The Impact of Compensation and Benefits in Increase the Job Satisfaction and thus Improve Employees Performance in Organizations

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A Major Project

Presented to

The School of Graduate Studies

Department of Human Resource Development and Performance Technology

Indiana State University

Terre Haute, Indiana

By

Karimah Alamri, M.S., HRD

September 13, 2013

 

 

 

 

 

 

LIST OF TABLES

 

1. List of Mandatory and Discretionary Benefits …………………………………………19
2. Table 2: Represents the research sample……………………………………….………..26
3. Table 3: Likert scale……………………………………………………………………….27
4. Table 4: The correlation coefficient …………………………………………………..…28
5. Table 5: Distribution of sample by sex variable…………………………………………29
6. Table 6: Distribution of sample by educational qualification variable…………………29
7. Table 7: Distribution of sample by Position Type variable………………………………30
8. Table 8: Distribution of sample by Job Grade variable…………………………………..30
9. Table 9: Distribution of sample by Marital Status variable……………………….……..31
10. Table 10: Distribution of sample by Number of dependent children variable………….31
11. Table 11: Distribution of sample by Age variable……………………………………….31
12. Table 12: Distribution of sample by Years of Experience variable…………….………23
13. Table 13: Data Analysis of research dependent variables………………………………23
14. Table 14: The Level of Satisfaction about the research dependent variables………….36

 

 

 

 

 

 

 

 

LIST OF FIGURES  

 

1. Maslow’s Hierarchy of Needs………………………………………………………….….10

 

1. Herzberg’s needs theory…………………………………………………………………12

 

1. Components of Employee Compensation…..……………………………………………15

 

1. Employee Compensation Legal Considerations in the US….…………………………….16

 

1. Relative Importance of Employer Costs for Employee Compensation….……………….18

 

1. Detailed Breakdown of Employer Cost for Employee Compensation……………………18

 

1. Policy Issues in Designing Benefits Package……………………………………………19

 

1. Productivity growth and real hourly compensation growth, nonfarm business sector, selected periods, 1947–2009…………………………………………………………….20

 

1. Growth of real hourly compensation for production/nonsupervisory workers and productivity, 1948–2011…………………………………………………………………21

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

Chapter 1: The Impact of Compensation and Benefits on Employee Performance in             Organizations…………………………………………………………………………6

1. Introduction ………………………………………………………………………………6
2. Literature Review…………………………………………………………………………9
   1. Motivation and the Hierarchy of Needs…………………………………………..9
   2. Definition of Compensation and Benefits…………………………………….…12
   3. Components of Compensation and Benefits packages…………………….…….14
   4. Major Issues in Compensation and Benefits ……………………………………17
3. Role of Compensation and Benefits in Profitability & Sustainability of the Organization………………………………………………………………………18
   1. Current Structure of Compensation and Benefits in the Private Sector………..…18
   2. Employee Motivation and Success through Compensation and Benefits…………20
4. Summary…………………………………………………………………………………..23

Chapter 2: The Relationship Between the Job Satisfaction and Compensations…………..…24

I.      Methodology and Procedures……….…………………………………………………………………..……25

1. Research procedures………………………………………………………….25
2. The research sample…………………………………………………….……25
3. The questionnaire………………………………………………………….…26

II.      Results and Interpretation of the Research……………………………………………………………29

 

1. Introduction……………………………………………………………….….29
2. Analysis of personal characteristics (Independent Variables) ………………29
3. Analysis of work items (Dependent Variables).……………………….….…32

III.      Conclusions and Recommendations………………………………………………………………………34

 

1. Introduction …………………………………………………………………34
2. Results of Research dependent variables……………………………………34
3. The results of analysis the research Independent variables…………………37
4. Recommendations……………………………………………………………39

IV.      References……………………………………………………………………………………………………………42.

The Impact of Compensation and Benefits on Employee Performance in Organizations

 

I. Introduction

Amidst the various advances in technology that brought significant changes in the business environment like automation of business processes and mechanization of operations in what used to be manual- labor intensive companies, one thing that remains unchanged is the fact that the people in the organization is the company’s greatest asset (Duckham, 2013). Typically, companies strive to provide the most competitive compensation and benefits package to attract new talents and to retain the best employees in the organization. In the current business environment, these changes have consequently led to a paradigm shift in the role of the human resources (HR) department of many companies especially those that compete at a global level. Among these changes are the addition of new scope and function of the HR department like promoting work life balance program of its employees and the various initiatives to support the program like telecommuting, fewer workdays per week by increasing the number of hours per day, compensatory days off and other means that will benefit the employees (Gitman, 2002).

This study was completed to determine the impact of compensation and benefits (C&B) on employee performance and identifying the relationship between the job satisfaction and compensation in the organizations and how this impacts bottom line targets of business enterprises. The problem was to identify the relationship between compensation rates and the morale of employees. The different strategic approaches to the compensation and benefits currently implemented in various companies to gain competitive advantage over other firms in the industry will also be evaluated. The paper also aims to correlate compensation and benefits to employee motivation and its impact to profit margins. The factors and aspects that influence the level of satisfaction and subsequently performance of the employees have been of core concern by the researchers for a long time. Finally, This paper presents the research and qualitative study to find the factors related to the factors that drive job satisfaction in workplace. These satisfaction factors would contribute to the development of the employees work performance and thus achieve the goals of all the stakeholders.

Previous research

A number of researches have been conducted within the context of workplace and employee satisfactions. The problem at hand was establishing the relationship between job satisfaction/morale and the compensation rates of employees. The research has shown that the various interpersonal as well as organizational factors might be directly linked to the satisfaction of the employees (Dressler, 2011; Duckham, 2013). The provision of support for family members is one of the factors that might influence employee satisfaction. Incentives have been a motivating factor for the employees, where the structure of the remuneration is highly coupled (Fleck, Glaser & Sprague, 2011; Gitman, 2002). The fostering mindset of talents by means of proper reward has also been connected to the satisfaction of the employees that relates and affects the performance of the employees. One of the notable findings of the researches conducted so far found that the employee satisfaction does not depend only on salary and payment, but also the quality of workplace environment as well as other aspects including career development provision, flexibility, equality and non-discrimination (McNamara, 2013; Mishel, 2012; Senyucel, 2009).

Research Questions

The following research questions were employed to guide this study:

1. What performance factors affect workplace satisfactions for employees?

2. To what level employees are satisfied as a result of influential performance factors?

3. What is the impact of compensation in employees’ overall job satisfaction?

4. What is the implication of incentives and allowances towards employees’ job satisfaction?

1. Literature Review

 A. Motivation and the Hierarchy of Needs

Motivation explains why an individual would behave in a certain way and it has three components: first is ignition or the initial feeling or desire to achieve a certain goal, second is direction or the set of actions taken to achieve the goal and third is the maintenance of the direction until the goal is achieved (Senyucel, 2009). In a workplace setting the employee may set a goal of getting a raise in salary and the set of actions that he or she will take will be to increase the scope of her job by taking on new assignments or staying longer hours in the office to do more; the same employee will maintain this direction until the manager gives the raise. Motivation is unique to each an every individual, what motivates one may not be entirely applicable to another but they may be classified under a general taxonomy of needs like Maslow’s theory on the hierarchy of needs that is still widely used by business organizations in their human resources departments.

 

Human motivation in the most basic sense is driven by the presence of unsatisfied needs thus; a thorough understanding of the employees’ needs will enable the organization to address them accordingly (NetMBA, 2010). In his 1943 paper, ‘Theory of Human Motivation’, Abraham Maslow introduced a humanist approach to management by presenting the hierarchy of needs which are often illustrated in a five tiered pyramid with the most basic of needs in the base and the more complex ones are at the top as shown in Figure 1. The hierarchy implies that the satisfaction of the most basic needs is a prerequisite to seeking the other more complex needs in the identified in the pyramid.

 

 

 

	Figure 1. Maslow’s Hierarchy of Needs.Retrieved from: http://www.netmba.com/mgmt/ob/motivation/maslow/

The most basic needs according to Maslow are the physiological needs; these are essentially what are needed by human to survive: food, water, shelter, clothing, rest and so on. If the body is starving or dehydrated and sick, then it is illogical to need something else before the physical needs are met. Once these are satisfied then the next tier, which is the need for safety from the elements, harm or danger is sought. Safety in this case can be in the form of being safe from physical threats or harm and emotional needs such as freedom from suffering which may be satisfied by residing in a secure location, availability and proximity of medical facilities and a stable and secure job. From a socioeconomic standpoint, it is important to note that the first two needs in Maslow’s hierarchy can be achieved by simply increasing the income level of an individual. When the first two needs are met, then a person would want to fulfill the social needs, which can be saved by interaction and connection with other people to find a sense of belongingness and friendship. In a workplace environment, this need can be satisfied by the relationships cultivated among team members in an organization who feel that they are an integral part of a group and that their individual contributions are essential to the success of the whole team. Managers can then take advantage of this relationship by fostering team spirit within the organization. The need for esteem would follow post the satisfaction of social needs and an individual will start to crave for attention and recognition from others, gain self respect or respect from others and achievement. At the top of Maslow’s hierarchy of needs is self actualization or the need to reach one’s full potential, to be all that one is capable of as well as the quest for truth, justice and wisdom. A caveat though is the fact that self-actualization is never satisfied, it grows continuously and individuals who have this need perennially seek more and better. According to Maslow, only a few reach this level and perhaps it can be considered as man’s greatest virtue and flaw. It is also worthy of note that Maslow has refined his hierarchy later on and included another tier between self esteem and self actualization, which is the need for knowledge and aesthetics (NetMBA, 2010).

Maslow’s hierarchy of needs presents an excellent framework for designing compensation and benefits strategies for companies because the tiered approach allows the organization to provide satisfaction to each of these needs. An example would be competitive pay and salary structures for the employees to allow them to buy nutritious food for their families and well as afford them to buy nice clothes and homes. The safety needs of the employees can be met by ensuring that the work areas are accident free, well lighted and the overall ambience and environment is conducive for working. Their social needs on the other hand can be provided by the business organization by fostering harmonious relationships in the workplace and organizing events that will allow them to socialize like town halls, team parties and outings. The organization can also organize reward programs to address the employees’ needs self esteem by recognizing top talents and awarding high performance teams. The examples mentioned are encompassing and general and so a more detailed discussion on the compensation and benefits programs of business organization to help their employees address their needs as well as keep them motivated at work that ultimately, will result to the achievement of the business goals of the organization follows in the succeeding sections of the paper.

Frederick Herzberg proposed another theory called the motivation hygiene theory. It emphasized that job satisfaction comes from various factors at the work place. Factors motivating different people may change as their live progress (Mishel, 2012.

). According to Herzberg, the individualism of employees is one of the biggest motivational factors. Employees need to feel independent and not having to be supervised in their work. Not having someone looking over their shoulders at all times motivates employees since they feel their employer trusts them. According to the theory intrinsic factors such as responsibility and recognition motivate employees. Extrinsic factors such as job security, salary and additional benefits contribute to high morale among employees. The figure below illustrates Herzberg’s theory of needs.

Figure 2: Herzberg’s needs theory
retrieved from www.brighthub.com

Victor Vroom of Yale proposed another theory called the expectancy theory. It proposes that what an individual expects to come from a decision or activity motivates him/her. The assumption is that all actions individuals take are aimed at maximizing pleasure and minimizing pain (Fleck, Glaser and Sprague, 2011).

1. Definition of Compensation and Benefits

Before delving into the specifics of employee compensation and benefits program, it would be prudent to look into theoretical grounding specific to the workplace environment. In this case it is John Stacey Adams’ Equity Theory on motivation which proposes that an employee seeks a balance between his inputs i.e. knowledge, skill, effort, etc. and the output which can be in the form of a wage, salary or reward (Senyucel, 2009). The theory implies that the employee will obviously has a standard of what constitutes a fair trade or balance between his inputs and his compensation which can be in reference to his colleagues’ salaries, pay grade or an industry benchmark. If an employee thinks that the inputs are not commensurate to the outputs then that employee may feel dissatisfaction and would either work less or ask for higher rewards for his efforts. Inputs in this case can either be quantitative like the number of hours rendered, service level agreements, transactions completed per hour or qualitative inputs like loyalty to the organization, flexibility in taking on tasks and stretch assignments, and the support provided to the organization. Likewise, outputs or rewards derived by the employee from his inputs can be quantitative like salary, cash bonus and other monetary forms of compensations. It can also be non-quantifiable outputs like recognition, promotions, positive appraisal or additional holidays. Maslow’s Hierarchy of Needs provides a generic definition of the needs that must be addressed by employers worldwide and answers the question which of these to prioritize; Adams’ Equity Theory on the other hand addresses the question of how much is to be provided to give satisfaction to the employees such that they are productive and happy.

The Equity Theory is straightforward and simple and has helped many organizations understand employee motivation and dissatisfaction, which directly impacts the quality of their performance and output levels. Many companies apply this theory to their own compensation and benefits package for their employees most especially to those at the staff or rank and file levels and is considered as one of the levers that can be pulled to increase productivity and efficiency in the conduct of business operations.

McNamara (2013) defines compensation as the payment that employees received for doing their jobs in the form of salary, wage or tips provided as base pay or variable pay. Base pay is dependent on the role in the organization, the scope of responsibilities as well as the skill sets required to perform the role. Of course, roles that entail more responsibility and technical expertise will have higher base pay than those that do not require specific skill sets and skill levels. Base pay is also market driven and like any other goods in the market, the price is dictated by the law of supply and demand hence, in demand skills and qualifications are often paid premium prices. In many countries, the minimum wage is set by the government to avoid labor exploitation of the populace and businesses operating inside that country must comply with the law else will be penalized or face prosecution. Variable pay on the other hand is paid out based on the performance appraisal of the employee on doing his job, if the employee was able to hit or surpass a target then the employee will be entitled to a variable pay depending on the companies policies. Compensation packages can be either a base pay a variable pay or both like an employee in the sales team for example gets a fixed monthly base pay and a variable pay that is paid out if the employee exceeds a monthly sales quota. For managers, a similar compensation package is also provided by the company by having both an incentive plan usually through stock options and performance plans that pays cash bonuses for high performing managers (Gitman, 2002).

Benefits are forms of value other than the base pay in return for their contribution to the company and may be in the form of health and life insurance, vacations, medical and dental plans, stock options, maternity and paternity benefits, retirement plan and many other forms (McNamara, 2013). It can be in tangible forms like those previously mentioned or intangible ones like appreciation from a manager, an office with a breathtaking view and even the company’s culture on diversity and open mindedness on sexual orientation can be considered a benefit on the part of the gay and lesbian community. Although the most of the benefits given to the employees as part of the package that paid for by the company, there are instances wherein the employee shoulders part of the cost like for example medical insurance which are often too costly for the company.

It is also important to point out that there are two major classifications of job roles in most organization, the exempt and non exempt roles and the fundamental difference is that exempt roles are paid a fixed amount for a given period regardless of the amount of time rendered. In short, exempt roles are not entitled to overtime but the base pay is usually higher than non-exempt roles. Non-exempt employees on the other hand are most often the entry-level positions and are entitled to overtime pay and can increase their monthly salary by working more hours.

C. Components of Compensation and Benefits Packages

Ducham stated that in order to be effective, compensation systems must: enable an organization to attract new talents, encourage loyalty and curb attrition rates, motivate for top notch performance as well as foster feeling of equity among its employees, reinforce corporate culture values and long term strategy, comply with government laws and regulations and reflect the company’s financial stance (Ducham, 2013). There are two components of a compensation package; these are the direct financial compensation and the indirect financial payments as shown in Figure 2.

	Figure 2. Components of Employee Compensation

The direct financial payments components are paid in increments of time like a monthly of bi monthly pay out of salaries and wages, or based on performance like an annual variable pay (i.e. performance bonus, merit bonuses based on last year’s achievements and paid out on the succeeding year). These components are determined based on the several criteria like job description, job analysis, job evaluation, pay structures and salary surveys. Job description entails the specifics of the role and is defined in writing stating the requisite educational qualifications, professional certifications, technical skill sets, functions, scope of responsibilities and other aspects of the job. It is where the employer and employee can level off their expectations from each other, obviously the more intensive the requirement stated the higher the pay grade will be. The job description contains the following basic requirements: Job Title or job identification, general nature of the job, major functions and activities, who the role reports to, supervises or works with inside and outside the company, essential functions, decision making authority, direct supervision, budget limit, and the standards of performance and working conditions. Job analysis pertains to the process of analyzing jobs and used as the basis of job descriptions and is usually done through information gathering methods like interviews, questionnaire and evaluation. Job evaluation on the other hand is the systematic approach to determining the appropriate compensation levels thru ranking, classification, factor comparison and point method. Pay structures are used in standardizing compensation packages within the business organization and includes the pay grades or band levels with their corresponding minimum, median and maximum salary amount per pay grade or band level. The collection of salary data is done through salary surveys or is purchased from a third party vendor and includes the industry average salaries, inflation indicators, cost of living indicators, salary budget averages and other pertinent information. Compensation packages must also be in accordance with existing laws and legislations enacted by the government, companies in the United States for example must be compliant to the Fair Labor Standard Act that controls the minimum wage, overtime pay, equal pay for men and women and controls child labor as well as other laws such as National Labor Relations Act, Social Security Act, and others as illustrated in Figure 3 (Dressler 2011).

	Figure 3. Employee Compensation Legal Considerations in the United States

 

 

 

 

D. Major Issues in Compensation and Benefits

Compensation possesses a legal contract and the court can enforce the agreement between the employer and employee should the need arises. As for benefits, these are provided at the discretion of the employer and are most usually for competitive strategy to reduce employee turnover and attract prospective employees, however this benefits can be withdrawn at will with no legal repercussions (USLegal, 2013).

Minimum wage is another issue surrounding compensation packages especially for the non exempt employees whose monthly wages are tied to the number of hours they render. To protect them from being exploited, governments have decreed minimum wage acts and enforce minimum hourly rates that should be paid to these types of employees. Although the minimum hourly rate varies per state, the Department of Labor act as a watchdog of the federal government to ensure that exploitation does not happen in the country. Pay equity for men and women is another issue although this has subsided over the years as more and more firms recognize equality of genders. Racial and ethnic differences are also another issue as controversy regarding the variances in pay for ethnic groups like Hispanics, Asians, African Americans and other groups.

Issues in compensation have also been caused by drastic changes in the industry and global economy like the financial crisis and recession that followed. Some firms are forced to lay off employees while others had to cut pay and suspend some benefits. Although certain laws prohibit diminution of pay, many firms were forced to do so to stay above water and not declare bankruptcy.

 

 

1. Role of Compensation and Benefits in Profitability & Sustainability of the Organization
   1. Current Structure of Compensation and Benefits in the Private Sector

According to recent labor statistics from the US Department of Labor (2013), a huge chunk or about 70% of employer cost for employee compensation goes to wages and salaries while 29% goes to benefits as shown in the pie chart in Figure 4.

 

 

 

 

 

 

	Source: US Department of Labor, Bureau of Labor Statistics

The cost of benefits is from insurance, legally required benefits, retirement and savings, supplemental pay and paid leaves. The corresponding percentage distribution is shown in Figure 5.

 

 

 

 

 

 

 

	Source: US Department of Labor, Bureau of Labor Statistics

Although benefits as mentioned earlier are mostly an option for the company, there are legally mandated benefits that every employer in the US must provide to its employees enumerated in Table 1 along with the discretionary benefits.

Table 1. List of Mandatory and Discretionary Benefits

Benefits Required by Federal or Most State Law	Benefits Discretionary on Part of Employer
Social Security	Disability, Health, and Life Insurance Pensions
Unemployment Insurance	Paid Time Off for Vacations, Holidays, Sick Leave, Personal Leave, Jury Duty, etc.
Workers’ Compensation	Employee Assistance and Counseling Programs
Leaves under the Family Medical Leave Act	“Family Friendly” benefits for Child Care, Elder Care, Flexible Work Schedules, etc.
	Executive Perquisites

Source: US Department of Labor, Bureau of Labor Statistics

Figure 6. Policy Issues in designing benefits package

Business organizations are also confronted policy issues when designing benefit packages such as what benefits to offer, who receives coverage, whether to include retirees in the plan, whether to deny benefits to employees during their initial “probationary” periods, how to finance these benefits, the degree of employee choice in determining benefits, cost-containment procedures, and how to communicate benefits options to employees (Dressler, 2011). A framework is presented in Figure 6 in structuring the benefit package foe employees.

 

 

 

 

 

 

 

1. Employee Motivation and Success through Compensation and Benefits

Post the Second World War employee productivity has had strong positive correlation with compensation but that has changed since the 1970’s where a gap between productivity and compensation has been evident (Fleck et al., 2011). Figure shows the drastic change in productivity and hourly compensation from 1979-1990 as compared to th