This chapter contains the following major sections. Firstly, Identification of relevant and recent literature. Secondly, summary of literature review – which highlights gaps in research which the study is expected to fill. Finally, theoretical and conceptual framework of the study will be addressed later in the chapter.
2.1 Identification of relevant and recently reviews:
Compensation systems play a significant role in promoting organizations’ strategic goals (Milkovich 1988). Traditionally, compensation systems were designed to strictly reward employees based on the specific jobs they performed. Earlier researches have concluded that employees are the most important resource of the organization, and to satisfy customers, organizations must first satisfy their employee’s requirements. And also, organizations have in the recent past experimented with this tradition as stated above and with increasingly varied forms of compensation based for example, on the market or on employee skills (Nebeker et al. 2001).
In comparing the traditional system with the skill-based pay systems, the latter rewards employees for the array of skills they possess or the combination of different jobs they can do. Two employees doing the same piece of work could be placed on very different pay levels because one may possess more skills than the other. Which is quite different from the job-based pay systems?
The result-based system approach to compensation could however be a very good system to ensure that irrespective of the skills you possess, your compensation is only tied to your output, as proposed by one researcher by the name Aguinis (2007). It is not always true that only the employee who demonstrates the competencies desired will produce the desired output and that makes the argument by Aguinis very valid
Defining compensation Milkovich and Newman (1999) stated that, Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. The Journal of Global Business and Economics (2010) also defines compensation as “the combination of all cash incentives and the fringe benefits mix that an employee received from a company which constitutes an individual’s total compensation.” (Chabra 2001) refers to Compensation as a wide range of financial and non-financial rewards given to employees in exchange for their services rendered to the organisation. According to him, it is paid in the form of wages, salaries and employee benefits such as paid vacations, insurance, maternity leave, free traveling facility, retirement benefits, etc. He indicated that the term ‘wage’ is used to denote remuneration to workers doing manual or physical work.
Thus, wages are given to compensate the unskilled workers for their services rendered to the organization. Wages may be based on hourly, daily, weekly or even monthly bases.
Compensation processes are based on Compensation Philosophies and strategies and contain arrangement in the shape of Policies and strategies, guiding principles, structures and procedures which are devised and managed to provide and maintain appropriate types and levels of pay, benefits and other forms of compensation (Bob, 2011). This constitutes measuring job values, designing and maintaining pay structures, paying for performance, competence and skill, and providing employee benefits. However, compensation administration is not just about money. It is also concerned with that non- financial compensation which provides intrinsic or extrinsic motivation for employees to improve in their performance (Bob, 2011). Compensation implies having a compensation structure in which the employees who perform better are rewarded much more than the average performing employees (Pearce, 2010).
Compensation Administration is concerned with the formulation and implementation of strategies and Policies that aim to compensate people fairly, equitably and consistently in accordance with their value to the organization (Armstrong, 2005). The task in compensation administration is to develop policies and procedures that will attain maximum return on Naira spent in the terms of attracting, satisfying, retaining and perhaps motivating employees (Anyebe,2003). Over time it has been a case in some organizations that their employees are under-remunerated or that some organizations do not have good compensation administration programs.
2.3 summary of literature review:
There are several factors that have been identified as influencing the productivity of employees. They include managerial factors, employees’ health, employees’ motivation, and interpersonal communication involved in the production process. Effect of compensation on employees’ productivity could be very strong in some organizations stated that good compensation for employees will be able to stimulate the emergence of fresh ideas and employees’ innovation. With so many ideas from employees, it would be very useful for the company. In a similar study, found that the existence of a good compensation of employees will make the health of employees also good. With the maintenance of health, the employee will get maximum performance opportunities. The number of working hours or employee present hours is able to obtain a maximum work performance. As a result, the planning process can be obtained with good production. They also noted that low compensation toward employees will trigger the employee to try to get their own business or side job. With the side business, it will disrupt the quality of employees’ work and concentration. Low concentrations of certain employees have a negative impact on quality and quality of production of goods in the company.
From these facts, it is clear that the influence of compensation on employee productivity is very strong. If it given more reasonable compensation to employees, the higher the productivity of employees. Conversely, if it given lower compensation for employees, the lower the productivity of the Financial Incentives in the Workplace No one works for free, nor should they. While pursuing money based on negative motives can lead to a poorer psychological well-being, this is not the same as pursuing money to provide security and comfort for oneself and family. Obviously, employees want to earn fair wages and salaries, and employers want their workers to feel that is what they are getting. To that end, it is logical that employees and employers alike view money as the fundamental incentive for satisfactory job performance. The use of monetary or other financial incentives in the classic work performance paradigm is based primarily on reinforcement theory. Reinforcement theory, they explained, focuses on the relationship between a target behaviour (work performance) and its consequences (pay) This is premised on the principles and techniques of organizational behaviour modification. Organizational behaviour modification is a framework within which employee behaviours are identified, measured and analysed in terms of their functional consequences (existing reinforcements) and where an intervention is developed using principles of reinforcement. In a much-publicized study, analysed thirty-nine studies conducted over four decades and found that cold-hard cash motivates workers whether their jobs are exciting or mundane, in labs and real-world settings alike. However, acknowledges that money is not the only thing that concerns employees. He noted that beyond some certain point higher salaries will make employees happier, but it will not “buy” better performance. In another study warned that employers who dole out small merit raises, less than 7% of base pay, may do more harm than good. According to her, small raises can actually be dysfunctional in terms of motivation because employees become irritated that their hard work yielded so little. As a result, she advises employers who must give small raises to be careful about linking them to results and to be scrupulous about being fair.
Compensation may be defined as money received for the performance of work plus many kinds of benefits and services that organizations provide their employee
2.4 Theoretical framework
Theoretical framework is set of pattern uniformity that is used to explain the relationship between to variables. the researchers is only focused by the two famous theory regards with compensation systems e.g. reinforcement theory, expectancy theory consequences and pay decision theory, agency theory.
2.4.1 Reinforcement theory: that a response followed by a reward is more likely to recur in the future (Thorndike’s Law of Effect). The implication for compensation management is that high employee performance followed by a monetary reward will make future high performance more likely. By the same token, high performance not followed by a reward will make it less likely in the future. The theory emphasizes the importance of a person experiencing the reward. Like reinforcement theory,
2.4.2 expectancy theory
(Vroom, 1964) focuses on the link between rewards and behaviours (instrumentality perceptions), although it emphasizes expected (rather than experienced) rewards (i.e., incentives). Motivation is also a function of two other factors: expectancy, the perceived link between effort and performance, and valence, the expected value of outcomes (e.g., rewards). Compensation systems differ according to their impact on these motivational components. Pay systems differ most in their impact on instrumentality: the perceived link between behaviours and pay, also referred to in the pay literature as “line of sight.” Valence of pay outcomes should remain the same under different pay systems. Expectancy perceptions often have more to do with job design and training than pay systems
2.4.3 Consequences of pay decision theory
is to understand what types of pay systems are most likely to be effective and how their effectiveness differs according to contingency factors such as business strategy, national culture, competitive environment, and employee characteristics, we need to have a good conceptual framework, or theory. In truth, there is yet no grand theory of compensation that takes these contingency factors into account, although recent work by Gomez-Mejia and Balkin (1992) is promising. In examining consequences, we need to recognize that effectiveness is a multi-faceted concept that could include at a minimum, cost, productivity, innovation, quality, financial, and attitudinal dimensions. Further, the relative importance of these dimensions will vary across organizations and business units.
At the individual level of analysis, theories have been used to show how pay plans can be used to energize, direct, and control employee behaviour. We briefly describe three such theories used in research on pay
Organization is defined as a group of people working together to achieve a common goal and for the organization to be able to achieve the common or set goal, its personnel which is the most important factors of production, should be compensated or reward adequately for them to be able to do their work effectively, because it is the personnel that will plan, organize, control and coordinate all the other factors of production, and it is very important for any management that want to survive or achieve its goal to be concerned about the welfare of its employees.
Total Compensation is used within organizations to promote performance and productivity of employees through motivation. It has been used to refer to rewards which Zigon (1998) defines as something offered after an action to increase occurrence of the same action which obviously points out to repeat of desired productivity. Another goal is to attract and retain best talents within the organization. To achieve these goals, compensation needs to be aligned to organizational strategies (Allen, Helms 2002). For example, a company pursuing differentiation strategy could use compensation to foster innovation among the employees to provide unique products while a company pursuing cost reduction could use compensation to foster wastage reduction
According to Zigon (1998) Managers have a wide variety of rewards to offer to employees at various cost levels which employees may find appealing. This requires understanding of individual employee preferences since employees are different. As well as monetary rewards, non-monetary rewards can be a
strategy of comprehensive performance improvement. Employees appreciate being recognised by people they work directly under (Nelson 2004). Allen and Helm (2002) confirms the importance of regular expression of appreciation by managers and leaders to encourage behaviour of employees to attain set goals. Reward system is the degree to which rewards are allocated according to employee’s productivity in contrast seniority, favouritism, or any other performance criterion. According to Jacob (2005) organization reward system should be perceived by employees as reinforcing the notion that most employees are good performers and there should be a linkage between reward and performance
2.5 Conceptual Framework
A conceptual framework is an analytical tool with several variations and contexts. It is used to make conceptual distinctions and organize ideas (Wikipedia).
The conceptual framework of this research is illustrated in the following charts. This illustration is made by the researcher and is based on his own understandings and interpretations.