Full Research Project – EFFECT OF COMPENSATION MANAGEMENT ON EMPLOYEES COMMITMENT: A STUDY OF UAC FOODS LTD, LAGOS.

Full Research Project – EFFECT OF COMPENSATION MANAGEMENT ON EMPLOYEES COMMITMENT: A STUDY OF UAC FOODS LTD, LAGOS.

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0       Preamble

This chapter presents the framework of the study in addition to a review of empirical studies on the subject. The following sub-topic was properly considered in the course of the study.

2.1       Conceptual Framework

Theories of compensation generally assume that greater performance requires greater effort or that it is in some other way associated with disutility on the part of workers. In order to provide incentives, these theories envisage the existence of reward systems that structure compensation so that a worker’s expected utility increases with observed productivity. Regardless of the effects of legislation on salaries in general, reward system continue to be influenced by several factors that are producing some important trends in compensating workers. One of such trends is aligning wages to the organizations objectives. Others include tailoring compensation to the needs of workers; better salary, and pay equity (Fisk, 2001).

 

2.1.1   Reinforcement Theories

Theories of reinforcement are centred not on need but on the relationship between behavior and its consequences. In the work place, these theories can be applied to change on-the-job behavior through rewards and punishments. Skinner, a professor at Harvard, was a highly contentious behavioral psychologist known for his work in operant conditioning and behavior modification. His reinforcement theories take into consideration both motivation and the environment, focusing on stimulus and response relationships. Through his research, he noted that a stimulus will initiate behavior; thus, the stimulus is an antecedent to behavior. The behavior will generate result; therefore, results are consequences of behavior.

According to McCoy (1992), “The quality of the results will be directly related to the quality and timeliness of the antecedent. The more specific the antecedent is and the closer in time it is to the behavior, the greater will be its effect on the behavior. The consequence provides feedback to the individual”. If the outcomes are considered positive, then the behaviour is positively reinforced. When the behaviour is positively reinforced, the individual is more likely to replicate the behavior. People tend to have an intrinsic need for optimistic reinforcement. When behavior is ignored, the behavior tends to go away or become extinct.

The three (3) types of reinforcement are the following:

1. Positive reinforcement: The application of a pleasant and rewarding consequence following a desired behavior, such as giving praise.
2. Negative reinforcement: The removal of an unpleasant consequence following a desired behavior, such as a manager no longer reminding a worker about a weekly deadline when the worker meets the deadline. This reinforcement is called avoidance.

Avoidance Learning: Employees change their behaviors’ to             avoid unpleasant consequences such as criticism or poor evaluation.

Extinction: The withdrawal of a positive reward. If the behavior is no longer positively reinforced, then it is less likely to occur in the future and it will gradually disappear.

Punishment: The application of an unpleasant result when an undesirable behaviour occurs to reduce the likelihood of that behavior happening again. This form of reinforcement does not indicate a right behaviour, so its use in business is not usually appropriate.

1. Continuous reinforcement can be effective in the early stages of behavior modification, but partial reinforcement is more commonly used. Reinforcement is most effective when it is administered immediately. The appropriate of a reward depends on the situation. But for managers to apply rewards appropriate for job performance, it is necessary to understand what constitutes a reward. And no single reward will be perceived positively by all employees. Rewards, however, are important in behavior-based motivation plans because they reward employee behavior that is desirable for the company.

According to McCoy (1992), both incentives and recognitions provide a reward; however, incentives drive employee’s attitude while recognition is an after-the fact display of appreciation for a contribution Financial rewards are certainly important in compensation programs. Social recognition gives employees a sense of self-worth by acknowledging the contributions they have made. This recognition could be given in the form of a ceremony that helps to validate and is an important compensation- and one that probably cost a company very little in relationship to the benefit to employees.

2.1.2 The Need Hierarchy Theory

The need hierarchy theory has been advanced by many theorists. Need hierarchies approach assume that people have different needs that can be arranged in a hierarchy of importance. The two popular are Maslow’s hierarchy of needs and the ERG theory.

Maslow’s Hierarchy of Needs:  Abraham Maslow (1954) a human relationist, argued that people are motivated to satisfy five need levels. Maslow’s hierarchy of needs shown in figure 2.1. At the baseof the hierarchy are the physiological needs things like food, sex, and air that represent basic issues of survival and biological function. In organizations, thee needs are generally satisfied by adequate wages and the work environment itself, which provides restrooms, adequate lighting, comfortable temperatures, and ventilation.

Next are the security needs for a safe physical and emotional environment. Examples include the quest for housing and clothing and the need to be free from worry about money and job security. These needs can be satisfied in the workplace by continuity (no layoffs), a grievance system (to protect against arbitrary supervisory actions), and an adequate insurance and retirement benefits package (for security against illness and for the provision of better return in later life). Even today, however, depressed industries and economic decline can put people out of work and restore the primacy of security needs.

Belongingness needs relate to social processes. They include the fellow need for love and affection and the need to be accepted by one’s peers. These needs are satisfied for most people by family and community relationships outside fixed job and friendships on the job. A manager can assist in satisfying these needs by allowing social interaction and by making employees feel like part of a team or work group.

Esteem needs is made up of two different sets of needs: the need for a positive-image and self-respect and the needs for recognition and respect from others. A manager can assist in addressing these needs by providing a variety of extrinsic symbols accomplishment such as job titles, comfortable offices, and similar rewards as appropriate. At a more intrinsic level, the manager can give challenging job assignments and opportunities for the employee to feel a sense of accomplishment.

The first on order of the hierarchy are the self-actualization needs. These needs involve realizing one’s latent capacity for continued growth and individual development. The self-actualization needs are perhaps the most complicated for a manager to address. In fact, it can be argued that these needs must be met wholely from within the individual. But a manager can assist by promoting a culture wherein self-actualization is possible. For instance, a manager could make available for employees a chance to participate in making decisions about their work and the opportunity to learn and use new information, skills, and capabilities.

Maslow suggests that the five (5) need categories comprise a hierarchy. An individual is inspired first and foremost to satisfy physiological needs. As long as they re-main, the individual is motivated only to fulfil them. When satisfaction of physical needs is achieved, they cease to act as primary motivational factors and the individual moves “up” the hierarchy and becomes concerned with security needs. This process on going until the individual reaches the self-actualization level. Maslow’s notion of the need hierarchy has a certain intuitive logic and has been accepted by many managers. But research has revealed certain challenges and defects in the theory. Some research has found that the five (5) levels of need are not always available and that the order of the levels is not always the same as postulated by Maslow. In addition, people from different backgrounds are likely to have different need categories and hierarchies. (Griffin, 2002).

2.1.3   The ERG Theory

Alderfer (1972) noted that, an alternative hierarchy of needs called the theory of motivation was developed. This theory reduced the need hierarchy developed by Maslow into three (3) levels. Existence needs is related to the physiological and security needs. Relatedness needs focus, on how people recount to their social environment. In Maslow’s hierarchy, they would include both the need to belong and the need to earn the esteem of others. Growth needs, the peak Level in the ERG schema, include the needs for self-esteem and self-actualization.

Although the ERG theory proposes that motivated behavior follows a hierarchy in somewhat the same fashion as suggested by Maslow, there are two important differences. First, the ERG theory proposes that more than one level of need cause motivation at the same time. For example, it suggests that people can be inspired by a desire for money (existence), friendship (relatedness), and the opportunity to learn new skills (growth) all at once. Second, the ERG theory was called a frustration-regression element. Thus, if needs remain discontented, the individual will become frustrated, regress to a lower level, and begin to pursue those needs again. For example, a employer previously motivated by money (existence needs) may have just been awarded a pay raise sufficient to satisfy those needs. Suppose that he then endeavours to establish more friendships to satisfy relatedness needs. If, for some reason, he finds that it is impossible to become better friends with others in the workplace, he eventually gets frustrated and regresses to being motivated to earn even more money.

2.1.4 The Two-Factor Theory

Another trendy content perspective is the two-factor theory of motivation. Frederick Herzberg (1959) propounded his theory by interviewing 200 accountants and engineers. He asked them to bring to mind occasions when they had been satisfied and motivated and occasions when they had been dissatisfied and unmotivated. Surprisingly, he found that diverse sets of factors were associated with satisfaction and with dissatisfaction—that is, a person might identify “low pay” as causing dissatisfaction but would not necessarily mention “high pay” as a cause of satisfaction. Instead, dissimilar factors—such as recognition or accomplishment—were cited as causing satisfaction and motivation.

This finding led Herzberg to bring to a close that the traditional view of job satisfaction was incomplete. That view supposed that satisfaction and dissatisfaction are at opposite ends of a single continuum. People might be satisfied, discontented, or somewhere in between. But Herzberg’s interviews had identified two diverse dimensions altogether: one ranging from satisfaction to no satisfaction and the other ranging from dissatisfaction to no dissatisfaction.

2.1.5 The Two-Factor Theory of Motivation

Hygiene Factors ·         Supervisors ·         Working conditions ·         Interpersonal relations ·         Pay and security ·         Company policies and administration

Motivation Factors ·         Achievement ·         Recognition ·         The work itself ·         Responsibility ·         Advancement and growth

 

 

 

 

 

Source: Griffin (2002) Management

Based on these findings Herzberg argues that there are two stages in the process of motivating employees. First, manager must endeavour that the hygiene factors are not deficient. Pay and security must be appropriate, functioning conditions must be safe, technical supervision must be acceptable, and so on. By providing hygiene factors at an suitable level, managers do not stimulate motivation but merely ensure that employees are not dissatisfied.” Employees whom managers attempt to “satisfy” through hygiene factors alone will usually do just sufficient to get by. Thus, managers should carry on to stage two—giving employees the opportunity to experience motivation factors such as achievement and recognition. The result is envisaged to be a high level of satisfaction and motivation.

Herzberg also went a step farther than most theorists and describes exactly how to use the two factor theory in the workplace. Specifically, he recommends job enrichment. He argues that jobs should be redesigned to give higher levels of the motivation factors.

Although widely accepted by many employers, Herzberg’s two-factor theory is not without its critics. One criticism is that the findings in Herzberg’s initial interviews are subject to diverse explanations. Another charge is that his sample was not representative of the broad population and that subsequent research often failed to uphold the theory. Robert and Lawrence (1967), At the present time, Herzberg’s theory is not held in high esteem by researchers in the field. The theory has had a major impact on managers, however, and has played a key role increasing their awareness of motivation and its importance in the workplace.

2.2       Conceptual Model

2.2.1   Needs and Expectations at work

According to Mullins (2007) motivation is a complex subject, it is a very personal thing and it is influenced by many variables which include the need of employee. Employee’s attitude is drive by his need to be met. Employee’s needs determined his attitude at work place. Fowler (2001) reminds us of the 12 human needs that have been around since the beginning of recorded history: family, health and well being, work/career, economic, learning, home/shelter, social relationships, spirituality, community, leisure, mobility and environment/safety. Work and private life in the new millennium will continue to revolve around the 12 human needs (Fowler, 2001).

Mullins (2007) opined that various needs and expectations at work can be categorized in a number of ways- for example the simple divisions into physiological and social motives or into intrinsic and extrinsic motivation.

1. Extrinsic motivation is related to ‘tangible’ rewards such as salary and fringe benefits, security, promotion, contract of service, the work environment and conditions of work. Such tangible rewards are often determined at the organizational level may be largely outside the control of the individual managers.
2. Intrinsic motivation is related to ‘psychological’ rewards such as the opportunity to use one’s ability, a sense of challenge and achievement, receiving appreciation, positive recognition and being treated in a caring and considerate manner. The psychological rewards are those that can actually be determined by the actions and behavior of individual managers.

2.2.2   Higher Set of Motivational Needs

According to Fowler (2001), the best-performing companies possess a set of values that creates the right conditions for high performance; he questions whether in such best companies there is something more going on that touches upon a deeper layer of human functioning, causing people to choose more freely, instead of being led by forces of which they are unaware; and it is a motivational needs system on which such preference is based. He suggests that in addition to the motivation needs system for physiological needs, sensual and enjoyment needs, and the need to respond to threatening situations, companies that get the best out of their people are characterized by a higher set of motivational needs system: attachment/affiliations oncoming the need for engagement and sharing, a feeling of community and a sense of longing to the company; and exploration or assertion concerning the ability to play and work, arise of fun and enjoyment, the need for self-assertion and the ability to choose.

Mullins (2007) discussed the complex and variable nature of needs and expectations as fallen under a simplistic but useful, broad three-fold classification as a starting point for reviewing the motivation to work.

• Economic Rewards: Such as pay, fringe benefits, annuity rights, material goods and security. This is an instrumental orientation to be gainfully engaged and concerned with other things.
• Intrinsic Satisfaction: Derived from the nature of the job itself, interest in the job, and personal growth and development. This is a personal orientation to be gainfully engaged and concerned with oneself.
• Social Relationships: Such as friendships, group working and the desire for relationship, status and dependency. This is a personal orientation to work and concerned with other people.
• Security and Job Satisfaction: It is generally believed that a job that offers security serves as a major boost in enhancing worker’s morale and employee’s attitude. Hence, workers will contribute their maximum efforts to help achieve organizational result.

Mullins (2007) asserts that motivation; job satisfaction and work performance will be determined by the comparative strength of these sets of needs and expectations and the extent to which they are fulfilled.

2.2.3   Frustration -Induced Behavior

According to Mullins (2007), there are two possible sets of outcome when an individual’s motivational driving force is blocked before reaching a desired goal. The two possible sets of outcome are constructive behavior or frustration. Constructive behavior as a positive reaction to the blockage of a desired goal and can take two main forms i.e. problem solving or restructuring. Problem solving is the removal of the barrier or blockage while restructuring is the substitution of an alternative. Furthermore, frustration means a negative response to the blockage of a desired goal and results in a defensive form of behavior.

According to Fowler (2001) there are many possible reactions to frustration caused by the failure to achieve a desired goal. These can be summarized under four broad headings, i.e. aggression, regression, fixation, and withdrawal. Mullins (2007) argued that these categories are not mutually exclusive and most forms of frustration induced behavior at work are a combination of aggression, regression and fixation. Aggression is a physical or verbal assault on some person or object. Regression is reverting to a childish or more primitive form of behavior.

Fixation is persisting in a form of behavior which has no adaptive value and continuing to repeat actions which have no positive results. Withdrawal is apathy, giving up or resignation. According to Mullins (2007), there are a number of factors which determine an individual’s reaction to frustration. These factors are level and potency, degree of attachment to the desired goal, strength of motivation, perceived nature of the barrier or blocking agent, and personality characteristics of the individual. He went further to suggest that it is important that managers attempt to reduce potential frustration through the following: effective recruitment, selection and socialization, training and development, job design and work organization, equitable personnel policies, recognition and rewards, effective communications, participative styles of management and attempting to understand the individuals’ perception of the situation.

Mullins (2007) in his conclusion asserts that proper attention to motivation and to the needs and expectations of people at work will help overcome boredom and frustration-induced behavior.

Positive Reinforcement or Negative Reinforcement

Same behavior likely to be repeated

Punishment or extinction

Same behavior less likely to be repeated

Behavior

Source: Adopted from Gibson, Ivancevich, Donnelly and Konopaske (2003). Organization: Behavior Structure and processes, 11th Edition, New York: McGraw –Hill Irwin

            Consequences of Behavior

 

 

 

 

 

 

 

2.2.4 The Main Causes of Low Commitment

Gibson et al (2003) identified the main causes of low commitment and productivity as perception, stereotype, attribution, attitudes, values and personality.

Perception: the process by which a person gives meaning to the environment. It comprises of organizing and interpreting various stimuli into a physical experience. Perception allows individuals select, organize, store and interpret stimuli into a meaningful and coherent picture of the world. The way an employee sees a situation often has much greater meaning for understanding behavior than the situation itself.

• An employer believes that an employee is given opportunities to use his judgment about how to do the job, while the employee feels that he has absolutely no freedom to make judgments.
• A subordinate’s response to a supervisor’s request is based on what he/she thought he/she heard the supervisor say, not on what was actually requested.
• The manager considers the product sold to be of high quality, but the consumer making a complaint feels that it is poorly made.
• A worker is viewed by one colleague as a hard worker who gives good effort and by another colleague as a poor worker who expends no effort.
• The salesperson regards his pay increase as totally inequitable, while the sales manager considers it affair raise.
• One- line operator views working condition as miserable, a co-worker right across the line regards working condition as pleasant.

 

 

 

 

 

 

 

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Factors influencing Perception – Stereotyping -Selectivity -Self concept -Situation -Needs -Emotions

Evaluation and Interpretation    of reality

Observation of the stimuli

Response behavior

Attitudes they formed

Stimuli (e.g. the organization’s reward system, the style of persuasion used by a supervisor, the work flow)

The Perception Process

 

 

 

 

 

 

 

Source: Adapted from Gibson, Ivancevich, Donnelly and Konopaske (2003)

Organizations: Behavior Structure and Processes, 11^th Edition, New York: McGraw-Hill

Stereotype: is an over-generalized, over simplified and self-perpetuating belief about people’s personal characteristics. The manner in which managers categorized others often reflects a perceptual bias. Age has been the basis for stereotyping employees. Researchers have found that managerial actions against older workers are influenced by stereotyping. The erroneousness of stereotyping can result in unfair programs for promotion, motivation, job design, or performance evaluation. It can also result in not selecting the best individual for a position. In an era of shortage of highly skilled job talent, organization will suffer from stereotyping that result in the rejection of a limited pool of candidates. Age, race, gender, ethnicity and lifestyle stereotype can prove extremely costly in terms of cost talent, jury judgments against the firm and the loss of goodwill and sales from customers in the stereotyped categories.

Attribution: is the process of perceiving the causes of behavior and outcomes. It is referred to as observing behaviors’ and drawing conclusions. Where causes of behavior are presented, they are usually explained in terms of individual or personality characteristics or in terms of the situation in which it occurred. Attribute can be dispositional or situational.

Dispositional Attributions: emphasizes some aspect of the individual such as ability, skill, or intentional motivation. It explains behavior in terms of something “within” the person such as aggressiveness, shyness, arrogance, or intelligence.

Situational Attributions: emphasizes the environment’s effect on behavior. It explains the reason for low performance and productivity as a result of a typical adjustment period in learning the ropes. It could also be as result of tardiness at work, which is explained by traffic jams or card trouble.

Attitude: are determinants of behavior because they are linked with perception, personality, and motivation. An attitude is a positive or negative feeling or mental state of readiness, learned and organized through experience that exerts specific influence on a person’s response to people, objects and situations. Attitudes are subject to change. This definition of attitude has certain implications for employers of labours. First, attitudes are learned, second, define our predispositions toward given aspects of the world. Third, attitudes provide the emotional basis of our interpersonal relations and identification with others. And forth, attitudes are organized and are close to the core of personality. Attitudes are intrinsic parts of a person’s personality. Affect, cognition and behavior are three components of attitude. These stimuli trigger affective (emotional), cognitive (thought), and behavioral intentions.

Fig 2.2:             Three Components of Attitude

Stimuli                                  Attitude                                       Outcomes                               Source: Adapted from Gibson, Ivancevich, Donnelly and Konopaske (2003) Organizations: Behaviour Structure and processes, 11th Edition, New York: McGraw-Hill/Irwin

Work Factors   -Job Design -Manager style -Company -Policies -Technology -Salary -Fringe Benefits

Components   -Affect   -Cognition   -Behaviour

Responses -Emotional: Statement about liking   -Perceptional: Statement about belief     -Action: Statement about Reaction

Values: Is the constellation of likes, dislikes, viewpoints, inner inclinations, rational and irrational judgments, prejudices, and association pattern that determines a person’s view of the world of which work is not an exemption. The importance of a value constellation is that, once internalized, it becomes (consciously or subconsciously) a standard or criterion for guiding one’s actions. The study of values, therefore, is fundamental to the study of managing; there is evidence that values are also extremely important for understanding effective managerial behavior.

Personality: Is a stable set of characteristics and tendencies that determines commonalities and differences in people’s behavior. A person’s personality is a relatively stable set of characteristics, tendencies, and temperaments that have been significantly formed by inheritance and by social, cultural, and environmental factors. This set of variables determines the commonalities and differences in the behavior of the individual.

2.2.5 Effect of Remuneration on Workers Commitment

Remuneration can take many different forms, including  monetary form or praise from superiors and co-workers, implicit promises of future promotion opportunities, feelings of self-esteem that come from superior achievement and recognition, and current and future cash rewards are associated with performance. Analysts, while recognizing that non-monetary incentives for performance can be important, tend to focus on monetary rewards because individuals are willing to substitute non-monetary for monetary rewards and because money represents a major claim on resources and is therefore in general preferred over an equal dollar-value payment in kind.

 

Evidence from research on compensation plans indicates that unequivocal monetary rewards in the form of transitory performance-based bonuses seldom account for an important part of a worker’s compensation. Medoff and Abraham (1980), who examine the pay of executive and professional employees in two large manufacturing firms, find little differences in earnings resulting from superior performance.

 

Lawler (1971) cites six separate studies of the relationship between pay and performance, and finds that “their evidence indicates that pay is not very closely related to performance in many organizations that claim to have merit raise salary systems. The studies indicated that many business organizations do not do a very good job of tying pay to performance. This conclusion is rather surprising in light of many organizations’ very frequent claims that their pay systems are based on merit. It is particularly surprising that money does not seem to be related to performance at the managerial level. Thus, the Medoff and Abraham proof seems to be indicative of general performance measurement and compensation systems, and we have no thorough understanding of the forces responsible for these practices. The pending benefits of tying pay to performance are obvious, and it is surprising to researchers that firms apparently resist introducing bonus-based compensation plans with enough financial “action” to have a major motivational effect. One explanation for the inadequate pay-for-performance plans, offered primarily by psychologists and behaviorists, is that monetary rewards are counter-productive. Deci (1972) argues that financial incentive actually lowers employee motivation, by reducing the “intrinsic rewards” that an employee receives from the job. Similarly, Slater (1980) opined that “Getting people to pursue money produces nothing but people chasing money. Using monetary incentives as a motivator leads to a progressive degradation in the quality of everything produced.”

 

Kohn (1988) in his article “compensation Can Be Bad for Business,” offers three reasons why merit-pay systems are counterproductive. “First, incentives encourage people to focus narrowly on a task, to do it as quickly as possible, and to take few risks. Second, extrinsic rewards can erode intrinsic interest. Finally, people come to see themselves as being controlled by an incentive.”

 

A second group of merit-pay critics argue that, while financial incentive schemes improve productivity in principle; in practice they induce significant adverse side effects that are costly to employee morale and productivity. The costs of dealing with many of the challenges induced by merit systems simply outweigh the limited organizational benefits they offer. Among the side effects often mentioned are horizontal equity concerns, and challenges associated with imperfect performance measurement.

 

Compensations are also tied to work levels in the firm and not to individuals; most of the average increases in an employee’s compensation can be traced to promotions and not to continued service in a particular position. Medoff and Abraham (1980), for example, find that between-work-level earnings differentials are more important than within-job-level differentials.

 

Promotions in companies serve two important and distinct purposes. First, individuals vary in their skills and abilities, jobs differ in the demands they place on individuals, and promotions are a way to match individuals to the jobs for which they’re best suited. This matching process occurs over time through promotions as workers accumulate human capital and as more information is generated and collected about the employee’s talents and capabilities. A second role of promotions is to give incentives for lower level employees who value the pay and prestige associated with a higher rank in the organization.

 

Promotions are used as the primary incentive device in most firms, including corporations, partnerships, and universities. The empirical advantage of promotion-based incentives, combined with the virtual absence of pay-for-performance compensation policies, suggests that providing incentives through promotion opportunities must be less costly or more effective than providing incentives through transitory financial bonuses. This forecast is mystifying to us because promotion-based incentive schemes appear to have many disadvantages and few advantages relative to bonus-based incentive schemes.

 

Steven et.al (2011) investigates the relationship between organization strategy and the use of performance measures in executive compensation. Their analysis shows that there is an increased stress on sales in the determination of executive compensation for firms pursuing a cost leadership strategy in order to attain competitive importance through low price and high volume while there is a decreased emphasis on accounting measures in firms pursuing a differentiation strategy, which require investments in brand recognition and ground-breaking products, investments that are subject to unfavorable accounting treatment. These outcomes indicate that compensation committees link executive rewards to firm strategy.

 

2.2.6  Incentives, Rewards and Recognition

The concepts of “incentive”, “reward” and “recognition” are quite interconnected and complementary in the context of employee motivation. It is hard to draw a line among them. The broadest category is the “incentive” which refers to any means that makes a worker desire to do better, try harder and expend more energy. It may be sub-categorized into two (2) division: monetary and non-monetary incentives. Monetary incentives can be said to be granting of reward in terms of money such as commissions, bonuses etc. Non-monetary or non-cash compensation do not involve direct payment of cash and they can be tangible or intangible. Some examples of this kind of compensations are; encouraging the employees by providing them with autonomy in their job and participation in decision making, assigning challenging duties, improving working conditions, recognizing good work through small gifts, letters of appreciation, plagues, tickets to restaurant etc., providing some services for the employees, organizing social activities in the work place Adler, Milne, and Stablein, 2001).

 

The difference between an incentive and reward may be noted while incentive aims to motivate and encourage certain behavior, reward is the appreciation for the accomplished behavior and it is a potential reinforce. Recognition covers monetary and non-monetary rewards and it refers to crediting, encouraging and appreciating individuals and teams who contribute, through their behavior and their efforts, to the success of the organization. It gives after-the fact reinforcement for precise types of performance or accomplishments and emphasizes what the organization values. Moreover, it helps to create a sense of a valued member of a successful organization. Examples of recognition are giving public praise, granting monetary and non-monetary rewards, celebrating and communicating successes (Alderfer, 1972).

 

2.2.7 Benefits of non-monetary incentive

The firm may receive extra benefits from specific rewards. Holiday travel might pay back in improved productivity for rested employees. Providing free stays in the other properties allows employees to become knowledgeable about them, which makes them more valuable employees. Also, if there is reason to believe that non-monetary incentive attract a specific type of employee, and that type of employee is more productive in a certain type of organization, then providing this kind of incentive can help attract a better group of employees to that company e.g a hotel wants to attract workers who like hotels. By awarding employees stays in corporate properties, people who enjoy hotels will self-select into those firms (Alonso & Lewis, 2001).

 

Beyond effort exerted to receive an award, a firm profit if the incentive system used creates longer-term benefits such as organizational commitment and organizational citizenship behavior. The organization must also be concerned that extrinsic rewards might crowd out intrinsic motivation. There is reason to believe that physical non-monetary incentives might be better at obtaining these long-term benefits in addition to the short term motivational impact.

 

2.2.8 Major Concept of Incentives

1. Underlying Concept of Incentive

According to Mullins (2007), the main concept of incentive is some driving force within individuals by which they attempt to achieve some goals in order to fulfill some needs. This model assumes that people’s behavior is determined by what motivates them. Their attitude is a product of both needs and incentives. That is, attitude = Function (needs – incentive).

Heinemann (1998) suggest that although motivation is a necessary contributor for employee’s attitude, it is not the only one. Along with attitude, motivation is also a combination of level of skill, knowledge about how to complete the task, feelings and emotions, and facilitating and inhibiting conditions not under the individual’s control. However, what is clearly evident is that if the director is to improve the work of the firm, attention must be given to the level of motivation of its members. The director must also motivate staff to direct their efforts (their driving force) towards the successful attainment of the goals and objectives of the organization.

1. Performance Incentives

Perhaps the most tangible way in which companies put motivation theories into action is by initiating incentive systems (Clifton, 2000). Incentives are compensation systems that tie pay to performance. There are many incentives used by organiations, some tying pay to individual performance and some to companywide performance. Pay-for-performance plans are very common among organizations.

At the same time, many downsides of compensations exist e.g it has been argued that incentives may create a risk-averse environment that diminishes creativity. This may happen if workers are rewarded for doing things in a certain way, and taking risks may negatively affect their paycheck. Moreover, research shows that incentives tend to focus worker’s energy to goal- directed efforts, and behaviors such as helping team members or being a good citizen of the company may be neglected (Ritzier, 2000). Despite their limitations, financial incentives may be considered powerful motivators if they are used properly and if they are aligned with company’s objectives.

1. Money as an Incentive

According to Mullins (2007) earlier writers such as Frederick W. Taylor (1856-1917), believed in economic needs motivation. Employees would be inspired by obtaining the highest possible wages through working in the most efficient and productive way. Performance was limited by physiological fatigue. For Taylor, motivation was a comparatively simple issue- what the worker wanted from their employers more than anything else was high wages. This concept is the rational- economic concept of motivation. The ideas of F.W. Taylor and his ‘rational economic needs’ concept of motivation and subsequent approaches to motivation at work have fueled the continuing debate about financial rewards as a motivator and their influence on productivity. Where there is little enjoyment in the work itself or the job offers little opportunity for career advancement, personal challenge or growth, many people may appear to be motivated, if not exclusively by money.

Cole (1998) suggests that for many hourly workers in the hospitality industry such as dishwashers, the work does not change much among different companies and there is little attachment to a particular company. For such staff, Weaver proposes a ‘Theory-M’ programmer based on direct cash rewards for above-average performance. A percentage base is calculated from the average performance of employees on the staff. According to Mullins (2007), we frequently see pronouncements from prominent business figures that motivation is much more about money’. Cole (1998) argues that ‘work is about letting people to know they are important, their hard work and efforts matter, and they are doing a good job. And this kind of recognition, in fact, can be more than money’. The short answer appears to be that for the huge majority of individuals, money is clearly important and a motivator at work. The extent and how important money is depends upon people’s personal circumstances and the other satisfactions they derive from work. The base line is surely the extent to which money motivates people to work well and to the best of their abilities.

According to Mullins (2007) pay may still make people tick; there are now a number of other important influences on motivation. For example, the feeling of being recognized and valued appears more important than money in motivating them to stay in a particular job. As Grayson and Hodges (2001) point out, ‘historically loyalty was bought and employers offered gradual progression up the hierarchy; a decent salary and job security in return for a hard work’. Increasingly, inspiration is based on values rather than purely on financial reward’. A similar point is made by Sanders (2003), if the 1980s were all about money, and people were only as good as their last bonus, in more recent years, time has become the new money, and quality-of- life issues have come to the fore. Benefits that replenish the psychological contract are becoming the most valuable, so holiday arrangement, career breaks and potential for flexible hours and home worthy are now on the agenda’.

Huck et al (2003) analyzed the influence of money on employee behavior and productivity and ask the question: what if employees are guided not only by monetary incentives but also by social norms? They further concluded that social norms interact with economic incentives and may have a large effect upon organizational performance.

2.2.9 Types of Monetary Incentives                                                   

The most frequently used compensations are listed as follows:

1. Piece Rate Systems: Under piece rate incentives, employees are paid on the basis of individual output they produce e.g a manufacturer may pay employees based on the number of purses sewn or number of doors fixed in a day. In the agricultural sector, fruit pickers are paid according to the amount of fruit they pick. These systems are suitable when worker’s output is easily observable or quantifiable and when output is directly correlated with employee effort. Piece rate systems are used in white-collar jobs e.g check-proofing in banks. These plans may inspire workers to work very fast, but may also increase the number of errors made. Therefore, rewarding worker’s performance minus errors might be more effective. Today, increases in employee monitoring technology are making it easier to correctly measure and observe individual output. For example, technology can track the number of tickets an employee sells or the number of customer complaints resolved, allowing a basis for employee pay incentives (Collin, 2002). Piece rate systems can be effective in increasing wemployee productivity. For example, Safelight Auto Glass, a nationwide installer of auto glass, moved to a piece rate system instead of paying workers by the hour. This change led to an average productivity gain of 20% per employee (Koontz, 1990).
2. Individual Bonuses: Bonuses are one-time rewards that follow specific accomplishments of employees. For example, an employee who reaches the quarterly goals set for her may be rewarded with a Jump sum bonus. Worker motivation resulting from a bonus is generally associated to the degree of advanced knowledge regarding bonus specifics.
3. Merit Pay: In contrast to bonuses, merit pay involves giving employees a permanent pay raise based on past performance. Often the company’s performance appraisal system is used to determine performance levels and the employees are awarded a raise, such as a 2% increase in y. One pending problem with merit pay is that employees come to expect pay increases. In companies that give annual merit raises without a different raise for increases in cost of living, it pay ends up serving as a cost-of-living adjustment and creates a sense of entitlement on the t of employees, with even low performers expecting them. Thus, making merit pay more incentive depends on making it truly dependent on performance and designing a relatively objective appraisal system.
4. Sales Commissions: Properly designed sales commissions are widely used to motivate sales’ employees. The blend of straight salary and commissions should be accurately balanced to achieve optimum sales volume, profitability, and customer satisfaction. In many companies, the paycheck of sales workers is a combination of a base salary and commissions. Sales commissions involve rewarding sales employees with a percentage of sales volume or profits generated. Sales commissions should be constructed carefully to be consistent with company objectives. For example, workers who are heavily rewarded with commissions may neglect customers who have a low probability of making a quick purchase. If only sales volume (as opposed to profitability) is rewarded, workers may start discounting merchandise too heavily, or start neglecting existing customers who require a lot of attention. Therefore, the blend of straight salary and commissions needs to be managed properly.
5. Team Bonuses: In situations in which employees should cooperate with each other and isolating employee performance is more difficult, companies are increasingly resorting to tying employee to team performance e.g 2007, Wal-Mart gave bonuses to around 80% of their associates based on store performance. If wokers have a reasonable ability to influence their team’s performance level, these programs may be effective.
6. Gain-sharing: Gain-sharing is a companywide program in which employees are rewarded for performance gains compared to past performance. These gains may take the form of reducing your costs compared to estimates or reducing overall costs compared to past years’ figures. These improvements are achieved through worker suggestions and participation in management through employee committees.
7. Profit Sharing: Profit sharing programs involve sharing a percentage of company profits with all employees. These programs are companywide incentives and are not very effective in employee pay to individual effort, because each employee will have a limited role in influencing company profitability. At the same time, these programs may be more efficient in creating loyalty and obligation to the company by recognizing all employees for their contributions throughout the year.
8. Stock Options: A stock option gives an employee the right, but not the obligation, to purchase company stocks at a predetermined price. Options remain popular in start-up organizations that find it difficult to offer competitive salaries to employees. In fact, many workers in high-tech companies such as Microsoft and Cisco Systems Inc. became millionaires by cashing in stock options after these organizations went public. In recent years, stock option use has declined. The main reason for this is the changes in options accounting. Before 2005, organizations did not have to report options as an expense. After the changes in accounting rules, it became more expensive for organizations to offer options. Moreover, options are less attractive or inspirational for workers when the stock market is going down, because the cost of exercising their options may be higher than the market value of the shares. Because of these and other problems, some companies started granting employee’s actual stock or using other incentives. For example, Pepsi Inc. replaced parts of the stock options program Admin
9. with a cash incentive program and gave managers the choice of getting stock options coupled with restricted stocks (Brandes, 2003).

2.2.10 Non Monetary Incentives

1. Awards: Plaques and other recognition awards may motivate employees if these awards fit with the company culture and if they reflect a sincere appreciation of employee accomplishments. Some companies manage to create effective compensation systems on a small budget while downplaying the importance of large bonuses. It is possible to motivate workers through awards, plaques, or other symbolic methods of recognition to the degree these methods convey sincere appreciation for employee contributions e.g Yum Brands Inc., the parent firm of brands such as KFC and Pizza Hut, recognizes employees who go above and beyond job expectations through creative awards such as the seat belt award (a seat belt on a plaque), indicating the roller-coaster-like, fast-moving nature of the industry. Other incentives include things such as a plush toy shaped like a jalapeno pepper. Hewlett-Packard Development Company LP has the golden banana incentive, which came about when a manager wanted to reward an employee who solved an important problem on the spot and handed him a banana lying around the office. Later, the golden banana award became an award bestowed on the most innovative employees (Nelson, 2009). Another alternative way of recognizing worker accomplishments is awarding gift cards. These methods are more effective if employees have a choice among alternatives (such as between restaurants, or between a restaurant and a retailer). The benefit of gift cards over pay is that instead of paying for life’s necessities such as mortgage or college, employees can enjoy the gift of going out to dinner, going on a vacation to place, or acquiring a cool gadget they may not have purchased with their own money. Thus, these awards may help create a sense of obligation to the organization by creating positive experiences that are attributed to the company.
2. Promotion: This is an elevation employee gets as a result of his contributions to the development of the organization. It is additional responsibilities given with additional remuneration.

• Training and development: Provision for self-improvement and betterment of the previous work is provided by the organization to the employee. It is also a means of incentives provided to encourage the employee in order to do better.

1. Free ticket trip: It could be given in such a way that will allow the faithful employee to take his family along to the trip, fully paid by the organization.
2. Scholarship for the Children: A faithful employee is also encouraged with the children’s scholarship in order to promote and enhance better performance to achieve organizational goals and objective.

2.2.11 Types of Compensation and Benefits

Compensation is payment a worker receives for services rendered. Payment typically happens as hourly wages or salaries, but can also take place as variable pay, such as commissions and bonuses. Benefits are usually extras you offer your workers, such as health insurance and 401(k) plans; however, some benefits are legally required.

Base or Guaranteed Pay

The basic cash amount you agreed to pay an employee is that worker’s base or guaranteed pay. In most companies, base pay is determined by an employee’s job description and position. The company sets a minimum and maximum range that an employee for a specific position may earn for the year. This amount can increase, decrease or stay the same, depending on the employee’s performance.

Variable Earnings

Piece-rate plans, merit-based programs, incentive bonuses and profit-sharing plans are types of variable compensation, which is based on an employee’s performance or results obtained. Depending on the position, an employer may combine base and variable pay. This may happen with a salesperson who receives a salary plus commission or sales bonus. Note that a bonus can be compensation or a benefit. For example, sales bonuses are compensation but annual Christmas bonuses are benefits,

Considerations

Compensation might also include supplemental wages, which are paid in addition to regular wages. Some supplemental wages, such as non-performance based bonuses and accumulated sick leave, are benefits. Others, such as commissions, overtime pay and severance pay, are compensation.

Equity Compensation

An equity-based compensation program lets you pay your employees with company shares, such as stock options, restricted stock, stock appreciation rights, profits interest and restricted stock units. Startup companies that cannot afford to pay their employees competitive wages or salaries may offer equity-based compensation instead, You can choose to pay your employees with stock instead of cash; however, this is a tricky process. Obtain legal advice if you decide to offer stock options as compensation.

Voluntary Benefits

Voluntary benefits are incentives you choose to provide your employees; you are not legally required to give them. They might include paid time off such as vacation, sick, personal and bereavement time and other forms of leave. You may also provide medical, dental, disability and accident insurance; a company vehicle and a cellphone; educational assistance; dependent care and adoption assistance programs; retirement plans; and transportation benefits. Moving, meal, travel and lodging reimbursement, wellness programs, athletic facilities, employee discounts and stock options are also voluntary benefits.

Mandatory Benefits

Legally required benefits include Social Security and Medicare taxes, which are used to fund programs that offer benefits to eligible retirees and disabled people and beneficiaries. Most employers must also pay federal and state unemployment insurance, which provides benefits to qualified unemployed individuals. If you have employees, you must carry workers’ compensation insurance, which compensates employees who suffer job-related illnesses or injuries. Depending on the state, you might also need to provide disability insurance coverage to employees who suffer non-job-related illnesses or injuries.

2.2.12 Components of Compensation

The Job Description: The Job Description of the employee that specifies how much should be paid and the parts of the compensation package.

The Job Description is further made up of responsibilities, functions, duties, location of the job and the other factors like environment etc.

These elements of the job description are taken individually to arrive at the basic compensation along with the other components like benefits, variable pay and bonus.

It needs to be remembered that the HRA or the House Rental Allowance is determined by a mix of factors that includes the location of the employee and governmental policies along with the grade of the employee.

Hence, it is common to find a minimum level of HRA that is common to all the employees and which increases in proportion to the factors mentioned above.

The Job Evaluation: The Job Evaluation that is a system for arriving at the net worth of employees based on comparison with appropriate compensation levels for comparable jobs across the industry as well as within the company.

Factors like Experience, Qualifications, Expertise and Need of the company determine how much the employer is willing to pay for the employee.

It is often the case that employers compare the jobs across the industry and arrive at a particular compensation after taking into account the specific needs of their firm and in this respect salary surveys and research results done by market research firms as to how much different companies in the same industry are paying for similar roles.

The components of compensation that have been discussed above are the base requirements for any HR Manager who is in charge of fixing the compensation for potential employees.

There are other variables as well that would be discussed in subsequent articles. This article has introduced several concepts around the topic of components of compensation and these concepts are crucial for HR professionals as well as those aspiring management professionals

2.2.14   Employee Commitment in an Organization

Compensation and employee commitment is a Human Resources field that has attracted increased research nowadays. Whilever (2001) studied the effect of human resource management practices on employee commitment using cross level analysis of hierarchical models. The findings revealed that organizations with human resources practices that focus on high commitment receive trust, confidence and increased commitment from the employees. Anvariet.al (2011) researched on the link between compensation practices and effective organizational commitment.

Avari (2011) is of the view that employee commitment is associated with behaviors of high involvement, reduced intentions of opting out of the organization, going extra mile to accomplish duties and task, willingness to help and uplift others at work and corporate citizenship. Employee commitment can be perceived as internal psychological force that makes an employee feel ready to work, accomplish tasks as specified, stick to the organization and speak positively about the organization.

Employee commitment can take different forms which are influenced by employee mindset. The forms of commitment according to Meyer and Allen (2007) are; affective, continuance and normative commitments. According to Meyer and Allen (2007), affective commitment is grounded on psychological position of the employee towards the organization.

Affective commitment is linked to emotional attachment, identification and involvement in the organizations activities and values. The other commitment is continuance commitment which is associated with opportunity cost considered by the employee were he to leave the organization. The cost is the psychological cost of working relationships, informal social groups, growth prospects and image or organization’s brand. The employee considers sticking longer in the organization if the opportunity cost is high. Normative commitment is the feeling of an obligation to remain in the organization. Normative commitment is largely out of reciprocity and the feeling of being highly indebted to the organization (Noble and Mokwa, 1999).

Employee commitment can be focused on various targets which are considered to be of importance to the employee (Cohen 2003). The foci include commitment to organization, occupation, team, customer, supervisor or trade unions. The foci are influenced by values, morals, performance, compliance, and competency and continuance culture of the organization also referred to as dimensions of commitment. Pare and Tremblay (2007) posits that the different forms and dimensions of commitment are critical in development of HR strategies, policies and practices aimed at increasing commitment at workplace.

2.3 Empirical Review of the Study

A great extent of empirical research has been conducted to examine the factors of influencing employees’ commitment and job satisfaction. Some studies have shown that job satisfaction is influenced by gender and age (Mesh’al, 2001; Gazioglu, Tansel, 2006).

Scheepers (2009) also examined the extent to which incentive systems affected the According to Kohn (1993) Incentive structures, however, are notoriously more tricky than they might appear to people who set them up. Human beings are both finite and creative; that means that the people offering incentives are often unable to predict all of the ways that people will respond to them. Thus, imperfect knowledge and unintended consequences can often make incentives much more complex than the people offering them originally expected, and can lead either to unexpected windfalls or to disasters produced by unintentionally perverse incentives.

Alfie (1993) argues that monetary incentives encourage compliance rather than risk-taking because most rewards are based only on performance. As a result, associates are discouraged from being creative in the workplace.

Another argument Kohn presents is that monetary incentives may be used to circumvent problems in the workplace. For example, incentives to boost sales can be used to compensate for poor management. Employers also may use monetary incentives as an extrinsic rather than an intrinsic motivator. In other words, associates are driven to do things just for the monetary reward versus doing something because it is the right thing to do. This can disrupt or terminate good relationships between associates because they are transformed from co-workers to competitors, which can quickly disrupt the workplace environment (Kohn, 1993).

In a perfect meritocracy, where the employees who work the hardest always reap the most rewards, incentives pose little problem. But no companies operate in an ideal world and thus incentives can breed resentment and discord among teams and employees. While it’s easy to quantify a salesman’s performance, it is harder to quantify a staff writer’s contribution to the department, even if the writer is adding just as much value to the company. That can lead those under an incentive scheme to feel unappreciated or the recipients of unfair treatment.

Incentives indenture employees to toil for the next small prize or award. The employee, forced to accumulate points and scores to validate his or her extra effort, is driven by the next incentive in the queue. He or she soon loses the sense of personal accomplishment one feels when one creates something of value. Like a mercenary, one’s work is cheaply sold for the next bit of praise or reward that management won’t release unless that employee earns his/her share.

According to Lyons (1994), incentives don’t work when they become an entitlement, leaving employees disappointed if incentive levels decrease from one year to the next. If the company lacks well-defined “best practices” in the field or does not drive financial performance through strategic or business planning, implementing an incentive plan alone will change little. The bottom line is employees may work harder, but their hard work may not significantly impact profitability. They will continue to install work unproductively, and the company’s business strategy will remain flawed.

Motivations of employees at information and communication technology firms. Statement of problem includes the need to motivate workers to achieve high performance. Methodology used was survey design. Data was analyzed with the use of Correlation Pearson. In accordance with the results of the study, an entrepreneurial reward system tends to focus on formal acknowledgement, social incentives and organizational freedom of employees to encourage corporate entrepreneurship.

Pouliakas (2008) tested the non-monotonic effect of monetary incentives on job satisfaction. The need to achieve job satisfaction was one of the problems examined. In the study, 1998-2005 of the British Household Panel Survey was used to investigate the ceteris paribus association between the intensity of bonus/profit-sharing payments and the utility derived from work.

Arnolds and Venter (2007) made an effort to determine the factors which affected the motivations of blue-collar employees at manufacturing and clothing retail firms. Manufacturing industry problems also include adequate motivation for its staff. Correlation was used to analyze the information gathered.

Ağırbaş et al. (2005) examined to what extent the head physicians assistants working at hospitals are satisfied by the motivational tools applied in the hospitals and if available motivational tools have an important effect on job satisfaction. Time of introducing incentives was a major problem of the study. Survey design methodology was applied and the data gathered were analyzed with the used of correlation. In the study, it is seen that no motivational tool provides the expectations of physician managers. It is also concluded in the study that such factors as the decrease of dismissal risk, improving the situations like promotion and appreciation and improving work place opportunities have significant and important effects on job satisfaction statistically.

Burgess and Ratto (2003) reviewed the incentive pay to improve public-sector efficiency and the evidence on its effects. The need to have a better policy in place was a problem looked at. Survey design was its methodology design.

Al-Angari (1999) examined the effects of incentive applications on the performances of employees in Riyadh Region Governorate. High performance goal was one of the problems noted.

Al-Johani (1997) made an assessment on the incentive system used at their institutions including the opinions of employees at Jeddah Migration Office. The need for effective incentive system and method of gathering opinions was also a problem examined. Survey methodology was applied while chi-square was used for the analysis. According to the findings of the study, it is emphasized that there is no great difference among the opinions of employees in terms of incentives and the most important incentives are financial incentives and then promotion.

Hilman (1987) examined the effects of financial incentives at medical institutions in terms of attitudes of doctors and their service. Attitude was a problem considered in achieving better services. The methodology used includes descriptive design while correlation was used to analyze the data. The researcher determined as a result of the analysis by taking the opinions of 302 doctors into consideration that financial incentives have important effects on the attitudes of doctors and service quality.

In another study by (Clarke, Oswald & Warr, 1996) on the relationship between age and remuneration and job satisfaction, the researchers found out that there is a direct correlation between job satisfaction and remuneration after controlling the age variable. This means that job satisfaction for the remuneration increases with age due to the low financial responsibilities with the growth of age.

Oswald (1996), the researchers examined data collected from more than five thousands employees. The result was that the job satisfaction declines with high level of education. The theory suggests that education has a negative impact on job satisfaction because increased education is associated with higher expectations, such a person may become dissatisfied with performing the routine tasks required of most jobs even their remuneration might be higher than younger employees. Such studies may indicate that the remuneration does not influence job satisfaction directly, but through other factors.

 

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