IMPACT OF COMPENSATION ON EMPLOYEE PERFORMANCE

(EMPIRICAL EVIDENCE FROM BANKING SECTOR OF PAKISTAN)

1.

Introduction

Compensation is the reward given to employees in return for their services rendered and it is
often the cornerstone of a productive workforce. The quality and performance of your companys talent
pool is usually directly dependent on how well you execute your compensation planning strategies. A
compensation package does not necessarily mean rewarding in the monetary form. It also includes
flexible benefits, medical care, work-life balance, as well as employee perks. Todays employees not only
work for the money, but also place equal emphasis on other aspects of compensation. In order to attract
the employee and motivate employee to increases their performance is by to make them know about cash
flow.
As arguments now days most individuals getting higher education they are not satisfied with their
jobs and turnover so it comes to the organization responsibilities to design the compensation plain to
retain the employees. Most employees believe their abilities that knows that if they perform well pay can
be increasing and in same meaning means compensation and rewards effects the employee decision
making to stay their organizations and also accepted the responsibility according to Bratian & Gold 1995.
Value employee training as a compensation and benefits packages has increases the performance
human resource outcomes normally increases the performance, satisfaction and productivity also stay
there and attracting. According to Mitchell and Holton people will stay or leave the company more
reasons they satisfied with their job promotional opportunity and work environment.
2.

Literature Review

2.1

Salary
According to research merit pay is the popular scheme been used by the organizations but they is
many factors of pay. Performance related pay normally effected employees performance creating
the output through pay and workers has more able to give pay structure according to the
performance. It can improves the individual motivation improve the performance of the employee
as performance related pay scheme been used.

2.2

Incentives and Rewards

Rewards as important role for employee performance. Effective employee reward systems can
significantly increase work performance. They can motivate employees to increase their work
quality and quantity and to align their performance with organizational objectives. They can
therefore be a very powerful influence on employee behavior, motivation and performance and
should be an integral component in any company strategy. Different level of people may be
influenced by different types of rewards. The organization should identify the types of rewards
affecting job performance the most and not to be left out, the level of workers motivation is also
highly affected by the rewards system. Generally, a reward is given in return for good work
or in recognition of merit or for performance of a service rendered. Rewards can either be
intrinsic, extrinsic or both. Intrinsic reward is directly related to the work itself as the individual
enjoys the reward as a result of completing the task successfully or reaching his goals. It is also
known as psychological rewards as it covers the opportunity to use ones ability, a sense of
challenge and achievement, receiving appreciation and being treated in a caring and considerate
manner.

2.3

Indirect Compensation

Non-monetary remuneration provided to employees, including annual leave, overtime allowance,

health insurance, life assurance, company car and mobile and pension funds. Note that both
standard contractual features (annual leave) as well as valuable benefits (healthcare) can be
included in indirect compensation. Indirect compensation compares to direct compensation,
which is monetary remuneration paid directly to employees for their services, starting with a
basic salary. The total remuneration package is a combination of direct compensation and indirect
compensation.
2.4

Employee Performance
Rewards is the key motive to increase the employee performance to expect well. The rewards
may be cash or recognition. According to Osterloh and Frey (2012) explained the mothly rewards
also increase the performance. According to Freedman (1978) recognition in pleasanter the
organization favorable works environment motivated the employee.

3.

Theoretical Framework

3.1
This study objective is to check the impact and relationship of the three factors on employee
performance as shown below:

SALARY

EMPLOYEE
PERFORMAN
CE

REWARDS
AND
INCENTIVES

INDIRECT
COMPENSATIO
N

Figure 1 : Schematic Diagram

3.2
The survey was conducted from various bank in southern Punjab approximately involved 45
banks and 200 questionnaires. All questionnaires regarding each variable are extracted from existing
questionnaires which published in journals and articles.

4.

Result and Discussion

4.1

Figure below show the result from the Correlation Analysis of all variables.
Performance
Performance

Rewards
Rewards

Moderate
Moderate
Positive
Positive

Salary
and
Rewards

Weak
Weak
Positive
Positive

Salary and
Indirect
Compensation

Salary and
Performance

Rewards and
Indirect
Compensation

Indirect
Compensation
and Performance

Figure 2 : Correlation Analysis

4.2
From the Regression Analysis finds Salary has positive impact on performance of employees,
rewards has negative and insignificant impact on employee performance, and show insignificant impact
of indirect compensation on employee performance or in other word indirect compensation has negative
impact on performance.
4.3
Descriptive Analysis show that all salary, rewards, indirect compensation are increase the
employees performance.
4.5
ANOVA Analysis on education basis finds the different educational group has different impact
which means salary has different positive impact on employee performance for all education groups,
rewards and indirect compensation has not same positive impact on employee performance.

5.

Result and Discussion

In conclusion, compensation will increase employee performance either it weak or moderate

positive relationship. Compensation plays a critical and major role in motivate employee in order to
achieve business objectives. Organization have to plan a compensation strategy to keep company
competitive and success. Therefore recommended that management prioritizes the implementation of a
performance management system to measure the output of employees and that should be used as a tool to
award the compensation to employees. Employees normally do not have any ideas of their entitlement
towards compensation and can be a result employer not providing them with such a details so its
automatically effected their interest about their job, satisfaction and future in the organization In
additional, in the phenomena of downturn economy, employees need to keep their financial under the
control for lifestyle betterment.