EMPLOYEES COMPENSATION AND EMPLOYEES’ INCENTIVES AS

PREDICTORS TO ORGANIZATIONAL PERFORMANCE

CHAPTER 1

INTRODUCTION

Background of the study

Organizational performance is a subjective perception of reality, which

explains the multitude of critical reflection on the concept and its measuring

instruments (Lebas, 1995; Wholey J., 1996). It is a company’s ability to reach its

goals and optimize results. It gives companies opportunities for improvement about

every employee’s skill and capability. Improving the organizational performance can

be used as leverage to achieve the goals of the company.

Moreover, organizational performance has always had a significant

influence on the actions of companies (Crook JR, Bratton VK, Street VL, 2006). One

of the concerns of this effect is the increase in the number and variety of means and

methods to measure the performance accurately and gradually establishing a vital

research field for both companies and academics. Unluckily, there is no agreement

in the literature on how to measure organizational performance, and the problem is

multilevel (Lusthaus, C., Adrien, M.-H., Anderson, G., Carden, F. and Montalván,

2002).

Although prescriptions for improving and managing organizational

performance are widely available, the issues of terminology, levels of analysis (e.g.,

individual, work unit, or organization as a whole), and conceptual bases for

assessment of performance preoccupied the academic community (Venkatraman, N.

and Ramanujam, 1986).

Human resource is the primary resource of a company’s competitive

advantage, and the success of the organization relies of the employees’

performance. Therefore, there is the need of finding possible and effective ways to

encourage people to exert extra effort beyond what is normally required among

employees (Tep, 2015).

However, on occasion, management would ask for comments from workers

regarding rules and processes, and at that point, it started to realize that employee

suggestions frequently proved advantageous to the company. Some company

managers began to profit from this by offering their staff members extra incentives.

The effort and motivation of the employees are what determines performance.

Employees' top priority is to be recognized for their abilities and services and to

receive compensation. And businesses have tried to take advantage of this by

providing their staff with performance-based incentives.

In a global perspective, particularly in Malaysia, they aim to be in the top

country in term of economy, citizen well-being and innovation by taking care of the

employee welfare to increase their performance. The welfare for employee cannot

be ignored. Some of the companies are taking care of the employee well-being by

providing compensation and benefits in term of remuneration, allowance, promotion,

and also incentive. The compensation and benefits is given based on employee

performance. Employees’ compensation is all form of pay and rewards going to

employee and arising from their employment (Dessler, G. 2015). Currently,

compensation and benefit play a significant role for the organization that aim to

accomplish their objectives and goals. The poor compensation and benefits will lead
to low performance and that will lead to low satisfaction level that will increase

absenteeism in employee and the outcome will decrease (Feraro-Banta, L., &

Shaikh, S. Al. 2017).

In some local advertising companies in Davao region, their hired brand

promoters will be given incentives if they exceeded their quota. According to brand

promoters, the incentives enable them to perform well and do their job properly.

This study revealed the lack of research on the relationship between the

variables that are undertaken in this study. In this regard, a comprehensive

understanding of the employees’ incentives and employees’ compensation to fully

understand its relationship on the organizational performance. Thus, this study is

focused to determine on what is the relationship between the employees’ incentives,

employees’ compensation, and the organizational performance.

STATEMENT OF THE PROBLEM

The main purpose of this study is to determine the impacts of incentives on the

employees’ organizational performance.

Specifically, this study pursues answers to the following question:

1.What is the extent of employees’ incentives of the respondents in terms of:

1.1 Recognition and Rewards; and

1.2 Financial or Monetary incentives

2.What is the status of the employee’s organizational performance of the

respondents?

3.is there a significant relationship between the extent of employees’ incentives

when analyzed in terms of:

3.1 Age
 3.2 Sex; and

3.3 Educational status

4.Is there a significant relationship between the extent of employees’ incentives and

the status of employees’ organizational performance?

REVIEW OF RELATED LITERATURE

Compensation

Compensation is defined by Mondy (2010, p. 268–269) as the “total of all

rewards provided to employees in return for their services,” the overall purposes of

which are to attract, retain, and motivate employees. These are processes are based

on Compensation Philosophies and strategies and contain arrangement in the shape

of Policies and strategies, guiding principles, structures and procedures which are

devised and managed to provide and maintain appropriate types and levels of pay,

benefits and other forms of compensation (Bob, 2011). Compensation implies having

a compensation structure in which the employees who perform better are paid more

than the average performing employees (Pearce, 2010). A perfect mix of these

aspects is ideal for optimizing the effect on employee performance and, ultimately,

organizational competitiveness since remuneration includes fixed and variable

components and employee perks and services.

Schermerhorn (2010, p.349) defines employee engagement as “a heightened

emotional connection. with the organization and that influences an employee to exert

greater discretionary effort in his or her work.” and further mentions that engagement

results to lesser turnover, increased productivity, stronger loyalty, and enhanced

customer service.
 In the study by Nawiyah et al. (2017:80), Compensation is a function of

Human Resource Management (HRM) related to any type of reward which an

individual receives in return for the implementation of organizational tasks. The study

by Thaief et al. (2015:24) said that employee compensation is any form of payment

or allowances granted to employees and results from the employees’ works. Riana

and Wirasadena (2016:83) said that compensation may be in the form of financial

and non-financial. For an organization, compensation reflects the efforts to maintain

and improve the welfare of their employees. Hameed et al. (2014:302) suggest that

compensation is the output and benefits that employees receive in the form of

wages, pays and the similar rewards as a money exchange for employees to

improve the Performance. Njoroge & Kwasira (2015:90) state that compensation

may include expenses such as bonuses, profit sharing, overtime fees and gifts that

consist of monetary and non-monetary gifts such as house rental and car facilities for

employees.

Compensation becomes a profound element for reducing turnover and

increasing retention. Compensation, a motivating factor for the workforce to be

responsible for the given tasks, which result in long term association with the

organization (Moncarz et al., 2009). It is also a tool to communicate the basis for

recognizing and rewarding the employee for the services rendered towards the

achievement of the organizational goals.

According to (Deckop et al., 2006; Moncarz et al., 2009) it was evident that a

strategized compensation structure increased employee performance to the

maximum level. The combination of monetary and non-monetary benefits has a

strong positivity towards employee acceptance. Even announcing spontaneous

rewards for the achievements of the employee or the team will boost the morale and
the same will be continued further, this gives a healthy competition at the workplace.

This is the base for corporate culture to be acclaimed across the organization. This

healthy and win-win situation will impact the organization from macro perspective,

success of teams and departments to the micro level, healthy contribution by

everyone towards the growth of the organization.

Incentives

Today, there must be a balance between an employee's devotion to the

business and their performance, and incentives are the most crucial instrument for

fostering employee engagement, work satisfaction, and motivation for high

performance. Incentives are defined as concrete incentives or any kind of

compensation that is given to an employee in the form of cash. It can be also defined

as a technique which usually used by employers to carry out their end of the

employment contract, a form of compensation to the employees for their effort

(Hartman, Kurtz & Moser,1994). Incentives are tangible or intangible rewards used to

motivate a person of group of people to behave in a certain way (Collins, Tinkew &

Burkhauser, 2008). A definition given by Zern, Dolea and Stilwell (2005, p.5),

incentive is “an explicit or implicit financial or non-financial reward for performing a

particular act”.

According to Torrington, Hall & Stephen (2008), Incentive is here described

as an element of payment linked to the working performance of an individual or

working group, as a result of prior arrangement. Incentives play an active role in

pushing forward individuals’ capacity and moving abilities, motivating them to

develop their skills, and balance between organization requirements and the
individual needs which enhance the organization performance efficiently and

effectively (Marwan, 2012).

Incentives, according to Ahiabor (2013), are things that drive people to do

things as a reward for improved productivity; they can be used to stimulate or tend to

inspire action or more effort. It can also be characterized as a motivating force for

someone to pursue a specific objective. As a result, incentives are used to motivate

people to work. Incentives are considered one of the most important factors that

encourage workers to put forth great efforts and work more efficiently (Rydval 2013).

It is because incentives and reward system direct workers’ capabilities into more

efficiency in their work in an attempt to achieve the institution's goals (Gana and

Bababe, 2011). Incentives are essential in organizational performance. It was

revealed that incentives can lead to employees becoming more involved in decision

making. It can also lead to increased efficiency and improved image of the

organization (Chepkemoi, 2018).

Financial/Monetary incentives. Financial incentives mean the amounts

paid to employees, either in the form of a lump sum or in the form of monthly

payments including all additional income for the individual. Money is the chief source

of satisfying the needs of people, and to satisfy the social needs by possessing

various items. Money whether it is in the form of salary, commissions, bonuses,

insurance, or any type of incentive pay motivates the employees motivates them to

perform properly. The way to ensure that money has meaning, as a reward for

accomplishment and as a way of giving people pleasure from accomplishment, is to

base compensation as much as possible on performance (Pamela, 2015).

Consequently, financial/monetary incentives are used by most companies to

motivate and stimulate people to exert more effort as money satisfies not just ones’

daily needs but also security and social needs.

Dr.Khaled Abdalla Moh’d Al – Tamimi (2018), aimed at investigating the

impact on financial and nonfinancial incentives on employees performance. This

gives the relationship between job performance and financial incentives. The

existence of a statistically significant in employee performance due to age, gender,

marital status and experience.

Financial incentives and rewards in the world are regarded to positively

affect employees’ commitment or loyalty. Employees stay in an organization because

the costs for leaving the organization are higher than benefits to be a part of the

organization (Saleem, 2011). Financial incentives and rewards make continuation of

the employment relationship because they create the basis for high levels of

commitment and employee motivation. Firms must develop strategies that include

financial incentives and rewards for example promotion, bonus, profit sharing or gain

sharing and employees stock ownership (Development and Learning Organization,

2011). Employees want their performance be appreciated by offering them

appropriate rewards and benefit package as an effective way not only to achieve

their organizational goals but also their continuation of relationship with talented

employees

According to study monetary incentives improved performance over30 per

cent compared with those who did not get incentives. Also, other researchers have

conducted similar empirical studies and found that performance increase in groups

with monetary bonus systems whereas in control groups performance usually stays

at the same level (Pelty, Singleton & Connell 1992, p. 430; Hanlon & Taylor 1994, p.
97; Condly, Clark & Stalovicth 2003, p. 51). Meanwhile, Camerer and Hogarth (1999,

p. 22─23) found that in studies researching monetary incentives the most common

result was that monetary incentives have no effect on mean performance.

Monetary incentives are provided in organizational setting with a view to

motivating and influencing individuals, teams and organizational behaviour for the

achievement of strategic objectives and performance of organizations (Randhawa

2018). The primary goal of monetary incentives for successful completion is to

encourage and motivate employees to do their best job. As a result, financial

incentives are critical in any employment.

Recognition and rewards/ Non-monetary Incentives. Non-financial

rewards are tangible rewards provided and controlled by a firm; which do not

necessarily benefit employees in monetary sense (Chiang and Birtch, 2008).

Although, financial incentives are the key to improving employees’ motivation, job

satisfaction and better performance, there are a number of non-financial incentives

that may represent more effective means of improving quality of work performance

as well as motivational level (Franco, Bennett, Kanfer & Stubblebine, 2004). The

incentives which cannot be measured in terms of money are under the category of

͞non-monetary incentives͟ . Promotion, job recognition, meaningful job and

opportunities for self-development, advancement are non-monetary incentives that

are successfully developed in an attempt to improve the working environment,

enhance performance and increase productivity (Lawzi, 1995). Non-monetary

incentives include promotions, flexible time, autonomy and engagement in decision

making.
 In the organization, the word “incentives”, “rewards”, and “recognition” are all

used interchangeably with no evident distinction. The incentives, on the other hand,

are the most essential component. Non-financial incentives are sometimes known as

moral incentive, which is concerns various aspects of psychological needs, and the

increase concentration of these aspects are come after the emergence of human

related theories (Akaili, 1996).

Non-monetary incentives and their ability to control the various psychological

needs and that’s why non-monetary incentives have a deeper and long-term effect

than monetary incentives on motivation (Jeffery, 2002). The study explained that

non-monetary incentives are highly visible and have greater value as a trophy. trophy

value index of non-monetary incentives to check argument. In his study, results

showed that employees enjoyed the gifts, pride, respect and recognition for long

term period. Employees enjoy telling their family and friends about their respect and

gifts (Jaffery, 2002). He also stated that cash incentives don’t match the level of

satisfaction which is gained by non-monetary incentives (Trophy value). He explains

that the benefits of cash incentives are short-term, whereas those of non-monetary

incentives are long-term. Benefits. In his study, monetary remuneration is addressed.

However, non-monetary compensation does not symbolize esteem and acclaim.

EMPLOYEES’ ORGANIZATIONAL PERFORMANCE

Durga (2017) defined performance as the act of executing a task or an

accomplishment or achievement. O'Flynn, et al. (2001) citing William and O’Reilly

(1998) said employee performance is defined using three criteria. First criteria, is that

employees’ output meets the standard of performance set by the organization’s

external customers. Secondly, employee performance can be defined in terms of

how the social processes utilized in the performance of their jobs enhances or
maintain the capability of the employees to work together on subsequent group

tasks. Finally, that employee’s personal needs are satisfied instead of them being

frustrated by the group performance.

Organizational performance is a complex phenomenon largely affected by

the ability and motivation of the workforce in any firm. Employee performance simply

is the target and goal achievement of an entity facilitated by the contributions labour

which is skilled or unskilled and possible suggestions to decisions or policies made

by the entity the employee works for. That is to say, that the extent to which an

organizations objective (goals) are being achieved courtesy to the role played by the

employee is what employee performance is all about (Maryam 2013).

Human efforts are required to achieve the goals of organizations. The

overall performance of an organization is directly dependent on the amount of efforts

positively applied by workers individually or collectively towards attaining the desired

goals (Agu, 2013).

According to Jones, George and Hill (2016), organizational performance is

a measure of how efficiently and effectively managers use resources to satisfy

customers and achieve organizational goals. The scholars further stress that

organizational performance increases in direct proportion to increases in efficiency

and effectiveness. It succinctly refers to the effectiveness of any organization in

fulfilling its purpose.

Relationship between Employees’ compensation, employee’ Performance

In the literature on human resource management and organizational

behavior, it is argued that non-financial incentives might be used as a tool for

employee motivation. Employees begin to believe that the company is helping them

when firms pay attention to various financial instruments, such as paid leave,
awarding bonuses for keeping an eye on their health and the healthcare of their

family or other family members. Therefore, monetary incentives increase the

motivation of employees leading to increased job performance ( Dilham, 2020). The

atmosphere that leaders create for their staff members may be used to evaluate non-

financial tools. These non-monetary tools help employees stay motivated for a while,

but if employers don't provide them with the right incentives, it can negatively impact

their job. Incentives affect how well employees perform at work, according to several

research. According to an investigation that examined the relationship between

incentive programs and employees' attitudes, various incentives, including monetary,

tangible, and non-tangible non-monetary ones, are crucial in improving workers'

attitudes about their jobs. Different studies have found that there was a linear

correlation between employee loyalty and job performance ( Dahwan, & Raju,

2021 ).

Al-Wathnani (1998) also discussed the incentive’s role on the efficiency of

employees. Incentives are positively correlated with workers' job satisfaction and

work engagement, but the most significant and valued incentives include

opportunities for decision-making, cash benefits, promotions, paid time off, and

allowances for a medical procedure. Verbal evaluations, letters of recommendation,

and cash bonuses are less popular and less motivating rewards.
THEORETICAL AND CONCEPTUAL FRAMEWORK

EXPECTANCY THEORY

Vroom, (1964) proposes that people act to maximize expected

satisfaction with outcomes. Expectancy theory claims that choices about what to do

are made based on a synthesis of three sets of beliefs: expectation, instrumentality,

and valence. He suggests that people put effort into work when they start to perceive

that it will lead to an increase in their performance, which will eventually increase the

chances of them receiving rewards. Consequently, an increase in these financial

incentives also enhances employee loyalty, which increases the employee's

performance and reduces the turnover rate (Luo, Young, & Reig, 2015). The

organization also pays attention to these things, as they also believe humans are an

asset and that they need to fulfill their needs to utilize their skills. In the hierarchy of

needs (1954), Maslow concluded that humans have five basic wants (physiological,

safety needs, love, and belonging, self-esteem, and self-actualization), which can be

satisfied through financial incentives and rewards. Employees with a sense of

recognition from their employers fall under the heading of self-esteem and, as their

needs are being fulfilled, they will experience increased job satisfaction as well

(Chong EE, et.al., 2014)

According to expectancy theory, an individual is motivated is a function of

two factors, the expectancy about the relationship between effort and a particular

outcome (e.g. a certain level of pay for a certain level of performance), referred to as

the ‘‘effort-outcome expectancy’’ and the valence (attractiveness) of the outcome.

 Their idea has ramifications for employees who think that no matter how

hard they work, they won't never execute at the required level, his motivation will

likely be poor in light of expectancy. As regards instrumentality, the employee will be

motivated only if his behaviour results in some specific consequence. If he works

extra hour, he expects to be incentives while for valence, if an employee is rewarded,

the incentives must be something he values (Aamodt, 2007).

HERZBERG'S TWO-FACTOR THEORY OF MOTIVATION

Most theories discuss job satisfaction within the context of motivation (Kian et al.,

2014). The Herzberg theory has been used as a method to explore job satisfaction

among employees (Lundberg et al., 2009). Herzberg used this model to explain that

an individual at work can be satisfied and dissatisfied at the same time as these two

sets of factors work in separate sequences.

Herzberg's two-factor theory has been widely applied in studies on staff

satisfaction, For example, Ruthankoon and Ogunlana tested Herzberg's two factor

theory and concluded that different hygiene and motivation factors are applicable in

different occupations in the Thai construction industry (Ruthankoon and Olu

Ogunlana, 2003). In the Pakistani context, these factors reported to be a strong

moderator for job satisfaction among staff in insurance companies (Rahman et al.,

2017).

Frederick Herzberg’s well known Two-Factor Theory was designed in year 1959.

Herzberg defined two sets of factors in deciding employees working attitudes

and level of performance, named Motivation & Hygiene Factors (Robbins, 2009).
Motivation Factors are Intrinsic Factors that will increase employees’ job

satisfaction; while Hygiene Factors are Extrinsic Factors to prevent any

employees’ dissatisfaction. Herzberg furthered that full supply of Hygiene Factors will

not necessary result in employees’ job satisfaction.

CONCEPTUAL FRAMEWORK

The conceptual framework presented in Figure 1 which presents Incentives

and Compensation as the independent variables with the following indicators, such

as Recognition and Rewards and Financial/Monetary Incentives.

Similarly, the said conceptual framework also includes the Employees’

Organizational Performance. In addition, the moderating variables such as age, sex

and educational status are also included in this study.

The said Variables and indicators will be used as a tool to determine if any

among them would significantly predict the organizational performance of the

employees.
INDEPENDENT VARIABLE DEPENDENT VARIABLE

INCENTIVES
 Recognition and
Rewards/ Non-
Monetary Incentives ORGANIZATIONAL
 Financial/Monetary
PERFORMANCE
Incentives

EMPLOYEES’
COMPENSATION

MODERATING VARIABLES

 Age
 Sex and
 Educational status

Figure 1. Conceptual framework

SIGNIFICANCE OF THE STUDY

Managers and HR Professionals: Through this study, managers and human

resource experts acquire evidence-based guidance for designing and implementing

incentive programs that effectively boost employee performance.

Employees. this study offers a pathway to understand how incentives can improve

their job satisfaction, career advancement, and overall work experience.

Future Researchers. The findings of the study will serve as a reference material

and a guide for future researchers who wish to conduct the same experimental

study, or any study related to the impact of incentives employees organizational

performance.

DEFINITION OF TERMS

Incentives- are the financial rewards that are given to employees as a reward for

their superior performance. Incentives are frequently referred to as payments for

performance. Incentives are distinct from wages in that they vary according to each

person's performance, whereas wages and salaries are fixed regardless of an

employee's performance. Tools for promoting individual or group behavior at work

include incentive systems. A high-quality incentive program inspires employees to be

inventive and creative. It fosters a sense of loyalty among those skilled and effective

personnel. Both monetary and non-monetary rewards can serve as incentives.

(Solanki 2022).

Performance- is "a particular result obtained in management, economics, marketing,

etc. that print features of competitiveness, efficiency and effectiveness of the

organization and its procedural and structural components. (Verboncu, Zalman,

2005)

Company- is an association of many people who contribute money or monies worth

to a common stock and employed in some trade or business and who share the

profit and loss arising therefrom. The common stock so contributed is denoted in

money and is the capital of the company. The people who contribute to it or to whom

it pertains are members. The proportion of capital to which each member is entitled

is his share. The shares are always transferable although the right to transfer is often

more or less restricted.” (Lindley 2023)

Productivity- is a measure of economic or business performance that indicates how

efficiently people, companies, industries and whole economies convert inputs, such

as labor and capital, into outputs, such as goods or services. Productivity can be

measured at any of these five levels. (Holliday 2021)

Employee Performance- is a metric used by successful businesses to measure

their work accomplishments. Experts define performance as the outcome of a

person's work or the performance of a person's work in carrying out his or her tasks

and responsibilities (Rusmiati & Fitriani, 2021). Meanwhile, employee performance is

a metric that indicates how well employees adhere to both explicit and implicit

standards, objectives, and priorities. Employee performance is defined as the

manner in which employees complete their assigned work and perform required

responsibilities (Omar, 2010). Additionally, it refers to the effectiveness, quality, and

efficiency of manufacturing. Productivity also influences how employees perceive

their value to
the organization. Employee performance is also critical to a business's success.

Each employee must work diligently to ensure that the company's vision and goal

are realized (Bakar, 2018).

Compensation. According to Jaleta et al. (2019), “Compensation is all income in the

form of money; goods directly or indirectly received by the employee in exchange for

services rendered to organization”.