Financial rewards alone will not increase job performance and satisfaction

A study into the relationship between rewards, job satisfaction and performance

26 April 2012

Dennis Bours, Dpbours@yahoo.com BSM023 Managing People (B), RGU

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Executive Summary
The historical idea that job satisfaction is related to job performance dates back to the early days of industrial psychology. The British are the second most dissatisfied employees in Europe, though Britain has not been marked by Europes lowest industrial performance figures. The aim of this study was to review the relationship between financial and non-financial rewards, job satisfaction and job performance. This study rejects there is a direct job satisfaction-performance relationship. It is plausible that financial rewards alone will not increase job performance, though research taking place in a developing economic environment with possible concerns of economic stability finds that financial rewards alone do increase performance under such circumstances. It is plausible that financial rewards will increase job performance if part of a wider rewards strategy, including non-financial rewards, though not accepted on the basis of the research being reviewed for this study.

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Table of Contents
Executive Summary ....................................................................................................................................... 3 Table of Contents .......................................................................................................................................... 5 List of Figures and Tables ............................................................................................................................... 6

1. Introduction............................................................................................................................................... 7 1.1 Report aim ........................................................................................................................................... 7 1.2 Hypotheses .......................................................................................................................................... 7 1.3 Research methodology ......................................................................................................................... 8 1.4 Report structure ................................................................................................................................... 8 2. Job satisfaction and job performance......................................................................................................... 9 2.1 Satisfaction and employee engagement ............................................................................................. 10 2.2 Job performance ................................................................................................................................ 12 3. Financial vs non-financial rewards............................................................................................................ 13 3.1 Financial rewards ............................................................................................................................... 13 3.2 Non-financial rewards ........................................................................................................................ 14 4. Conclusions.............................................................................................................................................. 16 5. Concluding remarks and recommendations ............................................................................................. 19 References................................................................................................................................................... 20

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List of Figures and Tables

Figure 2.1: Possible relationships between Job Satisfaction (JS) and Job Performance (JP) ............................. 9 Figure 2.2: Drivers to and elements of engagement ..................................................................................... 10 Figure 2.3: Employee engagement ............................................................................................................... 11 Figure 4.1: Possible relationships between constructs ................................................................................. 16 Figure 4.2: Financial rewards as a single moderating variable....................................................................... 17 Figure 4.3: Possible relationships between rewards, engagement and performance .................................... 18

Table 2.1: Estimated Effect Sizes for the Satisfaction-Performance Relationship .......................................... 10 Table 3.1: Financial and non-financial rewards ............................................................................................. 13

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1. Introduction
This studys subject matter is: financial rewards alone will not increase job performance and satisfaction .1 The idea that job satisfaction is related to job performance dates back to the early days of Industrial Psychology (Kornhauser and Sharp 1932, as stated in Wright 2006). Psychology Professor Mihaly

Csikszentmihalyi (1991) asserts: An organization whose employees are happy is more productive, has a higher morale, and has a lower turnover. Kay (1996) and Lumesse (2011) state the British are the second most dissatisfied employees in Europe, though Britain hasnt been marked by Europes lowest industrial performance figures. Do happier employees ensure increased job performance? Smith (2011) presents mixed research results analyzing employee happiness and actual economic performance. Zeynep (2012) states that happy employees result in increased retail sales.2

1.1 Report aim

This study aims to illustrate the relationship between financial rewards, job satisfaction and performance. More specifically, the various constructs are explained, the effect of financial and non-financial rewards towards job satisfaction and performance is reviewed and the inter-linkage between financial and nonfinancial rewards is assessed.

1.2 Hypotheses
Based on the above aim, this report will test the following hypotheses: H1: H2: H3: There is a direct relationship between job satisfaction and job performance. Financial rewards alone will not increase job performance. Financial rewards will increase job performance if part of a wider rewards strategy, including nonfinancial rewards.

1 2

Incentives and rewards are seen as one and the same construct and named rewards throughout the report.
Zeyneps article (2012) is mostly anecdotal in nature and only takes into account a very limited number of US retailers.

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1.3 Research methodology

This studys research methodology encompassed secondary on-line and off-line desk studies containing objective, unbiased knowledge, based on repeatable experiments and sound, valid and logical reasoning. The main question, whether financial rewards alone will increase job performance, is distilled across three hypotheses. This required describing the concepts of job satisfaction and job performance, which led to the construct of employee engagement, and the defining of performance as output and not behaviour related. With constructs clarified, the focus was on the relation and correlation between financial and non-financial rewards on output-related job performance.

1.4 Report structure

The job satisfaction-performance relationship is investigated in Chapter 2, linking job satisfaction and employee engagement. Chapter 3 explores the relationship between financial and non-financial rewards to employee engagement and job performance, looking at performance outcome measures. Conclusions are drawn and hypotheses testing are presented in Chapter 4. Concluding remarks and recommendations for future research are offered in Chapter 5.

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2. Job satisfaction and job performance

Organizational theorists (Arnold 2005) developed several viewpoints regarding the job satisfactionperformance relationship: (1) satisfaction causes performance; (2) performance causes satisfaction; (3) satisfaction and performance cause each other, (4) the satisfaction-performance relationship is moderated by (an)other variable(s); or (5) both are caused by (an)other external variable(s).

Figure 2.1: Possible relationships between Job Satisfaction (JS) and Job Performance (JP)

Numerous researchers studied each of these proposed relationships, though this did not result in consensus on which explanation is most valid across all settings or circumstances. Most findings point to the conclusion that the job satisfaction-performance relationship is weak at best. Jones (2006) analyzed various meta-analyses, presented in Table 2.1, and came to the same conclusion that there is a positive though very weak job satisfaction-performance relationship. The relationship seems to be an illusory correlation, being a perceived relationship between two variables that we logically or intuitively think should interrelate, but, in fact, do not (Chapman and Chapman 1969).

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Table 2.1: Estimated Effect Sizes for the Satisfaction-Performance Relationship (Jones 2006)

2.1 Satisfaction and employee engagement

One conclusion drawn by researchers, as represented in Table 2.1 (Wright and Cropanzano 2000), is that the weak job satisfaction-performance relationship relates to the narrow definition of job satisfaction. Wright and Cropanzano propose happiness as construct, capturing various life aspects. Jones (2006) calls it life satisfaction and both researches showed stronger correlations with job performance.3 Another construct is employee engagement, first described as an updated job satisfaction-concept (Schmidt et al. 1993). He defines employee engagement as "an employee's involvement with, commitment to, and satisfaction with work. Research (Blacksmith and Harter 2011, Harter et. al. 2009, Hulme 2006, Jeung 2011, Ryan and Edward 2000) defines a limited group of employee engagement drivers, visualised in Figure 2.2.

Figure 2.2: Drivers to and elements of engagement

3

It has to be noted that researches finding strong correlations were based on small research samples.

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Employee engagement goes beyond satisfaction, moving from the emotional - satisfaction with the job - to the behavioural and output related - performance on the job. The biggest difference between job

satisfaction and employee engagement is the purpose with which it is defined. Employee engagement is by definition employee behaviour demonstrating high levels of employee involvement, commitment, and loyalty. Main engagement drivers focus on those factors shown by research to be specifically related to job performance. (Blacksmith and Harter 2011, Harter et. al. 2009, Mars 2012)

Research (Buckingham and Coffman 1999, Blacksmith and Harter 2011, and Crabtree 2004) shows that the working population can be divided into three categories: 1. People who are engaged (committed, involved, satisfied, loyal, productive); 2. Those who are not engaged (just putting in time); 3. People who are actively disengaged (unhappy, spreading discontent). 29% of the working population is fully engaged. The rest of the population is either not engaged (52%) or actively disengaged (19%).

Figure 2.3: Employee engagement

This report does not focus on how to engage employees; the focus is on whether engagement impacts job performance. It is interesting to note that in the above research, productivity was seen as partly defining engagement, ie. engaged employees are committed, satisfied, loyal and productive.

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2.2 Job performance

Bauers (2004) study on job satisfaction and performance in the EU finds a number of drivers for the satisfaction-performance relationship, though most are drivers to and elements of engagement. Cook (2008) also concludes that the satisfaction-performance relationship is partly spurious.4 Despite the relevance of job performance as output measure in industrial and organizational psychology research, relatively little effort has been spent on clarifying and defining the performance concept (Campbell 1990, Campbell et. al. 1993). Job performance in this report will not focus on behavioural aspects, but on the outcome aspects of performance, referring to the results of the employees behaviour. Output performance measures include the following: Customer loyalty Profitability Productivity Employee turnover Quality (or defects).5 (Harter et. al., 2009) Safety incidents Absenteeism Shrinkage Patient safety incidents

The research found that the correlation is partly due to common causes of both constructs and these common causes are related to drivers to engagement as displayed in Figure 2.2. Output performance measures are industry and sector-specific.

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3. Financial vs non-financial rewards

This chapter reviews reward types and their effects on job performance, either directly or through engagement. Table 3.1 gives a non-exhaustive list of financial and non-financial rewards.6 7

Table 3.1: Financial and non-financial rewards

3.1 Financial rewards

Nimalathasan and Brabetes (2010) case study of the Sri Lankan peoples bank in finds strong correlations (0.61) between pay and job performance. It also finds strong correlations between promotion (0.57) and job performance, and working condition (0.74) and job performance which are non-financial rewards. Ajila and Abiolas (2004) Central Nigerian Bank focused research finds a significant relationship between financial rewards and job performance. Akanbi (2011) comes to the same conclusion researching rewards in

6 7

Rewards can be part of multiple categories, ie. a company car is partly a financial reward as well as manipulatable. Partly financial rewards are those that either replace an expense the employee would have had for his work otherwise, eg. a company car, or an expense the employee could have made otherwise, eg. gym pass or holiday trip, and the money can now be used differently. Clothing allowance can be both purely or partly financial, depending upon the representation aspect of the employees position.

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Nigerian flour mills. Hafiza et. al. (2011) comes to the same findings when researching non-governmental organizations in Pakistan. Performance-related pay (prp) is seen as a good indicator of the importance of financial rewards. Thompsons 1993 study as discussed in Matthewman et. al. (2009), Kohn (1993) and Pfeffer (1998), shows that employees do not find prp-schemes motivational, irrespective of their performance ratings. Money in itself is not regarded as a strong motivator. Herzberg et. al. (1956) claim: while the lack of it may cause dissatisfaction, money does not result in lasting satisfaction. And Pfeffer (1998) rightfully states: People do work for money but they work even more for meaning in their lives.

3.2 Non-financial rewards

Ajila and Abiolas (2004) and Akanbis (2011) research finds no significant relationship between the nonfinancial rewards of praise, recognition and employer recommendation towards job performance. They do find a significant relationship between financial fairness 8 and job performance. Hafiza et. al. (2011) also concludes that non-financial rewards9 have an insignificant impact towards job motivation and performance. Danish and Usman (2010) find an insignificant relationship between recognition and appreciation, and job motivation and performance in Pakistan. Bauers (2004) study on job satisfaction and performance in the EU finds that High Performance Workplace Organizations (HPWOs)10 perform better because of higher levels of job satisfaction. The main drivers for this relation are the involvement in flexible work systems, the increased autonomy over how to perform tasks, the opportunity to be part of decision-making and increased communication with co-workers. All of these are non-financial rewards, drivers to and elements of employee engagement (cf. Figure 2.2). Harters et. al. (2009) study focuses on non-financial rewards and their job performance relationship. Gallups Q12 survey instrument used focuses on drivers like satisfaction, recognition, praise, encouragement, involvement, commitment, feedback, dialogue, work relationships and opportunities. This study is a leading meta-analysis on the relationship between employee engagement and organizational

The financial fiarness principle has not been defined, but the study states that pay should be in line with profits made by the organization and wage differentials between high and low income earners should be within reason , Ajila and Abiola (2004). The non-financial rewards tested in this study are job autonomy, recognition, appreciation and level of challenge of tasks. HPWOs are characterized by at hierarchy structures, job rotation, self-responsible teams, multi-tasking, a greater involvement of lower-level employees in decisionmaking, the replacement of vertical by horizontal communication channels, and complementary HRM practice s that give employees the ap propriate incentives to participate in decision-making through the use of alternative payment schemes and increased employer provided training., Bauer (2004).

9 10

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performance outcome measures.11 In its seventh edition, the study incorporates 26 countries, though most research on which it is based still focuses on North-America.12 The study concludes that employee engagement relates to each of the nine performance outcomes (cf. Paragraph 2.2) and correlations are consistent across different organizations, with a 0.48 true score correlation between employee engagement and performance. The study further concludes that organizations in the top half on employee engagement double their chances of performance outcome related success compared to those in the bottom half.

11

The overall study involved 955,905 independent employee responses to surveys and 32,394 independent business/work units in 152 organizations, with an average of 30 employees per unit and 213 business/work units per organization. One hundred ninety -nine (199) research studies were conducted across the 152 organizations., Harter et. al., 2009
The meta-analysis includes data from 26 countries. The coverage of research studies now includes business units in Asia (Hong Kong, Japan, Korea, Thailand), Australia, New Zealand, Europe (Netherlands, Germany, United Kingdom, Ireland, France, Austria, Italy, Spain, Belgium, and Greece), former communist countries (Russia, Hungary, Lithuania, Czech Republic, Poland), Latin America (Brazil, Mexico), the Middle E ast (United Arab Emirates), and North America (Canada and the United States). , Harter et. al., 2009

12

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4. Conclusions
The British are Europes second most dissatisfied employees, though the UK has not been marked by Europes lowest industrial performance. Companies feel pay is not the only motivator; communication and open management are mentioned as other motivators, but the impact of these on job performance is not proven.

H1:

There is a direct relationship between job satisfaction and job performance.

Industrial psychology and some recent studies find an average to strong correlation between job satisfaction and performance. Though other studies and meta-analysis conclude that the relationship is not as strong, not necessarily direct and related correlation is partly due to common causes of both constructs and/or other moderating variables and wider constructs like employee engagement influencing the relationship. Hypothesis 1 on the direct job satisfaction-performance relationship is not accepted.

Based on the reviewed research, a possible relationship between the constructs is presented in Figure 4.1, though further research is needed to prove these relationships.

Figure 4.1: Possible relationships between constructs

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H2:

Financial rewards alone will not increase job performance.

Pay represents a very important factor in the employee-employer relationship. For the employer it represents a considerable part of operating expenses and affects staff recruitment and retention. For the employee it is vital to maintaining a standard of living and is seen as a value measure of his/her services or performance. Wages are also important to the government because it impacts economic elements like employment, inflation and development in general.

Studies find a moderate to strong correlation between financial rewards and job performance. The same studies also find other non-financial constructs strongly correlating to job performance, however they do not answer whether these are moderating variables towards financial rewards and its relationship with job performance. Other research finds that money in itself is not a strong motivator; People do work for money but they work even more for meaning in their lives (Pfeffer 1998). Hypothesis 2 on financial rewards alone not increasing job performance is plausible, though not accepted.

Research comes to contradictory conclusions, which might be related to the wider economic environment and stability under which research took place. Financial rewards alone seem to increase job performance in countries in which the economic system is still in development.

Figure 4.2: Financial rewards as a single moderating variable

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H3:

Financial rewards will increase job performance if part of a wider rewards strategy, including non-financial rewards.

Studies often explain the correlation of variables towards job performance; though seldom present conclusions on the relationships between these variables correlating with job performance. Research shows that a mix of rewards has a positive impact on job performance; though it is not clear what would the best mix of rewards and what the impact is of non-financial rewards on financial rewards. Hypothesis 3 on financial rewards will increase job performance if part of a wider rewards strategy, including non-financial rewards, is plausible though not accepted on the basis of the research being reviewed for this study. A possible relationship between rewards as drivers of engagement and performance is presented in Figure 4.3, though further research would be needed to prove these relationships.

Figure 4.3: Possible relationships between rewards, engagement and performance

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5. Concluding remarks and recommendations

This studys aim was to analyze the relationship between financial and non-financial rewards, job satisfaction and performance. This study rejects there is a direct job satisfaction-performance relationship. The relationship is not necessarily direct and job satisfaction as a construct is more emotion than output related, opposed to the main drivers of employee engagement specifically relating to job performance. It is plausible that financial rewards alone will not increase job performance, though research taking place in developing economic environments with possible concerns of economic stability finds that financial rewards alone do increase performance under such circumstances. It is plausible that financial rewards will increase job performance if part of a wider rewards strategy, including non-financial rewards, though not accepted on the basis of the research being reviewed for this study.

Researchers have been investigating the relationships between financial and non-financial rewards, job satisfaction and job performance; though most have not analyzed how financial and non-financial rewards interlink and influence one another and moderate the rewards-performance relationship. Further research is needed to prove how various reward packages influence job performance in differing economic environments.

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