tothe ineffectiveness of some compensation forms, particularly monetarycompensation.

Pratheepkanth’s(2011) study examined all aspects that relate to the rewards systemof the employees of the Commercial Bank of Sri-Lanka. The findingsshowed that medical facilities, leave, attractive loan systems, andfavorable working conditions positively influence employeemotivation. Also, non-monetary rewards such as holiday pay, overtimepay, bonus, training and promotion, and pension pay increase employeemotivation and makes them work harder. Therefore, the lower therewards, the lower the motivation and the lower the performance andthe higher the rewards, the higher the motivation, and the higher theperformances. Therefore, the study clearly shows that rewards andcompensation contribute to increased employee performance by raisingmotivational levels. Thus, the study was given a Likert scale valueof 63%.

Terera&amp Ngirande (2014) investigated the impact of rewards on thesatisfaction and retention rates of employees specifically nurses.The analysis of the results indicated that rewards and compensationenhance employee retention but does not have any significant impacton the satisfaction levels of the employees. The results, however, donot mean that rewards and compensation don’t lead to employeesatisfaction. Instead, the results imply that rewards andcompensation are not the only determinants of job satisfaction. Butemployee rewarding makes it more likely for an employee to stay withthe organization for a long time. Retention is one of the indicatorsof employee satisfaction which in turn translated to increasedemployee performance. The study is thus given a Likert Scale rankingof 58% due to lack of a clear connection between employeesatisfaction and rewards and compensation.

Tessema,Ready, &amp Embaye (2013) conducted studies in the US, Vietnam, andMalaysia to investigate the impact of employee recognition, pay, andbenefits on job satisfaction. Although the rate of satisfaction withboth the monetary and non-monetary compensation was higher forindividuals in the US, data from all three countries indicated thatcompensation impacts on employee satisfaction. Employee satisfaction,in turn, influences staff performance. Although more research needsto be done so that the results can be generalized to wholepopulations, the findings are credible. Therefore, a Likert scalevalue of 70% is ascribed to the study showing that compensationincreases employee performance.

Table1.0: Mean Likert scale percentage

Article

1

2

3

4

5

6

7

8

Mean %

%

65

75

55

68

63

58

58

70

64

Conclusionand recommendations.

Themean Likert Scale ranking of 64% guides the general conclusion of thestudy which is that effective compensation and benefits increaseemployee performance. However, more research needs to be done on thetopic to determine the extent to which various compensation andbenefits approaches influence performance. Although the Likert scalerankings of the eight studies analyzed might have some level of biasas it was based on the researcher’s own judgement, the homogeneityof the analyzed studies make the conclusion credible. No single studyamong the eight found out that compensation and benefits negativelyaffects employee performance. Only two studies cited no effect ofcash benefits on employee performance. Therefore, there is no doubtthat compensation and benefits impacts positively on employeeperformance. It is also clear that some compensation approaches suchas employee recognition influence performance on a larger scale thanother approaches such as cash bonuses. Hence it is integral that morecomprehensive studies are carried out to identify which approacheswork better than others. Furthermore, despite the fact that employeesatisfaction and motivation are considered to influence performance,there is insufficient evidence to support these assertions. Hence,more research should be done to establish the precise impact ofemployee motivation and satisfaction on performance.

References

Aslam,A., Talha, T., Ghaffar, A., &amp Mushtaq, H. (2015). Impact ofCompensation and Reward System on the Performance of an Organization:An Empirical Study on Banking Sector of Pakistan. EuropeanJournal of Business and Management,Vol. 4, No, 8. 319-325.

Haidich,A. B. (2010). Meta-analysis in medical research. Hippokratia,14(Suppl1), 29–37.

Harunavamwe,M., &amp Kanengoni, H. (2013). The Impact of Monetary andNon-Monetary Rewards on Motivation Among Lower Level Employees inSelected Retail Shops. AfricanJournal of Business management,Vol. 7, No. 38. pp 3929-3935. DOI10.5897/AJBM2012.1381

Inojo,B. O., Asabi, O. M. (2014). Compensation Management and EmployeePerformance in the Manufacturing Sector: A Case Study of a ReputableOrganization in the Food and Beverage Industry. InternationalJournal of Managerial Studies and Research,Vol. 2, No. 9. pp 108-117.

Mujaheed,M., Sameen, N. S., Naz, H., Nazir, F., &amp Manzoor, S. (2014).History of Human Resource Management: It’s Importance in AddingValue to Organizational Success in Gaining Competitive Advantage.EuropeanJournal of Business and Management,Vol. 6. No. 34. (294-300).

Njanja,W. L., Maina, R. N., Kibet, L. K., &amp Njagi, K. (2013). Effects ofReward on Employee Performance: A Case of Kenya Power and LightingCompany Ltd., Nakuru, Kenya. InternationalJournal of Business and Management,Vol. 8, No. 21. 41-49. doi:10.5539/ijbm. v8n21p41

Pratheepkanth,P. (2011). Reward System and its Impact on Employee Motivation inCommercial Bank of Sri-Lanka. GlobalJournal of Management and Business Research,Vol. 11, No. 4.

Terera,R. S., &amp Ngirande, H. (2014). The Impact of Rewards on JobSatisfaction and Employee Retention. MediterraneanJournal of Social Sciences,Vol. 5, No. 1. 481-487.

Tessema,M. T., Ready, K. J., &amp Embaye, A. B. (2013). The Effect ofEmployee Recognition, Pay, and Benefits on Job Satisfaction: CrossCountry Evidence. Journal of Business and Economics, Vol. 4, No. 1.pp 1- 12.