CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The reason behind developing business organizations in the world is making profit.
To achieve this objectives organization uses various available human and non-human
resources. Among these resources in human, which is commonly seen as the most
valuable asset organization could use to earn competitive advantage and achieve its
objectives. Because other requirement cannot perform the activities by themselves
rather it is by workers. As organizations strive to achieve one or more objectives
through exhaustive utilization of human capital, so also the employee aim toward
achieving individual purposes while working for the organization (Ivancevich, 2001).
When employees carry out their activities, organizations evaluate them for several
different reasons that include determining giving feedback, assessing for training
programs and making compensation.
Compensation is human resources management function that deal with every types of
rewards individual receives in exchange for performing organizational tasks
organization compensates employees through wages and salaries, bonus and benefit
such as health insurances, vacation times, pension programs. These activities are
important to increases the performance of employees (Dessler and Gray, 2005).

According to (Sherman, 1996 cited prasetya &Cato) the general purposes of

compensation policy covers respecting employee’s performance, maintaining
competitive labor market conditions, maintain justice employee salaries, motivating
employee performance and reduce employee turnover.

Employee performance is outcome or contribution of the employees to make them

attain goal (Herbert, John and Lee 2000). Employee performance can be manifested
in improvement in production, easiness in using the new technology, highly
motivated worker.

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1.2 Background of the organization

The Ethiopia monetary and banking law that come in the force in 1963, separated the
function of commercial and central banking creating National bank of Ethiopia as
proclamation No 207/1995 of Oct, 1963, CBE took over the commercial banking
activities of the former state bank. It started operation on Jan, 1, 1964 with the capital
of Ethiopian birr 20 million by having full of Ethiopian employees. Currently CBE
has more than 8.5 million account holders. In addition to this CBE combines a wide
capital base with more than 20000 talented and committed employees. It has more
than 900 branches stretched across the country (source: Www. Com ban
eth.et/company profile).

Yirgalem branch of the CBE is one of branches which are found in SNNPR, Sidama
zone, Dalle woreda in yirgalem town administration which is 47 km far from capital
city of SNNPR, Hawassa. This branch was established in 1970 E.C as pioneer in the
town with the aim of provided service for society in and around the town. Source:
CBE Yirgalem’s branch own document.
Visions

To become a world-class commercial bank by the year 2025

Mission

We are committed to best realize stock holders needs through enhanced financial
intermediation globally and supporting national development priorities by deploying
highly motivated , skilled and disciplined employees as well as state of the-art –
technology.
Values
Customer satisfaction
Quality service
Innovation
Team work
Integrity
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 1.3 Statement of the problem

To survive in competitive business, an organization has compensated and motivate

employees efficient manner. The reason is employees are the main asset of the
organization. Compensation systems are very crucial for any organization (Mondy,
2001). If employees are compensating appropriately, it would increase their
performance and motivate them to become more productive. Thus compensation has
positive relationship with employee’s performance (Nawab and Batti, 2011).

Caruth and Handlongthen, 2001 explained “employees are encouraged when they are
financial rewarded directly fasten their performance”. However, it is challenging task
for an organization to full fill all the needs of the employees. There are varieties of
factors that affect organization not to compensate employees properly. These include:
economic condition of the company, supply and demand of the work force in the
labor market, government policies and guidelines, external market condition and
competitors has considerable influence on employees’ compensation.

If the employees are not compensated properly it would decrease employee’s attitude
toward the work, this would decrease organizations productivity, employee’s
performance and satisfactions and motivations also decrease.

Thus the researcher is motivated to conduct this study on this topic to identify those
factors which affect the performance of employees and consequences of
compensation system issues on the employee’s performance. More over the
researcher interested to conduct this topic in order to suggest some mechanism to
depict those problems in the case study area

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 1.4 Objectives of the study
1.4.1General objective of the study

The general objective of the study is to investigate the effects of compensation on

employee’s job performance in case of Commercial bank of Ethiopia in Yirgalem
branch.
1.4.2 Specific objectives of the study
In line with the above mentioned general objectives, the study would have the
following specific objectives.

 To identify compensation packages which has higher impact on employees

performance.
 To determine factors affecting compensation systems in the organization.
 To indicate better compensation packages that would help the organization
enhance or increase on its employee’s performance.
 To examine the relationship of compensation systems and employees’
performance.
 To investigate the various methods of compensation used by organization and
how it satisfy the employees need

1.5 Research questions

In line with above mentioned specific objectives, the researcher would want to set
answers to the following basic questions.
1 .What are the major compensation packages practices in Commercial bank of
Ethiopia in Yirgalem branch?
2. What are the major impacts of compensation on employee’s job performance?
3. What factors that affect the compensation systems of the organization?
4. How does the compensation systems and performance related?
5. What are the different methods of compensation to increase employee’s
satisfaction.

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 1.6 Significance of the study

The researcher hope that outcome of the research would have the following
significances:

 The study would help the researcher to get his BA degree.

 The study would help the managers to indicate good methods of compensation
system in the organization.

 The study would be an important input for the managers when designing a
compensation packages for employees.

 The study would provide valuable information for managers on the impact of
good compensation packages in terms of enhancing employee’s performance.

 In addition to this the study would serve as a reference for future researches
on the topic.

1.7 Scope of the study

The study would have the conceptual, the geographical and methodological
delimitation. Conceptually, the topic of compensation and its impact on employee
performance is vast in the area of the study which requires intensive investigation.
But the researcher would assess the impact of compensation on employee
performance and the types of compensation packages that leads to increase employee
performance. Geographical the study focused on commercial bank of Ethiopia in
Yirgalem branch. Methodologically, all literatures would not be reviewed because of
lack of sufficient data like reference books in library and the time and budget
insufficient. Moreover the study would be intended to use the cross sectional survey
in an attempt to achieve its objectives.

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 1.8 Limitation of the study

The researchers have faced the following limitations while doing this research.

 Due to cost and time limitation other branches found in Yirgalem town are not
included in study.

 The researcher would be faced the problem of employees willingness to fill

questionnaires due to work load and inequitable attitudes.

 There would be the problem of job stress from employees this would leads to
some employees not to explain their own idea.

1.9 Organization of the study

The study would have five chapters. First chapter includes background of the study,
background of the organization, statement of the problem, objectives of the study,
research questions, significance of the study, delimitations and limitations and the
organization.

Chapter two deals with the review of related literature. Chapter three contains
methodology. Description area, research design, sampling size and sampling
technique, data source and collection method and methods of data analysis.

Chapter four would be discuss about the data analysis, presentation and interpretation.
Last chapter contains conclusions and recommendation

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Definition of compensation

Employees are real wealth of an organization. The attainment of organizational

objectives largely depends on employees’ motivation to work.

Compensation is total of all rewards provided to employees in turn for their service
(Mondy, 1999). Ivancevich (2001) defines compensation as all form of financial and
non-financial benefits as well as clear and apparent services which are accepted by
employees as the part of work relations. Here, one should know the fact that
employees work in organization for the sole purpose of earning enough money to live
comfortably and satisfy all their needs. Compensation not only allows organizations
to get right people in to the right job at the right time but it also facilitates the
effective utilization of its work force. According to Myer (1989), compensation is the
process of directly and indirectly rewarding employees for their performance of
assigned tasks. Dressler (2005), defines compensation as all form of payments or
reward given to employees which arises from their employment.

There are two components in compensation administration, which are fixed

component and variable component. A fixed component is in the form of basic salary
whereas a variable component is payment based on performance such as bonus or
profit sharing and benefits such as health insurance and annual leaves (Mondy, 1999).

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 2.2 Types of compensation

According to Mondy and Noe (1999), compensation is divided in to two types. These
are: Financial Vs non-financial compensation

1. Financial compensation

Financial compensation consists of both direct financial and indirect financial

compensation. Direct financial compensation which is paid to employees in the form
of wages, salaries, bonuses and commissions in exchange of their performance and
indirect financial compensation is a reward employees receive such as health benefits,
paid time off from work such as annual leave, maternity leave, sick leave and other
related benefits (Ivancevich,1989). In other way is divided compensation in to two
parts. Performance based pay and non-performance pay (F.Taylor, 1911).

2. Non-financial compensation

Non-financial compensation includes any satisfaction, which employees receive

from the job, such as the fulfillment of needs for recognition, personal growth,
advancement and affiliation or the job environment like pleasant work
companions, work setting and the like results non-financial compensation. For
example, being a member of successful department results satisfactions for the
member /for each individual/. Non-financial compensation consists of prizes, self-
steam and recognition. It also affects employees’ motivation, productivity and turn
over which intern affects organizations performance (Dressler, 2005).

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 Compensation

Financial Non financial

Direct Indirect (benefits) The job The job environment

-Wages -Insurance plans -Interesting -Sound policies

-Allowance -Life, health care duties -Appropriate status
-Salaries -Social assistance -Comfortable working
-Challenging environment
-Commissions benefits
responsibility -Team sprit
-Bonus  -Retirement
-Education 
 -Opportunity
assistance 
for recognition
-Employee service
-Paid absences
-Vacations,
holidays, sick
 

Figure1: Types of compensation (Mondy and Noe, 1999)

All these compensation s affect the performances of the employees in different

manners. A high rate of compensation in an organization results in high productivity,
profitability, competitive to other organizations.

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 2.3 Basic financial compensation

1.3.1 Wages

The remuneration paid for the service labor in production periodically to all
employees or workers. Wage means any economic compensation paid by employers
under some contracts to his workers the service rendered by them, usually referred to
hourly rate paid to such groups as production and maintenance employees. Wage
include family allowance, pay financial support etc. Payments directly calculated on
the amount of time worked (Mondy, 1999).

In general, wages are payments based on the number of units produced or piece rate
pay system. It is a payment to manual or blue collar workers for a short time period.

1.3.2 Salary

Salaries are money paid monthly or annual basis to employees whose output cannot
be easily quantified. And also the monthly paid rate is determined by the mutual
agreement between the individual employees and the employer (Ivancevich, 1989).

1.3.3 Bonus

Bonuses are lump-sum payments offered to employees in recognition of successful

performance. A bonus is a payment that supplements salary and can be paid in the
present on in the future. Majority of large and some small organization pay bonus in
the belief that doing so leads to better profitability, and competency of organization
(Ivancivich, 1989).

1.3.4 Incentives

An incentive scheme is a plan or a program to motivate industries or group

performance. An incentive program is most frequently built on monetary, but may
also include a variety of non-monetary rewards or prize (Ivancivich1989)

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 2.4 Non-financial compensation

2.4.1. The job

The major human resource management objective is to satisfactorily match job

requirements and employee abilities and aspirations. Although, the task of job design
is typically performed by other organizational units, human resource management has
a distinct responsibility for recruiting, selecting and placing individuals in those jobs.
A good job’’ has the potential for becoming an important part of non-financial
compensation (Mondy, 1999).

2.5. Compensation Vs employee performance

Higher performance requires much more than employee motivation. Employee ability,
adequate equipment, good physical working conditions, effective leadership and
management, employee health and other conditions all help raise employee
performance levels (Ivancivich, 1989).
Most compensation experts believe that pay affects the motivation of employees. A
number of studies indicate that if pays tied to performance, the employee produces a
higher quality and quantity work (Ivancivich, 1989). Compensation in the form of
pay for performance has intuitive appeal, it is extremely difficult to perfectly and it a
pay for performance system together. Developing a system that employees consider
as showing that pay is tied to performance requires a number of managerial skills.

 Managers must be able to allocate pay on the basis of merit. Any merit pay
increase must be meaningful, not token, if it is to be motivational

 Managers must be willing to specially discriminate among subordinates, in

terms of rating and rewarding performance.
 The pay system must be communicate at the time of employment in terms of
initial pay, expected long term progression, and adjustments.
This information should be communicated the manager, who informs the

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 employee as well what performance levels are required to obtain the pay
increases.
 Managers must have the ability to discuss the pay for performance linkage
with subordinates.

Due to this reason compensation are linked to measurable performance on employees

in to perform the objectives of the organization. So compensation and performance
have directly related.

2.6 Objectives of compensation

The objective of compensation system is to create a system of rewards that is

equitable to the employer and the employee alike, so that the employee is attracted to
the work and motivated to do a good job for the employer. Patrons suggest that in
compensation policy there are seven criteria for effectiveness. The compensation
should be:

 Adequate- minimum governmental, union and managerial level should

be meeting.
 Equitable- each person should be paid fairly, in line with his or her
effort, abilities and training.
 Balanced- pay, benefit, and other rewards should provide areas on total
reward package.

 Cost effective- effective pay should not excessive, considering what

the organization can afford to pay.

 Secure- pay should be enough to help an employee fee secure and aid
him or her in satisfying basic needs.

 Incentive providing- pay should motivate effective and productive

work.

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  Acceptable to the employees- the employee should understand the pay
system for the enterprise and himself or herself (Ivancivich, 1989).

In addition to the above objectives, compensation is used for a variety of objectives.

If establishes fair and equitable rewards to the employees so that they are motivated
to do the job in a better way for the organization.

It also adds value for the organization. It also adds value for recruitment. To sum up,
compensation has the following objectives:-

 To acquire qualified employees

 To retain current man power

 To ensure equity

 To reward (reinforce) the desired behavior

 To control costs: to prevent both over payment and under payment

 To facilitate understanding or build harmony in the organization

 To improve further administrative efficiency: to assure optimal use of all
organizational resources.
 Helps to assure the maximum prosperity to both the employer and employees
through maximum productivity.

2.7. Theories of compensation

2.7.1 Equity theories of compensation

Organizations must attract, motivated, and retain competent employees. In doing so,
organizations strive for equity in their compensation systems. Equity is workers
perceptions that are being treated fairly. Compensation must be fair to all parties
concerned and be perceived as fair (Mondy, 1999).

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 Internal Vs external equity

1. Internal equity

Internal equity exists when employees are paid according to the relative value of
their jobs within an organization. Job evaluation is a primary means for determining
internal equity. Employee equity exists when individuals performing similar jobs for
the same organization are paid according to the factor unique to the employee. The
most common factor is employee performance, as determined by the performance
appraisal. Internal equity is the perceived fairness of the pay structure within the
organization (Mondy, 1999).

2. External equity

External equity exists when the organization employees are paid comparably to those
who perform similar jobs in other organizations. Compensation survey enables
organizations to determine the extent or amount to which external equity is present.
External equity is the perceived fairness in pay relative to what other employers are
paying for the same type of labour (Mondy, 1999).

2.7.2 Motivational theories of compensation

Motivation is the act of stimulating someone or oneself to take a desired course of

action; it is the act or processing of furnishing with an incentive or inducement to
action managing requires the creation and maintenance of an employment in which
individuals work together in groups towards the accomplishment of common
objectives. Then the manager’s job is not to manipulate people, rather to motivate
them.

To motivate employees’ needs to recognized what motivate them. The primary tasks
of managers are to get people to contribute activities that help to achieve the mission
and goals of an organization. To guide people’s activities in desired directions
required knowing what leads people to things; that means, what motivated them. The

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basic elements of all human behavior is some kind of activity whether physical or
mental activities are goal oriented; that means, the people do things that leads them to
accomplish their goals (Bantie Workie,2004).

2.8 Factors affecting financial compensation

Financial compensation system can be influenced by a series of internal and external

factors (Ivancevich, 2001).

2.8.1 Internal factor

Internal factors are factors that affect compensation within the organization. Among
those factors in the organization are as follows:

1. The size and age of the organization: it is argued that large and new organization
tend to pay higher wages compared to small and old ones (Ivancevich, 2001).

2. Managerial philosophy and strategies: as top level management has the final say on
pay level decisions their views and strategies affect payment decisions, management
can obtain important guidance in identifying programs by periodically identifying
employees’ performance organization often makes the correct assumption when they
do not make inquiries.

Some methods used to identify those preferences are personal interview with cross
section of employees meeting with some group of employees or focus groups and
questioners accompanied by the computer printout of current benefits so that
employees can reading and visualizing the current packages (French, 1998).

When certain type of workers are in short supply, managers may have to offer
premium compensation to attract or hold them similarly managers who decide to
make their organization a leader interest of the compensation of offers will probably
be able to attract and help the best employee (Plunked and Atoner, 1996).

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3. Managerial attitude- the top management has a lot of influence on the wage and
salary administration because they can choose whether to pay the industry average
wage salary and above or below the average salary; the kind of working conditions to
be provided to the employees; length of service (Ivancevich, 2001).

4. Equity consideration- equity consideration holds the philosophy that the

compensation system should be fair and equitable. It means the compensation system
should be similar for the same type of work within the organization similarly; it
should be fair relative to what other people get for the similar job in another (Mony,
1999).

5. The productivity of the employees- the productivity of the workers has an impact
on the kind of wages or salary he/she gets.

The more productivity the workers is the better the salary or wage he/she gets and the
less productive the workers is the less the salary or wage he/she gets (Ivancevich,
2001).

2.8.2. External factors

External factors are that are outside the control of the organization. Among those
factors are the followings:
1) Government regulations: every government provides law for
compensation areas like:

 Minimum wage rate

 Equal pay provision top, avoid pay differential base on sex in job regarding
substantially equal skill, effort, responsibility and work conditions.

2) Cost of living- cost of living differs in different cities. For example the
cost of living is higher in Addis Ababa than same position from Yrgalem to Addis
Ababa he/she should get a higher salary.

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Cost of living as measured in term of customer price index may affect the
organizations compensation policy as it tries to adjust its employees earning inflation
(Mondy, 1999).

3) Market condition – regardless of factors that involved supply and demand

relationship in the labour market will be determine the wage and salary level in the
organizations.

4) Economic Condition –the economic condition of the industry, especially high

degree of competitiveness which affects the organization ability to pay high wages.

5) Union influence-union and relations law also influences may plan design. Labour
unions are influence groups that work in the interest of the workers; such unions
lobby the management for the formulation of fair compensation plans. These
organized unions can ensure better wages for employees (Ivancenvich, 1989).

2.9 Importance of compensation

Compensation is important to personnel managers for many reasons of all personnel

problems, paying employees is perhaps the most perplexing or complex one
(LeonC.MeGGINson 1981), states that it involves many emotional factors to
employees and employers.

2.9.1 The importance of compensation to employees

 It is the primary and often the only source of income for employees and their
family.
 It is fair reward for the work employees perform and the benefits they provide
for the employees.

 It determined the employees’ social status.

 Income level is often as a measure of persons worthy.

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 2.9.2 The importance’s of compensation to the employers

The amount a firm pays its employees in the form of wages, salary, and fringes
benefits is quite important, as this cost factor interacts with total revenue to determine
the firm’s financial success. Therefore, the primary way for employees to increase
their earnings is to increase the company’s sales and profits.

Afirms compensation policy should be to pay wages high enough to attract, motivates,
and retain qualified employees and, at the same time, low enough to ensure adequate
profits to attract new capital, expand productive facilities, and permit consumer
satisfaction at a reasonable price (MeGGINson, 1989)

2.9.3The importance of compensation to the nations’ economy

The nation also has an interest in the compensation problem most overt complaints of
workers focus their absolute and relative wage rate. If wage rates increase faster than
increases in employee productivity, unit labor costs group and the inevitable result is
a wage price spiral (MeGGINson, 1981).

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 CHAPTER THREE

Research Methodology
3.1 Description of the Study Area

The study was conducted in Yirgalem town. Yirgalem is one of the historical
towns in southern Ethiopia. Located 267 kilometers south of Addis Ababa 47
kilometers south of Hawassa in the Sidama Zone of SNNPR. The town was
established in 1924. Geographical the town has a latitude and longitude of 6ᵒ 45′ N
38ᵒ 25′ E / 6.750ᵒ N 38.417′ E and an elevation of 1776 meters. Climatically, the town
has wonedega. It is largest settlement in Dale Woreda (source: National Geographic
Globe (Map) Washington, D.C.: National Geographic Society .1965)

Demographics, based on figures from the Central Statistical Agency of Ethiopia

published in 2005, Yrgalem has an estimated total population of 43815 of whom
21840 are men and 21975 women .(Source: CSA 2005 National statistics Table b.4
archived 23 Nov 2006.)

Economical the town has favorable condition for several economic activities; among
this coffee is a major product around the town. More over postal service is provided
by the main branch; electricity, telephone service, micro and small enterprises,
schools, colleges, banks are also available. (Source: yirgalem town development and
infrastructure office)

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 3.2 Study Design

Based on its basic purpose, the major focus of this study was on description of data
related to effects on compensation on employee performance; so the most appropriate
research design for this study was descriptive. In addition to this the study was
applied the cross-functional research design that is the measurements where made
over a single period of time.

3.3 Data type and Sources

This study required both primary and secondary data to its successful accomplishment
of research. Primary data was collected through questionnaires and interview (semi-
structured interview) methods; which used to have first hand information required for
the study. Secondary data was collected from books, journals, organizational
documents, internet and different written materials which support this study.

3.4 Population, Sample size and Sampling Technique

The population of this study is employees who work in commercial bank of Ethiopia,
Yirgalem branch. There are 50 employees in the bank.
Sampling should come first along with mentioning target population. Due to financial
problems and difficulty for analysis the researcher selects 26 employees as a sample
size. This is around 52% of total population.

That is, n= n/N, 26/50= 52% where: n- sample size N- Target total population

The researcher was used simple random sampling technique; because simple random
sampling methods in which each element has equal chance of being selected in to the
sample and in order to the reduce the bias when researcher select as a sample from the
whole population.

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3.5 Methods of Data Collection

In this study, the researcher was used different instruments to gather data. Due to low
cost, validity, free from bias and due to consideration of time the researcher was used
questionnaire and interview to collect primary data. Both open ended and closed
ended questionnaires were distributed and collected from the employees of the bank.
Semi- Structured interview scheduled to the relevant managers to collect data on the
compensation policy and practice of the bank. On other hand researcher was used
different staff documents, internet and other published and non-published journals as
a secondary source of data.

3.6 Methods of Data Analysis

Once the data is collected from respondents the error and omissions detected by using
in house editing and correct as possible. Then the data was grouped based on
similarity or on the basis of common characteristics. To do so, the data has been
summarized, categorized, rearranged and tabulated to indicate the events, percentages,
cumulative percentage and frequency distribution data interpretation used to
interpreting and analyzing. For the simplicity the researcher was used percentage to
interpret and analyze the findings.

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 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 INTRODUCTION

This chapter deals about the analysis and interpretation of data that is collected from
the employees of commercial bank of Ethiopia in yirgalem branch, which has been
analyzed and interpreted according to the respondent view, with those objectives on
the impact of compensation on employee performance.

Out of 26 questionnaires distributed to employees of the commercial bank of Ethiopia

in yirgalem branch 21questionaries were collected, and the remaining 5
questionnaires were not returned. Based on collected questionnaires the researcher
have been analyzed by descriptive analysis, responses were tabulated ,frequencies,
and percentage techniques employed for the purpose of analyzing the collected data
and the results were interpreted in the form of statements and the interpretation was
done according to the collected data.

4.2 General respondent’s profile

These profiles indicate the demographic profile about the employees of commercial
bank of Ethiopia Yirgalem branch. The response rate is 80%from the total sampled
response rate.

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Table 4.1 Demographic characteristics / profiles

No Item Respondent
Frequency Percentage
Sex
- Male 16 76%
1 - Female 5 24%
Total 21 100%
Age
- 20-30 12 57%
- 30-40 6 28.5%
- 40-50 2 9.5%
2 - Above50 1 5%
Total 21 100%
Educational level
- Certificate - -
- Diploma 1 5%
- First degree 18 86%
3 - Second degree 2 9%
- PhD degree -
Total 21 100%
Service year
- 0-3 11 52%
- 3-6 9 43%
- 6-9 1 5%
4
- 9 and above - -
Total 21 100%
Basic salary(birr)
4000-5000 8 38%
- 5001-6000 4 19.5%
- 6001-7000 3 14%
- 7001-8000 3 14%
5 - 8001-9000 2 9.5%

- 9000 and above 1 5%

Total 21 100%

Source: questioner survey 2015

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Table 4.1, tries to show the respondents profile in terms of sex, age, educational level,
service year and basic salary.

As shown in table 4.1, the first information was about the genders of respondents.
Item one 16(76%) of the respondents are male and 5(24%) of the respondents are
females, these shows that female employees compared to male employees, they are
relatively low to their response. As researcher understood that the respondents age
group is 20-30 that is, 12(57%) of the total respondents. This indicate that the
employees are more in this and rewarding employees for their performance of
assigned tasks (Mayer, 1989).

As presented educational profile of respondents show that the majority of employees

are first degree holders 18 (86.5%), while 2(9.5%) of respondents are second degree
holders and the remaining 1(5 %) are diploma holders. This indicate that majority of
respondents are first degree holders. So the bank has capable and skilled employees
give aggressive services and it said to be most suitable source of competitive
advantage.

As employees year of service indicate that the majority of the respondents are
dominated by 0-3 years that is, 11(52%) of the population. Another question asked
from respondents the amount of basic salary earns. The data showed that the greater
number of employees basic salary face between 4000 and 5000. That is employees
which is, 8(38%) of them. So the compensation performance is the result of work of
employee because it is the strongest link for the planned goals and economic aid
(Bernadine et al, 1995).
4.3 Assessment of payment system and employees satisfaction

This part mainly deals with the presentation and explanation of employee’s opinion
and their level of satisfaction with the organizational payment level. With regard to
the payment level, the respondents were requested to evaluate and rank their payment
level by comparing with other employees of any other organizations, with their
educational status and related on their experience.
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4.2 compensation offered by the organization to the employees sufficient or not

Does your monthly salary sufficient No of Percentage

in according to your living standard respondents

Yes 13 62%

No 8 38%

Total 21 100%

Source: questioner survey 2015

Table 4.2 show that 13(62%) of the respondents said that the salary that received from
the bank is sufficient for their living standard. And also 8(38%) of others respondents
said it is not sufficient for their living standard.
From this majority of the respondents said that monthly salary received from the bank
is sufficient for their living standard. So it indicate that the bank has providing
effective salary payment to the employees and it creates satisfied and committed work
force that enables the employees to become more performers.

4.3 Salary increment given to the employee.

How often salary increment is given No of respondent Percentage

Every one year 11 52%

Every two year 9 43%

Every three year 1 5%

Above three year - -

Total 21 100%

Source: questioner survey 2015

~ 25 ~
 Tables 4.3 show that the duration of salary increment given to the employees. Based
on this 11(52%) of the respondent said that salary increment of the employees is
given in every one year term, 9(43%) of the respondents said that salary increment is
given in every two year interval, remaining 1(5%) of the respondents said every three
year term. As exhibited above the majority of the employees expressed that the salary
increment is given in every one year term. So it encourages the employees
performance to become more committed to their work and to become productive.

Table 4.4 Employees based on their payment level

N Question item V.high High Fair Low V.low Total

O
Fr % Fr % Fr % Fr % Fr % Fr %

1 How do you compare

the basic salary you
receive in the bank
compared to what
others receive (holding
- - 2 9.5 18 85.5 1 5 - - 21 100%
the same job position
in the bank?)

2 How do you compare

the salary you
receive in the bank
compared to what
others receive in other
similar banks (holding
the same position). - - 3 14 17 81 1 5 - - 21 1oo

Source: questionary survey 2015

~ 26 ~
Table 4.4 is to evaluate the payment level in the organization that hold the same job
position and the payment level to other similar organizations that hold the same job
position.

The above table show that 18(86%), of the respondents opinion show that the salary
receive that holding the same job position in the bank is fair. And also 2(9.5%) of the
respondents said that the salary receive is high, and 1(5%) of the respondents said that
the salary receive compared to other receive that hold the same job in the bank is low.
Therefore, the majority of employees said that the salary receive in the bank
compared to others receive that hold the same job position in the bank is fair, and
compensation must be fair to all parties concerned and be perceived as fair
(Mondy,1999).

As researcher asked employees about the payment of other banks that hold similar job
position 3(14%) of the employees said that high, 17(81%) of the respondents said that
fair, and 1(5 %) of the respondents said that low. From this researcher can conclude
that the salary receives in the bank compared to what others receive in other similar
bank mostly fair.
Table 4.5 shows employees’ satisfaction with respect to basic salary. According to
Ivancevich (2001), one should know the fact that employees work in organizations for
the sole purpose of earning enough money to live comfortable and satisfy all their needs.

To what extent are you satisfied with your Respondent Percentage

basic salary?
No (%)
Very high 2 9.5%
Satisfied 15 71.5%
Neutral 3 14%
Unsatisfied 1 5%
Very unsatisfied - -
Total 21 100%

~ 27 ~
 Source: Questioner survey 2015

Table 4.5 show that 2(9.5%) of the respondents said that by their basic salary very
satisfied, 15(71.5%) & of employees are satisfied, 3(14%) of the employees are
neutral, and also 1(5%) of the employees are unsatisfied with their basic salary. From
this majority of employees of commercial bank of Ethiopia in Yirgalem branch are
satisfied with their basic salary.

4.3 Compensation packages besides wage and salary

According to Ivancevich (1989), salaries are money paid monthly or annual basis to
employees whose output cannot be easily quantified. And also the monthly paid rate
is determined by the mutual agreement between the individual employees and the
employer.
Wages are the remuneration paid for the service labor in production periodically to all
employees or workers. And also wages are payments based on the number of units
produced or piece rate pay system (Mondy, 1999).

4.6 Other types compensation receive other than basic salary

Is there any other type of compensation you Respondent Percentage

receive than your basic salary
No. (%)

Yes 20 95%

No 1 5%

Total 21 100%

Source: questioner survey 2015

In addition to wage and salary, the benefits supplied by the organization to the
employees are very important to the wellbeing and security of its employees. The
benefits can be helpful in increasing the performance of the employees and recruiting

~ 28 ~
the qualified employees. Other types of compensation packages which were provided
by the organization and to identify them in commercial bank of Ethiopia in yirgalem
branch asked.
The response obtained from the respondents indicates that the organization supplies
other compensation package other than wages and salaries to the employees.

They were further asked to identify the compensation package offered to them in
addition to basic wages and salaries they were responded as follows:
Housing allowance
Living allowance or hardship allowance
Transfer or position allowance
Loan benefits such as staff mortgage loans
Transportation allowance
24 hours insurance coverage is attached to the employees.
Retirement benefit
Over time payment, holiday payment

Table 4.7 shows additional compensation benefit

According to Mondy (1999), additional compensation benefits are benefits that offer
to the employees. And these benefits are known as indirect financial benefits are life
and health care benefit, retirement benefits, vacations, holidays and sick leaves.

Does the additional compensation benefit you receive fair Respondent Percentage
compared to what other similar bank offer
No (%)

Yes 14 67%

No 7 33%

Total 21 100%

Source: questioner survey2015

~ 29 ~
Table 4.7 Shows that 14(67%) of the respondents said that the additional
compensation that receives from the commercial bank of Ethiopia in Yirgalem branch
is fair when compared to what other similar bank offer. And also 7(33%) of other
respondents said that it is not fair.

From, this majority of the respondents said that the additional benefits received from
the Bank are necessary for medical and health insurance to the employees. So,
additional benefits that commercial bank of Ethiopia in Yirgalem branch offers to
their employees is necessary to retain, and improve the performance of the
employees.

Table 4.8 Allowance payment

Do you get allowance payment? Respondent Percentage

No. (%)

Yes 19 90.5%

No 2 9.5%

Total 21 100

Source: questioner survey 2015

The above table 4.8 indicates that 19(90.5%) of the respondents said that get
allowance payment. And 2(9.5%) of the respondents not get allowance payments.

Some of these allowance are housing allowance, transportation allowance /or fuel
allowance, living or hardship allowance are given to the employees of commercial
bank of Ethiopia in order to perform better activities towards the organization
(Mondy,1999).

~ 30 ~
 Table 4.9 Shows compensation motivates employees to better performance.

Do you think that the compensation you get Respondent Percentage

motivated towards better performance
No (%)

Yes 16 76%

No 5 24%

Total 21 100%

Source: questioner survey 2015

The above table, 4.9 shows that 16(76%) of the respondents suggested that the
compensation to get from the commercial bank of Ethiopia in Yirgalem branch are
motivated towards better performance. This show that majority of employees are
motivated by compensation that are given by commercial bank of Ethiopia in
Yigalem branch. And 5(24%) of the employees are not motivated by compensation
that get from commercial bank of Ethiopia in Yirgalem branch. Researcher can
understood majority of the employees are motivated by the compensation that gets
from commercial bank of Ethiopia in Yrgalem branch towards better performance.

The compensation that employees get from CBE in Yirgalem branch are motivated
towards better performance of these the employees to take a desired course of action
by one self, increase commitment of employees towards organization, hard worker
towards the successful of the organization, enhance individuals work together towards
the accomplishment of the organization and also gives good service to the customers
of the bank.

~ 31 ~
 4.4 Analysis of Interviews

As the researcher asked the manager of commercial Bank of Ethiopia in Yirgalem

branch about the compensation policy of the bank, the compensation policy of the
Bank is based on branch performance. This means that good accomplished branch is
compensated more than other similar banks accomplished. For example bonus is
based on performance in one year time interval.

Managers were also asked about the basic factors which affects compensation policy
design. These base factors are external market condition, competitors, economy of a
nation, cost of living affect the compensation policy design of the bank. And the
managers of the Bank said that about compensation policy compared to other banks
are relatively better from others especially the commercial bank of Ethiopia gives
medical or health insurance.

As researcher asked the manager of the bank about the main compensation packages.
These packages are salary, wage, allowance, medical or health insurance, retirement
benefits, bonus, sales commission or overtime payment. And also researcher asked
about the contribution of compensation policy towards increase performance. The
manager said that compensation is very necessary towards increase the performance
of the employees, because compensation is merit based. The manager of the bank
said about the compensation policy reviewed, the compensation policy of the bank
reviewed on average two-three (2-3) years term time period

~ 32 ~
 CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

Depending on the data which was collected from the commercial bank of Ethiopia
employees in Yirgalem branch and the data was analyzed according to responses of
employees. In this chapter the very significance conclusion on the impact of
compensation on employee performance would be presented. Finally, it forwarded
recommendation to the concerned bodies of the bank in order to take all the necessary
measure.

5.1 Conclusions

From the study analysis the researcher concluded that the organization salary and
living standard of the employees are matched. This means the monthly salary
provided by the organization is sufficient.

Majority of the respondents said that the salary increment given to the employees in a
one year term period.

From the study analysis majority the respondents said that the salary given to the
employees in the commercial bank of Ethiopia in Yirgalem branch is fair that the
salary received that hold the same job position in the bank.

From the majority of respondents’ opinion the commercial bank of Ethiopia in

Yirgalem branch offered fair payment compared to other similar bank offered
that hold the same job position.

Majority of respondents suggested that the basic salary provided by the bank satisfy
the employees.

In addition basic salary and wage the bank offered different types of compensation.
These are bonus, housing allowance, transportation allowance and retirement benefit.

~ 33 ~
Majority of the respondent said that the additional compensation offered by the bank
is fair compared to other similar bank offered.

From the study analysis majority of the employees are gets allowance payment like,
housing allowance and living or hardship allowance.

Majority of the respondents said that compensations that offered by the bank of
played a great role towards better performance. In order to take a desired Course of
action by one self, increase commitment towards organization, become hard worker
to the successful of the organization and provide salary service to the customer of the
bank. From the manger of the bank that the interview conducted the compensation
policy of the bank is based on branch performance.

The manager of the bank suggested that the basic factor that affect compensation
policies are external market condition, competitors, economy of the nation and the
cost of the living.

From the manager response compensation is very necessary towards increase

performance of the employees because compensation is merit based.

5.2 Recommendation

 Based on the fact that gathered from the bank employees the following
recommendations are suggested as follows:

 The organization salary and the living standard of the employees are matched;
the researcher recommended that the organization is better to maintain by hold
this strategy.

 The researcher recommended that, it is better to give salary increment

providing by reviewing the strategy of the bank.

 The salary given to the employee’s commercial bank of Ethiopia in Yirgalem

branch is fair that the salary received in the bank compared to the other

~ 34 ~
 received that hold the same job position in the bank, so then researcher
recommended that the organization should improve and maintain this strategy.
The Commercial Bank of Ethiopia in yirgalem branch offered fair payment
compared to other similar banks offered that hold the same job position. So,
the researcher recommended that the organization should keep and maintain
these strategies.

 Majority of respondents suggested that the basic salary provided by the bank
satisfy the employees, the researcher recommended that it is a better strategy
and maintain it.

 In addition to basic wage and salary the bank offered different type of
compensation these are bonus, housing allowance, transportation allowance
and retirement benefit; the researcher recommended making the organization
competitive in the sector, it is better to maintain this approach.

 The compensation that offered by the bank played a great role towards better
performance, so the researcher recommended that the organization is better to
improve its own compensation policy.

 In generally, the researcher recommended that the compensation package now

a day plays a great role towards motivate employees, perform at their best
level and ensure the competitiveness of the organization, so CBE Yirgalem
branch keep, maintain its current compensation policy and improve for the
future.

~ 35 ~
 REFERENCE

Garry.Dessler (2005), Human Resource management, 9th edition.

Pratezya Arik and Kato.M. (2011). the effect of financial and non-financial
compensation on the employee performance.2nd ed. International research symposium
in service management, Yogyakarta, Indonesia.

John M. Ivancevich (1989), Human resource management, 4th edition, University

of Houston.

Nawab DR.S and Batti K.k 2011, Influence of compensation on organizational

commitment and job.international journal of business and social science Vol.2.No.8.

Bantie workie (2004 E.C), Introduction to Management, Addis Ababa University.

Leone. Megginson (1981), Personnel management Human Resource approach, 4th

edition, University of south Alabama.

P lunked and Atoner (1996), Management meeting and exceeding and customer
expectative, 8th edition.

John M. Ivancevich (2001), Human resource management 4th edition

Wndell L.French (1998), Human Resource management, 4th edition.

Wayne F. Cascio (1992) Managing Human Resource management, 7thedit

Chiu, caruth and Handlogthen, 2001, Retaining and motivating employees

compensation preference personal Review, pp,402, Hong Kong and China

R.Wayne Mondy (1999), Human resource management, 7th edition.

~ 36 ~
 Appendix I

Hawassa University

College of Business and Economics

Department of Management

Dear respondents..

The main objective of this questionnaire is to collect data about compensation

packages and its impact on employee performance in commercial bank of Ethiopia in
Yirgalem branch. To success in obtaining the necessary and accurate information
your honest cooperation is highly appreciated on answering the question. The
information you provide will be used only for the research purpose and the researcher
invite you in advance that these information will not be disclosed to other party.

Instructions

 It is not necessary to write your name

 Thick this(√) in the provided boxes appropriate

I. Background of the employee/personal information

1. Sex: Male Female

2. Age: 20-30 30-40 40-50 above50

3. Educational level:
Certificate First degree

Diploma Second degree PhD degree

4. Service year: 0-3 6-9

3-6 9 and above

~ 37 ~
5. Your basic salary in birr
4000-5000 6001-7000 8000-9000
5001-6000 7001-8000 above 9000

II Basic Business information.

6. Does your monthly salary sufficient in according to your living standard?

Yes No
7.How often salary increment it given?
Every one year every three year
every two year above three year
8.How do you see the amount of salary (basic salary) you receive in the bank
compared to what others receive (Those holding the same job position in the bank)?
Very high Fair Very low
High Low

9. How do you the salary you receive in the bank compared to what others receive in
other similar Banks, holding the same position?
Very high Fair Very low
High Low

10. To what extent are you satisfied with your basic salary?
Very satisfied Very unsatisfied Neutral
Satisfied Unsatisfied
11. Is there any other type of compensation you receive than you basic salary?
Yes No
12. If ‘’yes’’ in question 11, what are they?
Medical and health insurance Housing allowance
overtime payment Transportation allowance
specify if any other………………
13. How often you receive (example bonus)
every six month every two year every three year
~ 38 ~
every one year every two year above three year
14.Does the additional compensation benefits you receive is fair compared to what
other similar banks offer, if any
Yes No
15.If’’ yes’ question 14 what other kind of additional benefit-you get. Please mention
them……………………………………………………………….

16. Do you get allowance payment?

Yes No
17.do you think that the compensation you get motivated toward better performance?
Yes No
18. If ‘yes’ on question No 18 please mention it ………………………………

~ 39 ~
 Appendix II

INTERVIEW PREPARED FOR MANAGERS

1. What is the compensation policy of the bank?

2. What are base factors will affect compensation policy design?

3. What is the compensation policy of the bank compared to other similar banks?

4. What are the main compensation packages that are practiced in the bank?

5. What is the contribution 0f compensation policy toward increase the

performance of the employees?

6. How often the compensation policy of the bank revived.

~ 40 ~