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Problem Statement:

To identify and evaluate the effect of compensation on employee's performance

Objective of the research:

•What compensation is?
•How monetary compensation effects on employee's performance?
•How non monetary compensation effects on employee's performance?
•How compensation effect the organization's performance?
•What kind of compensation can play measure role in any organization?
•What kind of compensation as such does not affect the employee performance?
•What is the importance of compensation?

Back ground:
Compensation may be defined as money received for the performance of work plus
much kind of benefits and services that organizations provide their employee.
Compensation is recompense, reward, wage or salary given by an organization to
persons or a group of persons in return to a work done, services rendered, or a
contribution made towards the accomplishment of organizational goals. Wage,
dearness allowance, bonus and other allowance are examples of monetary
compensation, while good accommodation, children education, transport facilities,
subsidized ration of essential commodities, etc. come under non-monetary
compensation. In short, wage paid to collar workers or salaries paid to white collar
employee can be classified as compensation.
A good compensation package is a good motivator. Hence, the primary responsibility of
the HR manager is to ensure that the company's employees are well paid.

The remuneration paid, for the service of labor in production, periodically to an
employee/worker. Wages means any economic compensation paid by the employer
under some contract to his workers for the services rendered by them. Usually refer to
the hourly rate paid to such groups as production and maintenance employees' wages
include family allowance, relief, pay, financial support etc.
Salary is influenced by the size of a company by the specific industry, and in part by the
contribution of the incumbent to the process of decision-making. Salary refers to the
weekly or monthly rates paid to clerical, administrative and professional employees.
Salary is determined by mutual agreement between the individual and the employer.
An incentive scheme is a plan or programs 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 prizes.
The effective use of incentives depends on three variables. They are:
1. The individual.
2. The work situation.
3. The incentive plan.
Factors influencing compensation:
1. Organization's capacity to pay
2. Prevailing pay and benefits in the industry:
3. Compensation in the industry and availability of special competent personnel
4. Flexibility, i.e. kind of competencies and abilities in managers:
5. Performance/productivity/responsibilities of individual.
6. Organization philosophy such as to be leader or pay prevailing rates.
7. Qualifications and relevant experience.
8. Stability of employment and advancement opportunities.

Literature Review:
Compensation is the core of any employeement exchange.compensation motivate the
employee in different manner.
They analyze the relationship between pay and performance. Economic and
psychological theories predict that the design and implementation of a performance
measurement and compensation system affect the motivation of employees. Our survey
results demonstrate a positive relationship between the perceived characteristics of the
complete compensation system and extrinsic motivation. Intrinsic motivation is not
affected by the design of monetary compensation, but by promotion opportunities. The
compensation system also significantly affects work satisfaction and turnover intent.
Marco Van Herpen1, Mirjam Van Praag2 and Kees Cools1 Contact Information
(1) University of Groningen & The Boston Consulting Group, J.F. Kennedylaan 100, 3741 EH Baarn,
The Netherlands
(2) Faculty of Economics and Econometrics, University of Amsterdam, Roetersstraat 11, 1018 WB
Amsterdam, The Netherlands
the relationship between benefit and compensation policy and practice and a number of
attitudes and behaviors that affect productivity. A model for understanding how benefit
policy is translated into organizational productivity is also presented. It is clear from the
research discussed that compensation/benefit policy can have a sizable impact on
employee turnover, motivation, performance, and attitudes. However, because of
changing employee and employer needs, coupled with stagnant reward systems and
outdated benefit plans, most compensation/benefit programs are far from optimal and
almost all programs will undergo substantial redesign in the next decade.
William A. Schiemann1
A thorough understanding of internal incentives structures is critical to understand and
developed, it is determine to a large extent how an individual behaves inside an
organization.compensation is one of the most important factor,compensation is largely
independent of performance,effective bonding contracts,promotion bases incentives
system and the general reluctance of employees to fire.
Michael C .Jensen,Kevin J. Murphy ,George P. Baker

Changes in compensation from performance-sensitive (commission-based) to less

performance-sensitive (base salary plus commission) schemes hurt employee
performance. The less performance-sensitive plan retained fewer high-performance
salespersons and recruited more low-performance sales staff.
Joanna L.Y. Ho , Ling-Chu Lee, Anne Wu

Pay level influenced employee performance through its effect on organization-based

self -esteem indicates that organizations can increase the return-on-investment of their
compensation by reinforcing the connection between pay level and the employee's
value to the organization
DOnald G.Gardner,LInn Van Dyne and Jon L. pierce
Compensation strategy, we examined the extent to which organizations facing similar
conditions make different managerial compensation decisions regarding base pay,
bonus pay, and eligibility for long-term incentives. Second, working from expectancy
and agency theory perspectives, we explored the consequences of those decisions for
organizational performance. Using longitudinal data on about 14,000 top- and middle-
level managers and 200 organizations, we found significant differences between
organizations. Our results suggest that organizations tend to make different decisions
about pay contingency, or variability, rather than about base pay. Findings indicate that
contingent pay was associated with financial performance but base pay was not.
barry gerhart,George t.milkovich

according to John bishop an individual's relative wage depends on his/her productivity

relative to others doing the same job. Starting wages were influenced by background
characteristics and training cost realizations but not by relative productivity. Wages one
year later were influenced by productivity but the effects were small. The wage elasticity
was .2 at small establishments and 0 at establishments with over 400 employees. The
wage response to relative productivity and training costs was weaker in small labor
markets, suggesting that wages do not fully respond to performance because of the firm
specificity of job performance differentials.

Research Methodology:
• Type of Research
Quantitative Research
• Type of Study
Exploratory research has been followed for this study.
Data will be collected from two different sources.

• Secondary Data
Published article, Websites, L.E.G (University of Karachi)

• Primary Data
Following variables are included:
Monetary compensation
Profit sharing
Stock option

Non monetary compensation

Flexible work hour
Training pleasant work environment
Appraisal words
• Data Gathering
For data gathering I will design questionnaire.

• Contact Method
The respondents were contacted directly.


Sample size: 100

Sampling Element: Peoples of Karachi
• Sampling Type
Non probability sampling will be used
• Sampling Method
• Stratified sampling method is used
• We collect data from 10 service sector organizations
• We collect data from 100 employees which includes 40 females and 60 males
ALternative hypothesis:
Ho: compensation effects negatively on employee performance
Null hypothesis:
H1:compensation effects positively on employee performance

Line of action:
I have selected this topic to know about the impact of compensation on
employee performance in Karachi. I have chosen this topic because i m doing
specialization in human resource management and this report related to my field and it
is basic requirement of my course and as well as my degree.
Scope of study:
Through This study management of the organization will know how to improve the
performance of employees and their motivation level .this study will also helpful to
provide job satisfaction to employees.
1,William A. Schieman,The impact of corporate compensation and benefit policy on
employee attitudes and behavior and corporate profitability ,vol2
2.Marco Van Herpen1, Mirjam Van Praag2 and Kees Cools1 Contact Information
(1) University of Groningen & The Boston Consulting Group, J.F. Kennedylaan 100, 3741 EH Baarn,
The Netherlands
(2) Faculty of Economics and Econometrics, University of Amsterdam, Roetersstraat 11, 1018 WB
Amsterdam, The Netherlands,The Effects of Performance Measurement and Compensation on
Motivation, Volume 153
George P. Baker,Michael C . Jensen,Kevin J. Murphy,compensation and incentives
theory verses practice
3, Joanna L.Y. Ho ,University of California Irvine - Accounting Area, Anne Wu
National Chengchi University (Taipei), Ling-Chu Lee ,National Pingtung Institute of
Commerce,How Changes in Compensation Plans Affect Employee Performance,
Recruitment and
4, DOnald G.Gardner,LInn Van Dyne and Jon L. pierce, The effect of pay level on
organization-based self esteem and performance.
5, John bishop, The recoginition and rewards of employee performance
6, Barry gerhart, George t.milkovich, organizational difference in managerial
compensation and financial performance