RELATIONSHIP BETWEEN COMPENSATION SYSTEMS AND JOB

PERFROMANCE AMONG EMPLOYEES

HONG HUA TIMA

This project is submitted in partial fulfilment ofthe requirements for a

Bachelor of Science with Honours
Human Resources Development

Faculty of Cognitive Sciences and Human Development

UNIVERSITI MALAYSIA SARA W AK
2011
 ACKNOWLEDGEMENT

First of all, I want to express my highest gratitude to my supervisor, Mr.

Abang Ekhsan bin Abang Othman for his invaluable guidance and help throughout all
the way of completion of this Final Year Project. Never forget to express my
thankfulness to my supervisor that he was willing to spend his time in order to
explain and discuss the problem which facing in my research. I appreciate his
guidance and advice that facilitated me in completing this Final Year Project. Other
than that, I would like to thank Ms. Agatha and Profesor Madya Dr. Rusli who are
my evaluators in my FYP 1 and FYP 2. They have given me the constructive advice
and valuable comment to my study which allows me to correct the problem of the
study and also improve the quality of my study.
In addition, million thanks for two hotel industry in Kuching that allowed me
to conduct the questionnaires survey for pilot test and actual test in the hotel. Thank
specially for the staffs in both hotels for helping me to distribute the questionnaires in
hotels and informed me to collect back the questionnaires. Apart from that, I would
like to express my sincere thanks to all the respondents who were willing to
participate in the survey questionnaires and also provided the truthful information for
me.
For my beloved family, I would like to thank their spiritual, moral and
financial support throughout this research. Last but not least, thank you to all my
friends for their assistance, companionship, encouragement as well as sharing their
knowledge and ideas with me regarding this project whenever I was faced the
problem in doing this study.
Once again, I would like to convey my deepest thanks to all of you.
 ABSTRACT

RELATIONSHIP BETWEEN COMPENSATION SYSTEMS AND JOB

PERFORMANCE AMONG EMPLOYEES

Hong Hua Tima

The main purpose of this study is to detennine the relationship between

compensation system and job perfonnance among employees in the hotel industry.
The components of compensation that examined in this study included base salary,
perfonnance-based pay, recognition, and working condition. A total number of 65
employees in the hotel were selected as the sample in this study. Questionnaires were
used as an instrument in this study to collect the related data. Descriptive statistic was
used to explain the demographic characteristics of respondents by measuring its
frequency and percentages. Hypotheses were measured using statistical analysis
which included Independent T -Test, Pearson Correlation, and Multiple Regression.
The result has shown that there have significant relationships between four selected
components of compensations and employees' job perfonnance. Apart from that, the
discussion and past researchers regarding this study was also discussed. Lastly, the
summary of all chapters, recommendation for organization, human resources
practitioners, and future research, and limitations that encountered in this study will
be discussed.

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 ABSTRAK

HUBUNGAN ANTARA SISTEM PAMPASAN DAN PRESTASI KERJA

PEKERJA

Hong Hua Tima

Kajtan ini bertujuan untuk mengenalpasti hubungan antara sistem pampasan

dan prestasi kerja pekerja di industri hotel. Komponen pampasan yang dikajikan
dalam kajian ini termasuk gajt pokok, gajl berasaskan prestasi, pengiktirafan,
keadaan kerja. Sebanyak 65 pekelja di hotel lelah dipilih sebagai sampel dalam
kajian into Soal selidik dtgunakan sebagai instrumen dalam kajtan tnt unluk
mengllmplll data yang berkaitan. Statistik deskript~f lelah digllnakan untuk
menjelaskan ciri-ciri demografi responden dengan mengukur frekuensi dan
peratusan. Hipotesis diukur dengan menggunakan analisis statistik yang
merangkumi Test-t Berdikari, Korelasi Pearson, dan Regresi Berganda. Keputusan
telah menunjukkan bahawa empat komponen pampasan yang dipilih mempunyai
hubungan yang signifikan dengan prestasi kerja pekerja. Selain itu, perbincangan
dan penyelidikan yang lepas ten tang kajian ini juga dibincangkan. Akhirnya,
ringkasan zmtuk semua bab, cadangan untuk organisasi, pengamal sumber manusia,
.
dan bakal penyelidik, serla halangan yang dihadapi dalam kajian ini juga
dibincangkan.

111
 TABLE OF CONTENTS

Acknowledgement
Abstract 11
Abstrak III
Table of Contents IV
List of Tables Vll
List of Figures IX

CHAPTER 1 - INTRODUCTION

1.0 Introduction 1
1.1 Background of the Study 2
1.2 Problem Statement 5
1.3 Research Objective 7
1.3.1 General Objective 7
1.3.2 Specific Objective 7
1.4 Research Hypotheses 8
1.5 Conceptual Framework 9
1.6 Significance of Study 10
1.7 Definisi of Terms 11
1. 7.1 Financial Compensation 11
1.7.2 Non-Financial Compensation 11
1.7.3 Base Salary 12
1.7.4 Performance-based Pay 12
1.7.5 Recognition 12
1.7.6 Working Conditions 13
1.7.7 Job Performance 13
1.8 Summary 14

CHAPTER 2 LITERATURE REVIEW

2.0 Introduction 15
2.1 Context for the topic 16
2.1.1 Job Performance 16
2.1.2 Base Salary 18
2.1.3 Performance-based Pay 19
2.1.4 Recognition 19
2.1.5 Working Conditions 20
2.2 Basis for formulating conceptual! theoretical framework 20

IV
 2.2.1 Maslow Hierarchy of Needs Theory 20

2.2.2 Expectancy Theory 22

2.2.3 Equity Theory 24

2.3 Past Review 25

2.3.1 Gender 25

2.3.2 Base Salary 26

2.3.3 Performance-Based Pay 27

2.3.4 Recognition 29

2.3.5 Working Conditions 30

2.4 Summary 32

CHAPTER 3- RESEARCH METHODOLOGY

3.0 Introduction 33

3.1 Research Design 34

3.2 Population and Sample under Study 34

3.3 Data Collection Method and Procedures 35

3.4 Instrument of the Study 35

3.5 Pilot Test 37

3.5.1 Reliability and Validity of the Study 38

3.6 Data Analysis Procedures 39

3.6.1 Descriptive Statistics 39 I

3.6.2 Inferential Statistics 39 I

3.6.3 Independent T-Test 39 i

1
3.6.4 Pearson Correlation 40

3.7
3.6.5 Multiple Linear Regression
Summary of Statistical Method used to test Hypotheses
41

41 I
,
3.8 Summary 42 i

CHAPTER 4- FINDINGS AND DISCUSSION ~

4.0 Introduction 43

4.1 Descriptive Satatistic 44

4.1.1 Respondents' Demographic Factors 44

4.l.l(a) Gender 44

4.1.1 (b) Age 45

4.1.1 (c) Educational Level 47

4.1.1 (d) Length of Services 48

4.1.2 Employee Job Performance 49

4.1.3 Base Salary 51

4.1.4 Performance-based Pay 53

4.1.5 Recognition 55

4.1.6 Working Conditions 57

4.2 Validity Test for the Actual Test 59 i

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 4.3 Reliability Test for the Actual Test 61
• 4.4 Findings and discussion based on Hypothesis Testing 62
4.4.1 Independent Sample T-test (HoI) 62
4.4.2 Pearson Correlation (Ho2) 64
Pearson Correlation (Ho3) 67
Pearson Correlation (Ho4) 69
Pearson Correlation (Ho5) 71
4.4.3 Multiple Regression (Ho6) 74
4.5 Summary of the fmding 77
4.6 Summary 77

CHAPTER 5-SUMMARY, RECOMMENDATION, AND CONCLUSION

5.0 Introduction 78
5.1 Summary of the study 79
5.2 Recommendation 81
5.2.1 Recommendation for Organization 81
5.2.2 Recommendation for Human Resources Practitioners 82
5.2.3 Recommendation for Future Researchers 83
5.3 Limitations of Study 84
5.4 Conclusion 84
5.5 Summary 85

REFERENCES 86

APPENDIX 92

,
111\

VI
 LIST OF TABLES

Table 3.1

Total of Questionnaires distribution and collected 35

Table 3.2

Four-point Likert Scale 36

Table 3.3

Alpha coefficient of Pilot Test basedon 20 respondents 37

Table 3.4

Strength of Relationship between Independent and Dependent Variables 40

Table 3.5

Hypotheses Testing Method for Each Variable 41

Table 4.1.1 (a)

Distribution of respondents based on gender 44

Table 4.1.1 (b)

Distribution of respondents based on age 46

Table 4.1.1. (c)

Distribution of respondents based on educational level 47

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Table 4.1.1 (d)

Distribution of respondents based on length of services 48

Table 4.2

Employees' Job Performance based on influences of compensations 49

Table 4.3

Influences of base salary towards employees' job performance 51

Table 4.4

Influences of performance-based pay towards employees'job performance 53

~
Table 4.5
Influences ofrecognition towards employees' job performance 55

VB
Table 4.6
Influences of working conditions towards employees' job performance 57

Table 4.7
Goodness of data 59

Table 4.8
Alpha coefficient of Actual Test based on 65 respondents 61

Table 4.9
Independent Sample T -test 62

Table 4.10
Coefficient of Base Salary and employees' job performance 64

Table 4.11
Coefficient ofPerformanc-based pay and employees' job performance 67

Table 4.12
Coefficient of Recognition and employees' job performance 69

Table 4.13
Coefficient of Working Conditions and employees' job performance 71

Table 4.14
Stepwise Multiple Regression Analysis: Result of ANOVA 74

Table 4.15
Stepwise Multiple Regression Analysis: Result of Model Summary 74

Table 4.16
Stepwise Multiple Regression Analysis: Result of Coefficient 75

It
Vlll

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..
LIST OF FIGURES

Figure 1.1
The relationship between demographic factor and compensation systems
with employees' performance 9

Figure 2.1
What is Performance? 16

Figure 2.2
Maslow Hierarchy of Needs Theory 21

Figure 2.3
Expectancy Theory 23

Figure 2.4
Equity Theory 24

Figure 4.1.1 (a)

Distribution of respondents based on gender 45

Figure 4.1.1 (b)

Distribution of respondents based on age 46

Figure 4.1.1 (c)

Distribution of respondents based on educational level 47

Figure 4.1.1 (d)

Distribution of respondents based on length of services 48

ix
F ,...

CHAPTER 1

INTRODUCTION

1.0 Introduction

This research is to study the relationship between compensation systems and

employees' job performance. This chapter also includes the background of the
.
t,
r:
".~
study regarding how the compensation system will affect employees'
performance, statement of the problem, the objectives of the study, research
hypothesis, conceptual framework, significance of the study, and definition of
terms that used in this study.

.
!

1
1.1 Background of the Study

Employees is an important asset in an organization because whatever decision

or behavior of the employees will affect the successful or failure of the
organization. To ensure the best performance of the employees, organizational
leaders should motivate the employees by giving the rewards to them. Bergmann
and Scarpello (2001) said that compensation systems are conducted to motivate
and encourage the worker to work harder in order to attain the organizational
expectations (cited in Philips & Fox, 2003). According to Mondy (2008), "pay
and performance are directly related to achieving organizational goals. Workers
who best achieve their parts of organization goals are rewarded." (pg.21 0). This
shows that compensation as a motivator or reinforcement to encourage the
employees improves their performance and increases their commitment towards
the organizational goals (Nalini Govindarajulu & Daily, 2004).
Libby and Lipe (1992) also stated that performance incentives are able to
motivate the worker to perform well and they are more willing to contribute extra r
efforts and times towards their job (cited in Zuraidah Mohd-Sanusi & Takiah .
!
i
Mohd- Iskandar, 2007). Compensation systems can view as an important element 1
in retaining and improving the level of workers' performance in the organizations.
It is due to most worker views that compensations is their income, they need it to
survival and also to implement their responsibility towards family's expenses.
Therefore, they are willing to perform well in order to get the desired rewards.
Besides, compensation will also motivate some of the workers to improve their
performance in order to fulfill their self-actualization such as get the promotion
in an organization.
According to Legge (1995, cited in Baptiste, 2008), rewards will increase
employees' commitment towards organizational goals and they are more willing
to put more effort in their jobs and always develop themselves in order to provide
the desired performance. Besides, satisfaction of the employees towards their
rewards will also influence their performance (Fisher et aL, 2004, cited in
Baptiste, 2008). The consequences of increasing employees' satisfaction is
similar with increasing employees' commitment which is the higher

 compensation that employees get, the more willing employees to exert their
effort and improve their performance.

According to Smith and Rupp (2004), high compensation is one of the central
points to attract and retain the knowledge workers who able to produce
outstanding performance which is required by many organization. Within this,
knowledge workers seem as an vital resources for the organizations, if they are
satisfied with their compensations, they will be more willing to exert their total
knowledge towards the job performance and also work more diligently by
producing excellent performance.

According to Chiu et al. (2002, cited in Ghebregiorgis & Karsten, 2007), "pay
have a sign~ficant impact on employees behavior, performance, and effectiveness
in an organizations", thus top management should provide the desired
compensation to the employees in order to maintain or improve their
performance. However, different employees have different needs and desires.
Some of the employees are more attractive and motivated by acquiring the i
financial compensations (salary, performance based pay and allowance) whereas
!
some are more attractive by the non-financial compensations (recognition,
ii
working conditions, and opportunity development) (Lawler,1973; Miller,1991; .~1
Kohn,1993, cited in Nalini Govindarajulu & Daily, 2004). As a result, top i
management should clearly identify the needs of employees.
Furthermore, employees' wellbeing and workplace health and wellness
policies as the nonfinancial rewards for the employees and bring significant
effects to their performance and also organizational effective and profitable.
(Department for Work and Pensions, 2006; Tehrani et al., 2007 cited in Baptiste,
2008) For example, the employees who are working at the place where there are
stress-free and physically safe environment will be more capable to produce good
performance rather than those who working at the poor working condition.
Convenient workplace environment also helps to decrease the rate of
, absenteeism and turnover.
In addition, Jong and Hartog (2007) research demonstrate that some of the
respondents suggested that financial rewards are helpful to motivate employees

 provide extra efforts when implementing new servIces or introduce new

technology within an organization. However, Amabile (1988) research suggest
different ideas which intrinsic motivation is important than extrinsic rewards
(cited in Jong & Hartog). Based on two statement in above, no matter the
rewards system is in form of financial or non-financial is essential to motivate
and encourage the employee to contribute their effort or improving their
performance.

Nevertheless, the compensation system which is fairness and equity are more
required and attractive by employees. Goncharuk and Monat (2009) mentioned
that reward is one of the factors to improve employees' performance but the
rewards must be equity and provided immediately after the desired behaviors.
This is because the employees who received the equity compensation will be more
willing to exert the inputs and more likely to perform well due to their
contribution is appreciated and rewarded by the employers. Besides, the
employees are able to make improvement or change by notice the desired
behavior which is rewarded by the employers. This can also helps to improve the
productivity and reputation of the organization.

In addition, Morris et al. (2004) also stated that organization must provide
equality pay for the employees to encourage them to make the improvement (cited
in Ghebregiorgis & karsten, 2007). Equality pay is important issues in an
organization because most of the employees will compare their inputs with
outcomes (Morris et aI., 2004, cited in Ghebregiorgis & karsten, 2007). If they are
satisfied with the rewards system, they will be more motivated to work harder and
willing to create excellent performance. In conversely, they will leave the
company or produce poor performance intentionally if they are dissatisfied with
the rewards system.

4
II
1.2 Problem Statement

Employees' perfonnance is an important element to build the good reputation

for the outsider towards the image of the organization and also can prove the
prominent capabilities of the employees within an organization. This good
perfonnance can be maintained by rewarding the employees because "the
behaviors you reward are the behaviors you get" (Mondy, 2008). However, some
of the organization emphasizes more in the profit until they ignore the rewards of
the employees. If the employees are not satisfied with the compensation systems
provided by the organization, they will reduce their effort in perfonning their jobs
or less committed to the organizational goals. (Morris,Yaacob & Wood, 2004).
Furthennore, some of the top management utilizes "one program fits all"
approach to implement the compensation system in an organization (Nalini
Govindarajulu & Daily, 2004). This will reduce employees' satisfaction and also
produce poor perfonnance due to every individual employees have different needs
with others and they also pursue different compensations return by their efforts
and contributions. As a result, top management has to tailor the compensation
systems that are more suitable to the employees' needs in order to motivate them
and improve their perfonnance.
Although compensation systems seem to be crucial role in improving the
employees' perfonnance but it is difficult to implement effectively in an
organization (Bunning, 2004). Sometimes, unfair and inappropriate compensation
system will occurs due to different perception of employees towards the
compensation system and the managers may be bias in gender and race. The
manager might gives the higher compensation to the employees who are same
race or gender with them but give lower compensation to the employees who are
difference race and gender with them. Unfair compensation system can frustrated
the employees and some of them might leave the company if seriously. Therefore,
organizational must give equality rewards for their employees in order to maintain
their perfonnances and remunerate employees' contributions.

5
 Non-financial compensation is also important to increase or maintain the
employees' performance such as recognition, opportunity development, working
condition, and so on (Pfeffer et aI., 1995 cited in Smith & Rupp, 2004). Some of
the employees who work with the organization is because want to gain the
experiences and new knowledge rather than earn the money. Nevertheless, many
organizations are unrealized about it and only emphasizes in the financial rewards
(base pay and salary). Most of the manager are prefer to order their employees
rather than give them recognition and support. This will frustrate the employees
and reduce their motivation to improve their performance because they will think
that their performances are not appreciated by their employers. Besides, worse
working condition will also influence the cognition and emotion of the employees
and produce the low quality of performance.

In addition, sufficient funding is important for organization to provide the

attractive and expected compensation for the employees in order to motivate them
to perform well. Some of the companies are less ability to provide highest or
comparable compensation system will reduce the motivation of the employees and
reduce their efforts towards their performance indirectly. Besides, lack of
sufficient fund in providing the rewards for the employees will increase the rate of
turnover in an organization due to employees look for another company which is
more capable to pay highest and desirable rewards to them.

6
 1.3 Research Objectives

,.
1.3.1 General Objectives
I

The general objective of this study is to investigate the relationship between

compensation systems (financial and non-financial) and job performance among
the employees.

1.3.2 Specific Objectives

• To determine the difference between gender III employees' job
performance
• To determine the relationships between base salary with employees' job
performance.
• To determine the relationships between performance-based pay with
employees' job performance.
• To determine the relationships between recognition with employees' job
performance.
• To determine the relationships between working conditions with
employees' job performance.
• To determine the dominant component of compensations that affects
employees' job performance.

1.4 Research Hypotheses

HoI: There is no significant difference between gender in employees' job

Performance

Ho2: There is no significant relationship between base salary and employees' job
performance.

Ho3: There is no significant relationship between performance-based pay and

employees' job performance.

Ho4: There is no significant relationship between recognition and employees' job

performance.

Ho5: There is no significant relationship between working conditions and

employees' job performance.

Ho6: There is no dominant component of compensations that affects employees'

job performance.

1.5 Conceptual Framework

Demographic Characteristic

• Gender

~
(Yahaya, n.d.) Dependent Variables

Independent Variables Employees'

Job

Financial Compensation Performance

• Base Salary
(Torrington, Hall &Taylor, 2008)
• Perfonnance-Based Pay
(Gerhart, 2000, cited in Shields,
2007)
Non Financial Compensation

• Recognition
(Jeffries, 1997, cited in Nalini
Govindarajulu & Daily, 2004)
• Working conditions

(Baptiste, 2008)

Figure 1.1: The relationship between demographic factor and compensation

Systems with employees' performance

The conceptual framework in above show that the dependent variable and
independent variables of this study. The dependent variable which known as
outcome variable is the employees' job perfonnance. In other hands, independent
variables in this study which assume can bring effect on the dependent variable
are financial compensations (base salary, perfonnance-based pay) and non­
financial compensations (recognition and working conditions).

Besides, the employee's demographic characteristic which is gender also

be examined in this study to identify the difference between male and female in
employees' job perfonnance.

,.. .,..

1.6 Significance of The Study

This study helps top management to understand the relationships between

compensation system and employees' performance within an organization.
Besides, top management can be realized that which types of compensation bring
more attraction for employees and motivate them to improve their performance.
Through this, top management is able to tailor the most suitable compensation
systems of the organization in order to satisfy employees' needs. This is essential
due to employees are the main resources for the organization, their behavior and
contribution will affect the performance and reputation of the organizations.
Therefore, if they are satisfied with their rewards, they will be more willing to
exert their effort and contributions towards their job performance.

On the other hand, the employees will notices that their contributions and
performances are actually appreciated by the employers but it might compensate
in different ways. Some of them may get the financial rewards whereas some of
them may compensate in non-financial rewards. Apart from that, the employees
are able to distinguish the fairness or bias of the compensation system which
implement in the organization.

Lastly, the researcher can gains more knowledge about the components of
compensation system within an organization and its implications towards
employees' performance.

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1.7 Deimition of Terms
1.7.1 Financial Compensation

Conceptual Definition

Financial compensation includes direct financial compensation and

indirect financial compensation (Henderson, 1995 & Mondy, 2008). Direct
financial compensation refers to "the pay that a person receives in the
form of wages, salaries, commissions, and bonuses" (Mondy, 2008, p.242).
Indirect financial compensation also called benefits and it "consists of all
financial rewards that are not included in direct financial compensation"
(Mondy, 2008, p.242).

Operational Definition

In this research study, financial compensation refers to the reward which

perceives by employees in form of money in the specific time and the
amount of money which is provided depends on performance of
employees.

1.7.2 Non-financial Compensation

Conceptual Definition
Non-financial compensation is defined as "the satisfaction that a person
receives from the job User! or from the psychological and physical
environment in which the person works" (Mondy, 2008, p.242).

Operational Definition
Non-financial compensation III this study is the kind of compensation
which can satisfy the psychological and physical needs of employees in
the workplace.

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,..

1.7.3 Base Salary

Conceptual Definition

According to Heathfield (2010), "base salary is a fixed amount ofmoney

which excludes benefits, bonuses, or any other potential compensation
paid to an employee."

Operational Definition
Base salary in this study refers to initial monetary rewards which obtain by
employees at the end of every month and it does not include other
compensations.

1.7.4 Performance-Based Pay

Conceptual Definition

According to Shields (2007), performance-based pay is "any remuneration

practice in which part or all ofremuneration is based directly and
explicitly on employees' assessed work behavior and/ or measured results"
(p.348).

Operational Definition
In this research study, performance based pay is defined as certain amount
of money received by employees based on their level of performance or
their productivity.

1.7.5 Recognition

Conceptual Definition

"Recognition includes giving praise (compliments), awards (certificates of

t
achievement, private budgets, increased autonomy), and ceremonies
(public speeches and celebration) (YukI, 2002, cited in Jong & Hartog,
2007)."
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 Operational Definition

Recognition in this study refers to awards or praIse given by top

management to employees. This compensation shows that employers are
appreciated employees' contributions and performances.

1.7.6 Working Conditions

Conceptual Definition

According to Mondy (2008), working condition can defined as the

workplace environment which is comfortable, safe and healthy.

Operational Definition

In this study, working conditions refers to the workplace environment

which is convenient, harmony, and safety provided to employees in order
to improve their performances.

1.7.7 Job Performance

Conceptual Definition
Job performance can be referring as output measures such as productivity,
product and service quality, and employee turnover. (Dyer & Reeves, 1995;
Boselie & Dietz, 2003, cited in Baptiste, 2008)

Operational Definition

In this study, job performance is defined as the output and the productivity
which produce by employees in the specific times, quantity, quality and
areas.

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1.8 Summary
The overall of this chapter discuss about the main aspects of research
which includes background of the study, statement of the problem, research
objective, research hypotheses, conceptual framework, significance of the
study, and definitions of tenns for this study. This will be continued by more
comprehensive literature review for this study in the next chapter.

14