COMPENSATION SYSTEMS AND EMPLOYEE PERFORMANCE IN

MICROFINANCE INSTITUTIONS IN NYERI COUNTY, KENYA.

CATHERINE NKATHA KABIRU

D53/NYI/PT/33067/2014

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE AWARD OF THE DEGREE IN MASTER

OFBUSINESS ADMINISTRATION (HUMAN RESOURCE MANAGEMENT

OPTION) OF KENYATTA UNIVERSITY.

JUNE, 2018
 DECLARATION
This project is my own original work and has not been presented to any university or
institution of higher learning for examination for the award of a degree in any university.

Signature ……………………………. Date ……………………………..

Catherine NkathaKabiru

D53/NYI/PT/33067/2014

This research project has been presented for examination with my approval as Kenyatta
university supervisor.

Signature ………………………………. Date…………………………….

Dr. Paul-Waithaka

Lecturer,

Department of Business Administration

School of Business

Kenyatta University.

ii
 DEDICATION
I dedicate this work to my son Gad and my daughter Octavia.

iii
 ACKNOWLEDGMENT
The accomplishment of this work has successful through the continued technical
assistance of my supervisor Dr. Waithaka. I thank my employer for providing time and
creating conducive environment for the study. The encouragement and resilient of my
family through the tasking duration cannot go unacknowledged. I am indebted to my
colleagues for their moral support and encouragement.

iv
 TABLE OF CONTENT
Declaration ............................................................................................................................. ii
Dedication ............................................................................................................................. iii
Acknowledgement ................................................................................................................. iv
List of Tables ....................................................................................................................... viii
List of Figures ........................................................................................................................ ix
Abbreviations and Acronyms .............................................................................................. x
Operational Definition of Terms ........................................................................................ xi
Abstract ................................................................................................................................. xii
CHAPTER ONE: INTRODUCTION................................................................................. 1
1.1 Background of the Study................................................................................................... 1
1.1.1 Employee Performance ...................................................................................... 4
1.1.2 Employee compensation ................................................................................... 5
1.1.3 Performance of Microfinance Institutions ....................................................... 8
1.1.4 Microfinance Institutions in Nyeri ................................................................... 9
1.2 Statement of the problem ............................................................................................... 10
1.3 Objectives of the study .................................................................................................... 12
1.3.1 General objectives ............................................................................................. 12
1.3.2 Specific objectives ............................................................................................. 12
1.4 Research Questions ......................................................................................................... 12
1.5 Significance of the Study ................................................................................................ 13
1.6 Scope of the study............................................................................................................ 13
1.7 Limitations of the Study .................................................................................................. 13
1.8 Organization of the Study ............................................................................................... 13
CHAPTER TWO: LITERATURE REVIEW ................................................................. 14
2.1 Introduction ...................................................................................................................... 14
2.2 Theoretical Review .......................................................................................................... 14
2.2.1 Agency Theory ......................................................................................................... 14
2.2.2 Equity Theory ................................................................................................... 16
2.2.3 Maslow Hierarchy of Needs Theory ............................................................... 18
2.3 Empirical Review ............................................................................................................ 19
2.3.1 Salary and Employee Performance ................................................................. 19
2.3.2 Commission and Employee Performance ...................................................... 21

v
 2.3.3 Bonuses and Employee Performance ............................................................. 23
2.3.4 Job Promotion and Employee Performance .................................................. 25
2.4 Summary of Literature Review and Research Gaps...................................................... 26
2.5 Conceptual Framework ................................................................................................... 27
CHAPTER THREE: RESEARCH METHODOLOGY................................................ 28
3.1 Introduction ..................................................................................................................... 28
3.2 Research Design .............................................................................................................. 28
3.3 Target Population ........................................................................................................... 28
3.4 Sample Technique ........................................................................................................... 29
3.5 Data Collection Procedure ............................................................................................. 29
3.6 Validity and Reliability ................................................................................................... 30
3.7 Data Analysis ................................................................................................................... 32
3.8 Ethical Considerations..................................................................................................... 33
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSIONS .......................... 34
4.1 Introduction ...................................................................................................................... 34
4.2 Response Rate .................................................................................................................. 34
4.3 General Information ........................................................................................................ 35
4.3.1 Level of Education ......................................................................................... 35
4.3.2 Working Experience....................................................................................... 36
4.4 Descriptive Analysis ........................................................................................................ 36
4.4.1Effects of Salary ................................................................................................ 37
4.4.2 Effects of Commissions ................................................................................... 38
4.4.3 Effects of Bonuses ........................................................................................... 39
4.4.4 Effects of Job Promotion ................................................................................. 39
4.5 Employee Performance ................................................................................................... 42
4.6 Qualitative Analysis ........................................................................................................ 42
4.7 Correlation Analysis ........................................................................................................ 43
4.7.1 Relationship between Salary and Performance ............................................ 43
4.7.2 Relationship between Commission and Performance .................................. 44
4.7.3 Relationship between Bonuses and Performance ......................................... 45
4.7.4 Relationship between Job Promotion and Performance .............................. 45
4.8 Regression Analysis ........................................................................................................ 46
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATION ... 48
5.1 Introduction ...................................................................................................................... 48
vi
5.2 Summary of Findings ...................................................................................................... 48
5.2.1 Salary ................................................................................................................ 48
5.2.2 Commission ...................................................................................................... 49
5.2.3 Bonuses ............................................................................................................. 49
5.2.4 Job Promotion .................................................................................................. 49
5.3 Conclusions ...................................................................................................................... 50
5.4 Recommendations ........................................................................................................... 50
5.5 Suggestions of Further Study .......................................................................................... 51
References .............................................................................................................................. 52
APPENDICES ................................................................................................................ .. 56
APPENDIX I: SPECIMEN LETTER TO RESPONDENTS ............................................. 56
APPENDIX II: QUESTIONNAIRE..................................................................................... 57

vii
 LIST OF TABLES
Table 3.1 Sample Size ........................................................................................................... 28
Table 4.1 Level of Education ................................................................................................ 36
Table 4.2 Effect of Salary...................................................................................................... 38
Table 4.3 Effect of Commission ........................................................................................... 39
Table 4.4 Effects of Bonuses ................................................................................................ 40
Table 4.5 Effects of Job Promotion ...................................................................................... 41
Table 4.6 Salary and Performance ........................................................................................ 42
Table 4.7 Commission and Performance ............................................................................. 43
Table 4.8 Bonuses and Performance .................................................................................... 44
Table 4.9 Job Promotion and Performance .......................................................................... 44
Table 4.10 Model Summary .................................................................................................. 47
Table 4.11 Regression Analysis ............................................................................................ 48

viii
 LIST OF FIGURES

Figure 2.1 Conceptual Framework ....................................................................................... 26

Figure 4.1 Response Rate ...................................................................................................... 35
Figure 4.2 Working Experience ............................................................................................ 37

ix
 ABBREVIATIONS AND ACRONYMS
BPR Business Process Re-engineering

HRM Human Resource Management

MFI Micro finance institution

NACOSTI National Commission for Science, Technology and Innovations

NGO Non-governmental organizations

OECD Organization for Economic Cooperation and Development

SBPS Skill Based Pay System

x
 OPERATIONAL DEFINITION OF TERMS

Bonuses Is a form of payment either through cash or shares

to the employees based time worked and volume
of work
Commission Amount paid monthly to employees other than
salary based on Skills or level of output.

Compensation It is the total cash and non-cash payments that you

give to an employee in exchange for the work they
do for your business
Compensation Systems These are salary payment, job promotions, bonuses
and commissions

Employee Performance These are the number of units produced or service

given by a particular employee and time taken to
do a certain work.
Job Promotion Is a form of compensation where employees are
awarded through job change or position change
vertically.
Performance It comprises the actual output or results of an
organization as measured against its intended
outputs (or goals and objectives).

Salary It is a systematic fixed money payment that an

employee earns for performing work during a
specific period of time

xi
 ABSTRACT

Compensation and benefits are two of the best tools for companies to recruit and retain
quality employees. Enticing benefits and compensation also help existing employees stay
motivated to excel each day at work. This study analyzedthe influences of compensation
systems on employee performance in the MFIs. The study guided by specific objectives
which are to establish how salary, commissions and bonuses affect the employee
performance of deposit micro finances in Nyeri. The study sought to answer various
research questions to ascertain influences of compensation systems on employee
performance of MFIs in Nyeri County. the study was guided by the following theories;
Agency Theory, Equity Theory and Maslow Hierarchy of Needs Theory. The study
adopted a descriptive survey design. The target population of the study was drawn from
all deposit taking MFIs operating in Nyeri Central Sub-County. There are 15 registered
deposits taking MFIs in Nyeri Central Sub-County. The respondents under consideration
were managers, supervisors and employees in the micro finance institutions numbering
389. Systematic simple random sampling was applied to get the respondents. Every
second respondent was provided with a questionnaire for a period of atleast 5 days in
every MFI to arrive at a sample size of 189 respondents. Primary data was collected by
use of semi-structured questionnaire. Upon collection of data, it was checked for
completeness, consistency and errors. The data was further coded and entered for
analysis using SPSS. The results of the study were presented using tables and figures.
The study found that the variable that influenced the employee performance most is the
salary of the employee. The payment of salaries to employees based on performance was
highlighted as the most dominant form of compensation as well as the pay on a monthly
basis reviewed occasionally. It can be concluded that salary greatly influences employee
performance. The study concluded that commission significantly influences employee
performance. The study concluded that bonuses to a great extent influences employee
performance. The study also concluded that to a great extent job promotion influences
performance of microfinance institutions in Kenya. The study recommends that firms
should consider reviewing the salary pay on a yearly basis. The study also recommends
that firms should consider finding a way of paying bonuses based on the time period one
has worked in an organization. Finally the study recommends that microfinance
institutions should promote their employees by changing their job roles and tasks.

xii
 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

It is widely acknowledged that one of the most critical human resource problems in any

organization is how to influence employee performance. Given the complex nature of

reward strategies that influence various forms of employees behavior, it follows that

understanding the role of different reward strategies on employees performance can

assist human resource managers in designing and implementing an effective reward

strategy that will give an organization a competitive edge (Ndung’u&Kwasira, 2010).

Increasingly, organizations are realizing that they have to establish an equitable balance

between the employee’s contribution to the organization and the organization’s

contribution to the employee. Establishing this balance is one of the main reasons for

reward strategies (Aslam, Ghaffar, Talha, &Musthaq, 2015)

According to Agyare, Yuhui, Mensah, Aidoo, and Opoku (2016), a milestone in the

success of an organization is to fulfill the continuous changing needs of organization and

employees; heavy responsibility falls on top management to develop strong relationship

between them. Organizations expect employees to follow the rules and regulations, work

according to the standards set for them; the employees expect good working conditions,

recognition, fair treatment, career growth, and involvement in decision making (Nyaribo,

2016). These expectations of both parties vary from organization to organization. For

organizations to address these expectations, an understanding of employees’ motivation

is required (Walela&Okwemba, 2015).Therefore, an organization should know why its

1
employees come to work on time, stay with the organization for their working life and

remain productive (Gyimah, 2011).

Compensation is one of the most important elements which motivate employees to

contribute their best effort to generate innovative ideas that lead to better business

functionality and further improve company performance both financially and non-

financially. According to McKim and Hughart (2005) there are other means to reward

employees that do not just focus on financial compensation. Some of these include the

appraisal that employees are able to acquire from their managers, the opportunity to take

on important projects or tasks, and even leadership attention. Much research on leader

power have found that supervisor reward power would be positively associated with

employee task performance, productivity, satisfaction, turnover, and organizational

citizenship behaviors (Ahmed, Ullah, & Ahmed, 2015)

Employees will give their maximum when they have a feeling or trust that their efforts

will be rewarded by the management. There are many factors that affect employee

performance like working conditions, worker and employer relationship, training and

development opportunities, job security, and company’s overall policies and procedures

for rewarding employees. Among all those factors which affect employee performance,

motivation that comes with rewards is of utmost importance. The effectiveness of skilled

employees is likely to be limited if they are not motivated to perform. One of the means

that organizations can use to enhance employee motivation and performance is to

provide performance- related compensation (Nyaribo, 2016).

A reward and compensation system is based on the expectancy theory, which suggests

that employees are more likely to be motivated to perform when they perceive that there
2
is a strong link between their performance and the reward they receive (Gerhart,

Minkoff& Olsen, 1995). In other words, the compensation system (e.g. profit sharing)

contributes to performance by linking the interest of employees to those of the team and

the organization, thereby enhancing effort and performance (Siramiati, Hadiwidjojo,

&Rohman, 2009). According to Nelson and Spitzer (2002) although cash rewards are

welcomed by employees, managers should never use this as a tool to motivate their

employees to improve their performance levels. Should this happen, there is a change

that the essence of the reward would be forgotten.

One way used by management to improve the performance, to motivate and to increase

employees’ job satisfaction is through compensation (Walela&Okwemba, 2015).

Basically, compensation is something that employees received as remuneration for their

work. Mwangi (2014) says that compensation in the form of financial is important for

the employees, because with the compensation they can directly fulfill their needs,

especially the needs of physiology. However, the employees must also hope that it

receives compensation in accordance with the sacrifice that has been given in the form of

nonfinancial also very important for the employees especially for their career

development.

To improve the performance of employees was not only through financial compensation

alone but also through non-financial compensation. In Maslow’s theory of motivation by

the (Ndung’u&Kwasira, 2012) that financial compensation is only effective to improve

the performance, especially for employees who are new to the work and the employees

received a lower level. But for long-time employees and employees working at middle to

upper levels, they actually require more nonfinancial compensation. Non-financial

3
compensation in the form of awards for their work performance, providing the

opportunity for self-actualization, etc. In detail, nonfinancial compensation is comprised

of; Employment. Non-financial compensation from the challenging work tasks

interesting, responsibility, and recognition.

1.1.1 Employee Performance

Employee performance impinges on the organization’s performance (Ahmed et al.,

2015). Employee performance is defined as the completion of actions with the skills with

the outcome contributing to achievement of organizational goal (Ombima, 2014). Swasto

(1996) added that employee performance is the actions or the completion of errands that

were done by individuals within specific period of time to achieve organizational goal.

Mwangi (2014) noted that employee performance is a mutual result of efforts,

motivation, abilities and perception of tasks. This means that employee apart from

employees’ abilities and skills, motivation, efforts and perception of tasks are important.

These factors are directly influenced by how well the organization compensates the

employees (Nelson Waweru&Spraakman, 2012).

Measuring performance is of great importance to an incentive plan because it

communicates the importance of established organizational goals. “What gets measured

and rewarded gets attention” (Kirubi, 2014). In discipline of human resource

management, different writers suggest the following indicators for measuring employee

performance and they include: quality that can be measured by percentage of work

output that must be redone or is rejected; Customer satisfaction that can be measured by

the number of royal customers and customer feedback. Also, timeliness, measured in

terms of how fast work is performed by the employee when given a certain task;

absenteeism/tardiness observed when employees absent themselves from work; and

4
achievement of objectives measured when an employee has surpassed his/her set targets,

he/she is then considered to have performed well to achieve objectives (Muchiri, 2016).

The management of individual performance within organizations has traditionally

cantered on assessing performance and allocating reward, with effective performance

seen as the result of the interaction between individual ability and motivation. It is

increasingly being recognized that planning and an enabling environment have a critical

effect on individual performance, with performance goals and standards, appropriate

resources, guidance and support from the managers all being central (Njanja, Maina,

Kibet, &Njagi, 2013)

Human resource policies and practices indeed do affect organizational as well as

individual performance. Job satisfaction for example, has for a long time been seen as

key to affecting business performance as well as commitment. In addition researchers

have also identified motivation as the mediating mechanism and some identify trust and

morale. In spite of more recent attention to commitment, motivation is still considered to

be an important influence to performance (Okoth, 2014).

1.1.2 Compensation Systems

Compensation is undoubtedly the most important communication element within an

organization. It involves a number of methodologies and philosophies. As Milton Rock

(1984) has stated, it is one of the great challenges to management, requiring the creation

of “an environment which stimulates people in their jobs” (Duda, 1987). Employee

compensation is an important factor in performance of any organization

(NnajiIhedinmah&Egbunike, 2008). Compensation is job rewards to employees and

includes salary given to employees, bonuses and commissions advance to employees.

Greater job satisfaction resulting from job rewards ensures employees focus on their

5
tasks thereby increasing their productivity (Muchiri, 2016). A sound compensation

system has the ability to attract the right kinds of human resource (Gerhart et al., 1995).

The fit between employee performance and compensation system characteristics are

proven to be important (Ali, Edwin &Tirimba, 2015). The distinguished pay factors are

fixed pay and performance based pay, tangible benefits and non-tangible benefits, rigid

benefit plans and flexible benefit plans, skill based pay and job based pay.

Employee compensation is an extrinsic motivator (EK &Mukuru, 2013). However recent

research by Nassazi (2013) found considerable evidence that higher salaries directly

affect job performance. They argue that in the case that labor turnover is costly for an

organization (because of severance, training and hiring costs), firms could pay higher

wages to decrease quit rates and save on turnover costs, which could be costly in

financial institution such as microfinance institutions. These statements are confirmed

by Reddy and Karim (2014); they argue that compensation factors such as salaries are

the most important motivational factor in organizations. Al-Ameryeen (2015) concluded

in his study that, job applicants believe that pay is the most important attribute in seeking

employment. Therefore, lowering wage levels to market parity reduce worker

productivity and increases employees turnover in organizations (Sajuyigbe, Olaoye,

&Adeyemi, 2013).

Salary is an important aspect of employee compensation since also affect the retirement

befits (Kenya, 2009). Employees need to feel the hard work they put into their job

matches what they are paid as salary. Okoth (2014) reported 25 percent of employees say

fair compensation is the single most important thing they want from their organization.

An appropriate salary scale for employees is therefore necessary for better performance

6
of employees in microfinance institutions. However its influence in microfinance

institutions has not been assessed and this study aims at investigating.

According to Mamdani and Minhaj (2004) commission refers to employees’ earning that

is based on volume or some form of performance. Commissions are used to shift risk

from the employer to the employee. Employees with a job in sales make base salary and

often a sales commission for meeting or exceeding particular sales targets. A sales

commission is additional compensation the employee receives for exceeding

expectations. Employers pay employees a sales commission to incentivize the employees

to produce more sales and to reward and recognize people who perform most

productively. The sales commission has proven to be an effective way to compensate

sales people and to promote more sales of the product or the service (Osibanjo, Adeniji,

Falola, &Heirsmac, 2014). This study intends to investigate in which ways microfinance

awards commissions to its employees and the extent it influences performance of

microfinance institutions.

Bonuses refer to employees’ earnings as rewards for special achievements, improving

productivity and raising profits (Karim, 2014). Condly and Clark (2003) observed that

bonuses work like investments, wherein rewarding a bonus to an employee will usually

increase the employees’ work input and simply encourage them to work better in the

future. Rewarding the employees now and then will increase their due diligence

considerably, and hence increase the overall input from the manpower in the

organization itself. When an employee of a micro finance institution is rewarded a bonus

for doing good work, it will obviously encourage him/her to continue doing quality

work. This is because according to Tucker and Miles (2004) bonuses motivate

employees to raise their performance to meet business goals. A firm might want the

employees to lower production costs, for example, or eliminate waste in the materials

7
they use, increase deposits, get more customers among others. Organizations might give

cash or non-cash bonuses as incentives. Bonuses can serve as an important tool for small

businesses such as microfinance institutions, which have smaller staffs and a smaller

reservoir of talents than larger firms, helping ensure employee loyalty and reducing

turnover (Gyimah, 2010). There is therefore need to explore various bonuses and reward

given to employees in microfinance and empirically assess the extent to which they

influence performance of employees in microfinance institutions.

1.1.3 Microfinance Institutions in Nyeri County

Microfinance institutions play important role in providing additional financial services to

the public. According to Otero (1999) microfinance is the provision of financial services

to low income poor and very poor self-employed people. They spur economic

development by encouraging micro investments and improving standards of living

(Mwangi, 2014).

According to the Central Bank of Kenya 2015 Annual Report, by December 2014 there

was a total of 5,350 MFIs in the country. Such high number of MFIs is due to the criteria

adopted by the Central Bank (CBK, 2015). In Kenya, the microfinance sector is

composed of commercial banks, development finance institutions, and deposit-taking

and non-deposit-taking microfinance institutions. Performance of microfinance

therefore, is an important factor in development of a country. Attainment of

organizational goal is the reason for existence of all organization including microfinance

institutions. The most important resource in attainment of organization goal is human

resource (Reddy, 2014). Therefore the utilization and performance of each employee has

a direct bearing on the extent to which an organization, such as a microfinance

institution, will achieve its goal.

8
Nyeri is a town situated in the Central Highlandsof Kenya. It is the county headquarters

of Nyeri County. The city happens to be the central administrative headquarters of the

country's former Central Province. Following the dissolution of the former provinces by

Kenya's new constitution on 26 August 2010, Nyeri is now the largest city in the newly

created Nyeri County. The city is situated about 150 km (a two-hour drive) north of

Kenya's capital Nairobi, in the country's densely populated and fertile Central Highlands,

lying between the eastern base of the Aberdare(Nyandarua) Range, which forms part of

the eastern end of the Great Rift Valley, and the western slopes of Mount Kenya. The

city population, according to the 2009 Kenya Population and Housing Census, was

estimated at 225,357.

According to the CBK, 2015) there are twenty four deposit-taking MFIs licensed by the

Central Bank of Kenya (CBK) and regulated under the microfinance act 2006. Fifteen of

the MFIs operate in Nyeri Central Sub-County. These are Kenya industrial estate

ltd.(k.i.e), K-rep development agency, Uwezo deposit taking microfinance limited,

Biashara sacco, Kenya women finance trust (kwft), Young women Christian association

(ywca), Agriculture finance corporation (afc), Business initiative management assistance

services (Bimas), Taifasacco, Small and micro enterprise programme (smep), Faulu

Kenya, Wananchisacco, Mwalimusacco (Nyeri), Nyeri teachers sacco and Jamii bora.

All these microfinance provide financial services to lower and middle income earners in

Nyeri central sub-county. The presence and sustained operations indicate members value

microfinance institutions performance.

1.2 Statement of the Problem

Microfinance institutions (MFIs) play a vital role in the economic development of

developing countries. They offer loans and/or technical assistance in business

development to low-income communities in developing countries (Hartungi, 2011).

9
Research reveals that approximately 4 million Kenyans depend entirely on Microfinance

Institutions (Kirubi, 2014). Despite the increase in the number of MFIs in Nyeri Central

Sub-County for the last 10 years, the same has not been reflected in the increase in the

compensation strategies used to retain some of the talented workforce (County choice,

2016). According to Kwamboka, (2011) poor compensation is observed to be a barrier to

employee performance in the financial institutions and thus most of the MFIs are unable

to retain the most experienced staff hence losing them to the commercial banks.

Equitable and fair reward and compensation are paramount to employee satisfaction and

hence employee performance in MFIs.

According to a study by Aslam et al., (2015) on effects of compensation on productivity,

employees who are able to experience and receive recognition for their work are also

able to have a better perception of their work, their workplace and the people they work

for. Another research by Yukl and Latham, (2015); Latham and Pursell, (2010); Yukl,

Wexley and Seymour, (2012) on contributions of salary to employees performance found

out that, the incentive wage / salary does not give consistent results on the performance

of the employees.

According Sentono (2009) on effects of compensation procedures on performance,

performance will be well when the employees are paid or the salary is in accordance

with the agreements. The results are consistent with a recent study conducted by

Benjamin, (2012) with the title Explaining Outsourcing Performance In Uganda’s

Commercial Banks, which found out that the financial compensation is very influential

on the performance of outsourcing employees in commercial banks in Uganda. Another

study also conducted by Ahmad (2012) entitled causes on Increasing demand of

outsourcing employees and its impact on Pakistan business, the results showed no

positive effect of financial compensation on employee performance.

10
The studies conducted above shows a contradictory findings on the effects of employee

compensation, with some showing a strong positive correlation while some

recommending on non-monetary compensation i.e. a study by Odunlami and Matthew,

(2014) and studies by (Nelson &Spraakman, 2012). Moreover, majority of these studies

were done in more developed countries such as Pakistan, Singapore, UK and South

Africa. Therefore, a study needs to be carried out on the effects of compensation on

employee performance in MFIs in Kenya.

1.3 Objectives of the Study

1.3.1 General Objective

The general objective of the study was to analyze the effects of employee compensation

systems on employee performance in microfinance institutions (MFIs) in Nyeri County.

1.3.2 Specific Objectives

The study was guided by the following specific objectives:

i) To establish the effect of salary on employee performance in microfinance

institutions in Nyeri County.

ii) To determine the effect of job promotion on employee performance in microfinance

institutions in Nyeri County.

iii) To establish the effect of bonuses on employee performance in microfinance

institutions in Nyeri County.

iv) To determine the effect of commissions on employee performance in microfinance

institutions in Nyeri County.

11
1.4 Research Questions

The research sought to answer the following research questions;

i) What is the effect of salary on employee performance in microfinance

institutions in Nyeri County?

ii) How does promotion affect employee performance in microfinance institutions

in Nyeri County?

iii) To what extent do bonuses affect employee performance in microfinance

institutions in Nyeri County?

iv) Is there any relationship between commissions and employee performance in

microfinance institutions in Nyeri County?

1.5 Significance of the study

The study would give the MFIs an independent evaluation of the general effects of

employee compensation and thus explain their impact of employee performance i.e. the

study would therefore give guidelines on the most effective employee compensation

policies and practices. The findings of the study provided vital information to policy

makers and human resource managers of the banks to either consolidate or rethink ways

of rewarding staff of the microfinance institutions. The study would form a basis for

further research by scholars interested in furthering the body of knowledge on employee

compensation in microfinance institutions in Kenya.

1.6 Scope of the Study

The study was conducted on only fifteen MFIs operating within Nyeri Central Sub-

County, Kenya that offers services to small scale entrepreneurs. Respondents selected for

the study consisted of credit managers, operations managers and credit officers of these

institutions. The study focused on the four variables; salary pay, commissions, job

promotion and bonuses and the employee performance of micro finances as dependent

12
variable. The study included data for year 2014 to 2016 since this is the period when

MFI growth in terms of numbers was evident.

1.7 Limitations of the Study

Some participants viewed the information as confidential, sensitive and they were

reluctant to fill in the questionnaire as they feared that competitors may use the

information for their own gains. To mitigate this, the researcher used introductory letter

and authorization from the university to carry out this research, assuring the MFIs that

information collected was treated as confidential and used for academic purposes only.

The researcher persuaded the respondents and explained to them the importance of this

research study. Some participants viewed the information as confidential, sensitive and

their responses were biased as they feared that competitors may use the information for

their own gains. However, assurance was maintained through the provision of a letter

from the university assuring them that the information provided only for education

purposes.

1.8 Organization of the study

The study is structured as follows: the chapter one provides the research background,

statement of the problem, research objectives, significance of the study, scope, and the

limitations encountered in the course of the study. Chapter two presents literature review

of existing research on the effects of compensation on employee performance and

conceptual framework. Chapter three deals with the methodology employed in the study.

It provides explanation and description of the methods and procedures to be used.

Chapter four presents the descriptive and inferential analysis of the findings of the study.

Chapter five presents the study findings summary, conclusions and recommendation

based on each of the four specific objectives.

13
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

Chapter gives an overview on the various theories on compensation and performance of

MFIs. Empirical literature on the four variables; salary, job promotion, bonuses of

employees and commissions. Literature review helped in establishing existing gaps,

some of which were addressed by this study. The chapter culminates by summarizing the

empirical literature and showing the relationship between the independent variables and

dependent variable through a conceptual framework.

2.2 Theoretical Review

According to Arvil (2009), a good research is grounded on theories relating to the

objectives of the study. In accordance of the same, several theories have been put

forward which have implications of compensation on employee performance in order to

guide this current study. The theories have been listed herewith.

2.2.1 Agency Theory

This theory originated from Stephen Ross in 1970s and it states that both the employer

and the employee are the stakeholders of the company, and the remuneration paid to the

employee is the agency cost. The employee will try to get an increased agency cost

whereas the employer will try to minimize it. Hence, the remuneration should be decided

in such a way that the interest of both the parties can be aligned. Agency theory is one of

the most widely used theories in management (Gerhart et al., 1995). Broadly, agency

theory is about the relationship between two parties, the principal (owner) and the agent

(McKim&Hughart, 2005). More specifically, it examines this relationship from a

14
behavioral and a structural perspective. Theory suggests that given the chance, agents

will behave in a self interested manner, behavior that may conflict with the principal’s

interest (Okoth, 2014).

As such, principals will enact structural mechanisms that monitor the agent in order to

curb the opportunistic behavior and better align the parties’ interests (Njanja et al.,

2013). Firm performance by way of cost minimization and greater efficiencies is the

desired outcome of the agency theory perspective. When the ownership and management

of a firm are separated, theory suggests that agency problems are created, and agency

costs are incurred to alleviate these problems (Walumbwa, Lawler, &Avolio, 2007). To

elaborate, separation of ownership and management is a key component of agency

theory; the principal authorizes or delegates work to the agent, and the agent is expected

to act in the best interest of the principal (Ek&Mukuru, 2013).

An agency problem is created when the interest of the principal and agent are misaligned

and the principal lacks the information to accurately assess the behavior of the agent

(Sajuyigbe et al., 2013). Agency problems can take the form of moral hazard or adverse

selection (Ali et al., 2015). Moral hazard refers to the situation where the agent lacks

effort in the scope of the employment relationship. It is considered a form of

opportunistic behavior that includes free-riding, shirking, and perk-consumption

(Chrisman, 2004; Chua, 2009; Karra, 2006). Adverse selection refers to the situation

where the agent lacks the ability and skills to competently behave in the scope of the

employment relationship (Al-Ameryeen, 2015).

The underlying assumption of agency theory is based on the economic model of man

(Davis, 2007; Eisenhardt, 2009; Jensen &Meckling, 2006) and helps the employer to

establish the correct compensation scheme which will help the employee carry out the

agency job efficiently. Thus individuals will seek to optimize their own utility in the
15
compensation procedures. In the principal-agent relationship, an agent is hired to

maximize the principal’s utility. However, agency theory assumes agents will instead

behave opportunistically because they too are self-serving. Therefore, the principal

enacts mechanisms to minimize losses to their own utility (Osibanjo et al., 2014).

This theory is applicable in this study in that managers are the agents of various

microfinance institutions in Kenya and are entrusted to make prudent moves in ensuring

the compensation system in the banks doesn’t adversely affect the Banks overall

performance (Karra, 2006). Therefore managers should make their decision very

carefully taking into considerations cost the institutions incurs and the implications on

the shareholders wealth.

2.2.2 Equity Theory

Equity theory was proposed by John Stacey Adams in 1963 and has a one major

proposition which is the comparison of one’s inputs and outcomes to others inputs and

outcomes and as a result of this comparison one might experience equity or inequity.

This proposition is very clear and parsimonious unlike many theories in the social

science. Ever one can understand this theory since it has to deal with our feelings toward

equity and justice (Eisenhardt, 2009). These are very important issues to humans and that

is why people will be inclined to understand this theory more clearly (Rice, 2003).

Researchers emphasized that theories should not be too broad or too narrow. Equity

theory has achieved this limitation. Equity theory has focused on what motivates

employees and describes that employees input something and expect something back in

return. This equalization of relationship will tend to motivate employees to perform

(Chua, 2009). The theory also emphasized two situations of inequity, which is the case

of over reward and under reward and how humans tend to react in either situation. Equity

16
theory is considered to be one of the most valid frameworks to understand human

attitudes and motivation (Miner, 2004).

According to Miner (2000), equity theory has the following characteristics: Prediction of

performance: the evidence of research showed that both over reward and under reward

will have an effect on performance, but the question that remained unanswered is for

how long this effect will last before corrected by cognitive distortion. On balance the

theory seems to predict performance at least for a short period of time (Jensen

&Meckling, 2006). Prediction of work satisfaction: the research done in this area gives

strong support for equity theory. In over-reward situations guilt and dissatisfaction was

experienced which led workers to increase inputs, and under-reward created anger and

resentment, which led in many cases to turnover and absenteeism, and lowering inputs

(Phillips, 2006). Construct validity: the central construct of the theory is equity

motivation or perhaps two constructs involving guilt or shame reduction and anger

reduction.

When individuals compare themselves to referent others, the result is either equity or

inequity. In the case of inequity a person will experience anger or guilt and this anger or

guilt will motivate individuals to reduce inequity by following one of seven methods or a

combination. This relationship is falsifiable; it is constructed in a way that can be refuted

by researchers. Inequity may not lead to anger or guilt in some situations. The drawback

of equity theory is that it has not accounted for individual differences and for different

cultures. More research needs to be conducted to further explore this relationship (Miner

2008).

According to Pilty (2009), equity theory has a lot of utility in it. It is generalizable to

almost any relationship whether intimate, exploitative, or occupational. The second

utility is that equity has many constructs and some of them are not measured, yet, this
17
allows us to delete inapplicable constructs and variables instead of adding new constructs

and variables to the theory (Corbetta&Salvato, 2004). The third utility of equity theory is

comprehensiveness. Fourth, the theory is logical and it explains human behavior

consistently. This is apparent in its use and consistency as we seen through research.

Fifth, equity theory is unbounded by space or time. This means that it is applicable to

any relationship which increases its generalizability. Sixth, all propositions of the theory

have specified the cause and effect relationships. Seventh, the theory has construct

validity. Constructs like pay satisfaction may lead to job satisfaction (Fama, 2000).

Through studies these constructs have behaved the way they supposed to behave.

Finally, the equity theory is self-verifying since the nature of relationships is specified.

Equity theory can be applied in microfinance institutions compensation systems in

ensuring that employees are compensated based on their qualifications and experience.

Equalization in compensation will tend to motivate employees to perform and feel

appreciated (Chua, 2009). The microfinance institutions should also emphasize on the

issues of inequity where cases of over reward and under reward are minimized and how

humans tend to react in either situation (Miner, 2004).

2.2.3 Maslow Hierarchy of Needs Theory

Maslow hierarchy of needs is a theory in Psychology proposed by Abraham Maslow in

his 1943 paper “A theory of human Motivation”. The theory postulates that people are

motivated to achieve certain needs and that some needs take precedence over others.

Maslow's hierarchy of needs theory states that people have a pyramid hierarchy of needs

that they will satisfy from bottom to top. Starting from mere physiological subsistence

the Maslow hierarchy of needs covers belonging to a social circle to pursuing your talent

through self-actualization (Faiola, 2009). Important to the hierarchy of needs theory is

18
that Maslow felt that unfulfilled needs lower on the ladder would inhibit the person from

climbing to the next step (Cascio, 2007).

The pyramid of needs is divided into two categories: deficiency needs (physiological and

safety) and growth needs (belonging, self-esteem and self-actualization). If the

deficiency needs aren't satisfied, the person will feel the deficit and this will stifle his or

her development. When Maslow's hierarchy of needs is applied to work situations, it

implies that managers have the responsibility, firstly, to make sure the deficiency needs

are met in both the work pay and working conditions (Wiley, 2011). This means, in

broad terms, a safe environment and proper wages. Secondly, it implies creating a proper

climate in which employees can develop their fullest potential; failure to do so would

theoretically increase employee frustration and could result in poorer performance, lower

job satisfaction, and increased withdrawal from the organization (Brockne, 2008).

This theory is applicable in this study since compensation systems and the delayed

compensation will block the person from their higher growth needs and hence reduced

employee performance (Latham, 2015). Employees may work harder to get security, but

without fulfilling their other needs. If security doesn't return they will fulfill their needs

elsewhere or burn out, this theory is relevant to our study because it affirms that job pay

and security affect performance of employees and the reason for job insecurity here is

improved compensation (Sentono, 2009).

2.3 Empirical Review

This section includes the empirical studies which have been carried out on the four

independent variables and their effects on dependent variable.

19
2.3.1 Basic Pay and Employee Performance

According to Hameed (2014) on the impact of wage increase on employee performance

found out that, a fixed wage have a significant positive effect on job satisfaction,

regardless of an employee’s risk preference. The study also found that, there is an

expectation from the employer of a longer term commitment from the employee for

providing a regular uninterrupted compensation.

Richard (2014) study found out that 80 to 90 percent of organizations use merit pay.

Salary pay is monetary reward given to employees in addition to their fixed

compensation. This pay plan is based on individual performance but bonuses are not

based on performance (Suman& shout, 2010). These studies found out that, there are

reward like the long term growth as well as employee relation and mostly form of cash in

and stock. The length and performance pay plan mostly are their long term incentive also

generate some problem of their liquidity long term incentive cantonal get immediately

value because requirements on reward convicted in to cash. Performance related pay

directly impact the workers performance creating the output through pay and workers

has more able to give pay structure according to the performance (Shilongo, 2013).

A study done by Nyaribo (2016) on the relation between compensation and employee

performance found out that, the pay for shorter term incentive give the power job shorter

oriented. The study also found out that individual motivation improves the performance

of the employee in this context performance related pay refer to system linking the

performance it based on the organizational accountably measure individual outputs

individual output of the organizations performance pay can be manage value of potential

references. This is remarkable since a performance based reward scheme often consists

of a fixed part and a variable part. The most obvious explanation for the fact that only

20
little attention is given to the composition of the reward package is that is often easier to

evaluate and discuss extremes.

Holmstrom and Milgrom (2011) found out that an optimal incentive contract can be to

pay only a fixed wage, independent of measured performance. However, Awasthi and

Pratt (2010) found a significant result on their hypothesis that monetary incentives are

positively related to time spent on decision tasks. Shilongo, (2013) reported in a case

study that the incentive effect of a piece rate pay was an increase of about 22 percent in

production. The previous seemingly contradictory results are in line with the study of

(Bryson, Buraimo, & Simmons, 2011) who concludes that neither performance based

pay nor fixed pay, produces universally superior results. From a firm perspective the use

or non-use of performance based pay is mostly determined by the costs of monitoring

(Lazear, 2011).

Mukuru (2013) showed that other firm aspects such as the stage of the firm (i.e. the age

of the firm), the skills and the profitability of an organization are of influence to the

optimal pay composition. The latter are determinants from a company’s point of view. A

profoundly different approach to determine an employee’s wage is to use the efficient

wage.

2.3.2 Commission and Employee Performance

A study on the impact of commission pay on performance by Murray and Gerhart,

(2011) found out that, by adding commission-earning opportunity, companies drive

salesmen to set more aggressive goals, to work through obstacles and rejection, and to

continue to prospect and seek new selling opportunities. Though according to the study

straight salary offers the most stable income for employees, sales employees who have

worked on straight commission often appreciate a higher level of guaranteed income and

base pay. The balance of stability and incentive to perform at a higher level has a nice
21
balance of benefits from both straight salary and straight commission. The key is to offer

just enough stability that employees feel satisfied with their basic financial security but

still have motivation to sell more to earn more.

According to Lawler (2013), when compensation is based on volume or some form of

performance, this is known as commission based remuneration. Other terms used

include piecework or piecemeal. Many industries used this type of remuneration to get a

minimum standard of production in exchange for compensation. It is used to shift risk

from the employer to the employee. There are two methods to calculate commission.

One is based on volume of services and the other is based on sales. An example of an

industry that uses volume remuneration extensively is the fishing industry. The men that

work on the boats have a risk that the captain will not find fish. In exchange, the captain

may hit upon some nice fishing grounds and bring in a large catch. Once the fish is

offloaded, the processors use commission to compensate the production workers. These

workers are paid by piecemeal, that is, how much final product they can generate from

the catch. Typically their cuts of the meat are weighed and they are compensated based

on that measurement for services rendered.

The traditional job based system assumes that an employee should be paid according to

his position in the organization. However, there is growing evidence that a shift of focus

from job based systems to skill based systems is recommendable (Zeng &Honig, 2017).

A skill based pay system (SBPS) can best be described as ‘a system in which the

capabilities of individuals are the primary focus and which cause them to be managed in

a way that facilitates organizations developing organizational capabilities that provide

competitive advantage.

In addition, Gomez-Mejia and Balkin (2012) found out that the following elements

benefited the results of a SBPS: the organization is situated in a start-up or growth phase,
22
has a participative culture and offers other incentive programs complementing skill

based pay. This is in accordance with Nyaribo (2016) who states that workers in a skill

based pay system have strong incentives to increase knowledge and skill since higher

skill levels are associated with both higher status and with pay.

According Gerhart (2011), Salary plus commission is more difficult to administer than a

pay structure with one basic type of pay. With this pay structure, payroll staff must

manage both the salary and commission aspects of pay. Additionally, salesmen can

become confused about how their pay is calculated, especially if more than one type of

commission is offered. Some companies offer multiple commission percentages for

multiple product and service categories, as opposed to one commission rate across the

board. Salary plus commission critics most often point to challenges in execution, not the

ideas behind motivating employees with commission. Some companies use relatively

small commissions as small add-ons to standard salary or wages.

2.3.3 Bonuses and Employee Performance

A possible solution to deal with employees that have different degrees of risk aversion is

to use flexible benefit schemes (Barringer&Milkovich, 2010). According to the

Milkovich (2010) study, flexible benefit scheme employees are allowed to express their

relative preferences with respect to topics such as healthcare, dental and employee life

insurance. Rigid benefit plans, on the other hand, are by management predetermined

standard benefits. However, a firm should use this solution with caution since the results

of Igalens and Roussel (2010) suggest that flexible pay lacks efficiency. This is in

accordance with the evidence provided by Barber, Dunham and Formisano (2012). They

add that a firm should consider different factors, such as risk aversion and demand for

leisure, when determining the reward schemes.

23
Furthermore, Barber, (2012) study showed that an increased understanding of benefits

following implementation of a flexible benefit plan generates increased satisfaction. A

downside of using flexible schemes is that it takes time for employees to get used to and

subsequently choose the right package (Cable & Judge, 2014). By contrast, not only do

flexible benefit plans lead to higher energy levels and greater focus, it will also reduce

the employee turnover and increase the productivity (Schwartz, 2010). Bonuses are used

to increase performance from the employee. This is a variable type of remuneration and

is more commonly found with salaried staff to incentivize them for a particular goal

whether time or volume based. Other reasons used for bonuses are to increase or

maintain retention of certain skills or the pool of skill sets needed in the company.

Sometimes bonuses are paid when a company meets certain financial standards or goals

over an extended period of time.

Dee prose (2014) found out that motivation of employee productivity can be enhance

provide effective recognition which provide the result improve the performance of

organization. He entire second of the organization that the employee motivated to

assessment the performance of job compensation. The ability to organization is

accommodates the needs employees their performance. Inside the commitment towards

their organization and their work play a critical role (Eisenbegal, 2012).

Milkovich and Newman (2010) found out that, bonuses is a compunction of a big range

of financial benefits and Non-financial benefits that include; Social security: this is

managing insurance system by the rules of employee must pay into system and contain

perchance of pay up to maintain limit.

2.3.4 Job Promotion and Employee Performance

Researches by groups of researchers (Zainuddin, Junaidah&Nazmi, 2010) and another

group (Danish &Usman, 2010) found a positive significant relationship between

24
opportunities for promotion and job satisfaction. Sulaiman and Omar (2012) argue that

employees that perceived promotion decisions as fair are more likely to be committed to

the organization, experience career satisfaction, perform better and subsequently have a

lower intention to leave the organization.

Clark (2011) found that both satisfaction with pay and job security are the most

important job satisfaction categories for determining future quits, while satisfaction with

promotion opportunities is not a significant factor. Using cross-sectional data on British

nurses, Shields and Ward (2011) found that dissatisfaction with promotion and training

opportunities have a stronger effect on intentions to quit than dissatisfaction with

workload or pay. Shields and Ward also found that employees who report promotion

prospects as the most important work characteristic do not have significantly different

job satisfaction than those who report other employment characteristics as most

important.

Using data from the 2009 and 2010, Pergamit and Veum (2010) found a positive

correlation between promotions and employee performance. However, their empirical

model only controls for promotions and the type of job change. Francesconi (2011)

analyzes the effects of promotions on changes in job satisfaction using British household

data. In another study using British household data, Clark (2012) includes a dummy

variable indicating whether the respondents have opportunities for promotion as an

explanatory variable. This variable is very similar to the promotion expectations variable

included in the present study; however the study does not analyze the effects of actual

promotions upon employee performance.

De Souza (2012) estimates the effect of promotions on worker satisfaction, focusing on

promotion satisfaction in a small sample of managers. De Souza finds that managers who

received a promotion are more satisfied with promotion opportunities and have greater
25
promotion expectations for the future. De Souza also considers other aspects of

employee satisfaction, but does not analyze overall job satisfaction.

2.4 Summary of Literature Review and Research Gap

Compensation is usually narrowed to cash and as a result, employers only have a

tunneled vision when it comes to the issues of compensation for their employees.

Other aspects of compensation which makes up the total compensation package for

the employee are not given much attention in the researches above. Employees

themselves fail to recognize the fact that their compensation is a package and not only

related to cash. The by- product of the above understanding of compensation is that it

is poorly managed and most of the time performance is affected adversely.

More-ever, Studies discussed above on compensation shows clearly that most of the

studies have been done in the developed world while studies in developing countries

such as East Africa region are scanty and broad. However, it is also notable that the

Microfinance institutions in Kenya have not taken the issue of compensation

seriously (Tosi&Tosi, 2012).

26
 2.5 Conceptual Framework

Independent Variables Dependent Variable

Salary

-Piece rate

- Monthly rate

- Forms of Payment

Job Promotion

- Job Change

- Position Change
Employees Performance
-Reward system
-Targets Achieved
Bonuses - Time taken per task
--
-Time Based - Out put levels
-Volume Based

-Employee Involvement

Commissions

-Skilled based commission

- Level based commission

-Project orientation

Figure 2.1 Conceptual Framework

Source: Researcher, (2018)

27
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

The chapter explains the methodology that was used in the study. The chapter thus,

outlines into research design, target population and sample, description of research

instrument, data collection procedure and data analysis technique.

3.2 Research Design

The research design that adopted in this research study is the descriptive survey design.

Descriptive survey is a method of collecting information by interviewing or

administering a questionnaire to a sample of individuals (Orodho, 2003). It can be used

when collecting information about people’s attitudes, opinions, habits or any of the

variety of education or social issues (Orodho&Kombo, 2002). The design adopted was

an investigative design since it is easy and efficient to use and is an accurate counter and

indicator to measure (Pamela, 2003). The researcher choses descriptive survey design

because the study aims at collecting information from respondents on their experiences

and perceptions of effects of employee compensation on performance of financial

institutions.

3.3 Target Population

The target population of the study was drawn from all deposit taking MFIs operating

Nyeri Central Sub-County. As of 2017 December, there are 15 registered deposits taking

MFIs in Nyeri Central Sub-County. The respondents under consideration were the

28
managers, supervisors and employees in the micro finance institutions totaling to 389.

These are the key resource persons in the best position to answer on issues of

performance and employee compensation.

Table 3.1 Target Population Study Population

Category Population

Managers 80

Supervisor 72

Employees 207

TOTAL 359

Source: Respective MFI Database (2018)

3.4 Sampling Design and Sample Size

Systematic simple random sampling was applied to get the respondents. Every second

respondent was provided with a semi-structured questionnaire for a period of at least 5

days in every MFI to arrive at a sample size. Stattrek (2015) formula was used to

determine the sample size for a known population and a known level of confidence.

n= N

1+N (e)2

The known variables for the study are as follows: N- Total Population Size is 359 e-

Level of Precision at 95% Confidence level. The unknown variables for the study are as

follows: n- Sample Size. Employing the above formula, the sample size was:

n= 359
29
 1+359(0.05)2 = 189

The sampling frame therefore was 189 respondents selected from the target population of

359 of the 15 MFIs in Nyeri town. To obtain an appropriate sample size from the

members a systematic random sampling was used hereby the 1.8975 th =2nd= (1 + N (e)2)

member was selected.

Table 3.1: Sample Size

Category Population Sampling rate(x/1.8975)

Managers 80 42

Supervisors 72 38

Employee 207 109

TOTAL 359 189

Source: Primary data

3.5 Data Collection Procedures and Instruments

The researcher sought permission from the relevant authorities in Microfinance

Institutions in Nyeri to be allowed to collect data. After the permission is obtained, the

researcher sought appointment from the respondent prior to the actual data collection.

Data was collected by use of semi-structured questionnaire. The questionnaire had both

open ended and closed questions. In this study questionnaires werechosen for collecting

data for they were easier to administer and analyze the data collected from the field. The

questionnaires were administered by the researcher personally.

30
3.6 Validity and Reliability of Research Instrument

3.6.1 Validity of Research Instrument

Mugenda and Mugenda, (2005) define validity as the degree to which results obtained

from the analysis of the data actually represent the phenomenon under study. To assess

the content and face validity, the researcher consulted the supervisor to determine the

validity of the instruments and offer suggestions on content. The researcher also

involved some of the colleagues in the masters class for their comments. Their

recommendations were used in the improvement of the final questionnaires. Before using

the questionnaires for generating data for the study, a pilot study was conducted in

KaratinaTown which is outside the study sample. Five individuals were targeted for

pilot. The purpose of pre-testing the research instrument was to: Verify whether the

questionnaire is clear to the respondents, establish whether the questionnaire effectively

addresses the data needed for the study, assess and identify any problems respondents

would encounter in completing the questionnaire that may not have been foreseen when

constructing the questionnaire this was used to test the correctness of the data collection

tools.

3.6.2 Reliability of Research Instrument

Reliability of the research instrument is its level of internal consistency over time. A

reliable instrument therefore, is the one that constantly produces the expected results

when used more than once to collect data from two samples drawn from the same

population. Reliability of the instrument was enhanced through a pilot study; split half

method of randomly selected Respondents. During the pilot study, the instrument was

split half into all odd numbers put them in one subset and all even numbers in another

subset. The scores of all the odd numbered items of the respondents in the pilot study

31
was computed separately and then compared to see the suitability of the instrument using

Cronbach’s alpha. A Score above 0.7 was accepted.

3.7 Data Analysis and Presentation

Once the questionnaires were collected, they were scrutinized to ensure they are duly

completed and are consistent, after which they were numbered. This was followed by

checking that all items are answered according to instructions to reduce errors and

maintain the validity of the data. The researcher analyzed the quantitative data by

tallying responses of closed ended questions. The data was coded, and entered into the

computer for analysis using the SPSS. Descriptive, correlation and inferential analysis

was used.Content analysis was used to analyse qualitative data.Data was presented in

form of tables and figures. The data was analyzed using multiple regression analysis.

The model was;

Y = β0 + β 1X1 + β 2X2 + β 3X3 + β4X4 + ε Where:

Y= Employee Performance in MFIs β0= Constant

β1 to β4 =Coefficient of independent variables

X1 = Salary

X2= Job promotion

X3 =Bonuses

X4 =Commissions

ε =Error term of the model

32
The Correlation coefficients provided for the degree and direction of relationships. It

measures the association, or co-variation of two or more dependent variables. The

statistical calculation of such correlation was done and expressed in terms of correlation

coefficients. The γ provided information on the direction and magnitude of an observed

correlation between two variables (X and Y).Inferential statistics was carried out to

establish the nature of the relationship that exists between variables. Data was interpreted

with the help of significance P-values, if the P-value is less than 0.05 the variables was

deemed significant to explain the changes in the dependent variable. The coefficient of

determination (R2) was used to analyze the percentage in which the independent variable

determines the dependent variable. It indicated the proportion of the variance in the

dependent variable that is predictable from the independent variable.

3.8 Ethical Consideration

Before collecting data the researcher was guided by the University code of ethics and

shall obtain authority from relevant offices and authorities. This included obtaining

research permit from NACOSTI and an authorization letter from University Business

School. The researcher also made telephone calls liaise with the directors of the

microfinance institutions under study so that they can allow employees working under

them to participate in the study. The questionnaire included a clause showing data

confidentially, security keeping, safe custody and participants were not required to write

their names to avoid exposing respondents.

33
 CHAPTER FOUR

DATA ANALYSIS, FINDINGS AND DISCUSSIONS

4.1 Introduction

This chapter presents the analysis and findings of the study as set out in the research

objective and research methodology. Descriptive statistics, correlation analysis and

inferential analysis has been used to discuss the findings of the study.

4.2 Response Rate

The researcher in attempt to collect data relevant to the study distributed 189 copies of

questionnaire to the MFIs Staff. Out of 189 questionnaires distributed, it’s notable that

173 which are 92% of the total filled and returned. This indicates that the response rate is

acceptable and conforms to Mugenda and Mugenda (1999) stipulation that a response

rate of 50%is adequate for analysis and reporting; a rate of 70% and over is excellent.

34
 Percentage of Filled Questionnaires
Questionnaires
not complete
8%
Questionnaires not complete
Completed Completed Questionnaires
Questionnaires
92%

Figure 4.1 Questionnaire Distribution in Percentage

Source: Researcher, (2018)

4.3 General Information

The section presents the data findings on the respondents’ general information. The

demographic information included gender of respondents and their level of education.

4.3.1 Level of Education

Table 4.2 Level of Education

Level Frequency Percentage

Diploma 13 8%

Degree 111 64%

Masters 49 28%

Total 173 100%

Source: Researcher (2018)

35
The study sought to establish the highest level of education of various respondents. The

findings were summarized in the Table 4.1 above. Majority of the respondents (64%) in

the study had a degree certificate and minority had diploma certificate. This indicates

that the respondents had knowledge on the concepts under study.

Work Experience

47

7
3 2
OVER FOUR YEARS 2 TO 4 YEARS 1 TO 2 YEARS UNDER 1 YEARS

4.3.2 Working Experience

Figure 4.2 Working Experience

Source: Researcher, (2018)

The study sought to establish the working experience from the employees. From the

findings in Figure 4.2 above, it established that majority of the respondents (79.9%) had

a working experience of more than five years. Employees with an experience of 2 to 4

years followed with 11.5%. This is an indication that the data collected was from the

36
right target population with readily available information and that the data will be

reliable for analysis.

4.4 Descriptive Analysis

The study sought to establish the strength of the relationship between compensation

system and performance of employees in microfinance institutions in Nyeri County. In

respect to this respondents were asked to indicate to what extent they agreed with various

aspects that were tested under compensation systems. The study utilized a five-point

likert scale ranging from strongly agreed (5) to strongly disagree.The researcher used the

arithmetic mean and standard deviation in shown in the tables below.

4.4.1 Effects of Salary

The study sought to establish the effects of salary on performance of microfinance

institutions. The findings were summarised in the tables below;

Table 4.2 Effects of Salary

Salary Mean Std. Deviation

Our company pay salary to employees based on performance 3.000 .943

The pay on a monthly basis is reviewed occasionally equitably 2.750 1.404

The performance based pay affects employees performance 2.143 .8483

Our company fixed salary affects employees 1.510 .994

Our company pay fixed salary to employees
1.571 .69

The descriptive statistic measures considered were mean and standard deviation. Mean

was used to establish the average value of the data while standard deviation gave the

dispersion in the data. High mean presents majority of the respondents strongly agreeing

with the statement presented to them while low standard deviation translates to low
37
dispersion of their response. From the findings, salary pay to employees based on

performance was highlighted as the most dominant form of compensation (M=3.000) as

well as the pay on a monthly basis reviewed occasionally (M=2.750). This indicates that

salary based on performance is key in keeping the employee in the company for long and

therefore it’s important to develop salary based compensation to enhance survival during

turbulent times. The fixed pay was also pointed out has having influence on the

performance of the microfinance institutions. However, the standard deviation on the pay

on a monthly basis reviewed occasionally had high standard deviation (SD = 1.404)

while the company fixed salary pay effects on employee performance (M=1.571). The

findings are consistent with a study by Hameed, (2014) on the impact of wage increase

on employee performance found out that, a fixed wage have a significant positive effect

on job satisfaction, regardless of an employee’s risk preference. The previous seemingly

contradictory results are in line with the study of (Bryson, Buraimo, & Simmons, 2011)

who concludes that neither performance based pay nor fixed pay, produces universally

superior results.

4.4.2 Effects of Commission

The study sought to establish the effects of commission on performance of microfinance

institutions. The findings were summarised in the table below;

Table 4.3 Effects of Commission

Commission Mean Std. Deviation

As a company pay commissions based on the skill of a particular

employee 4.164 .922

This company is always paying bas ed on units produced or output per

employee 3.893 .685

38
The commission pay based on the skill of the employee affects 1.821 .772
employee’s performance

The commissions pay based on unit affect employee’s performance 1.714 .810

Source: Research Data (2018)

The descriptive statistic measures considered were mean and standard deviation. Mean

was used to establish the average value of the data while standard deviation gave the

dispersion in the data. High mean presents majority of the respondents strongly agreeing

with the statement presented to them while low standard deviation translates to low

dispersion of their response. The finding suggest that skill based pay (M=4.164) and pay

based on units produced (M=3.893) were found to affect the performance of

microfinance institutions the most. On the other hand, pay based on skills effects on

performance of microfinance institutions (M=1.679) and units based pay effects on

performance of microfinance institutions (M=1.714) were found to affect performance

the least. The findings contradicts with a study on the impact of commission pay on

performance by Murray and Gerhart, (2011) which found out that by adding

commission-earning opportunity, companies drive salesmen to set more aggressive

goals, to work through obstacles and rejection, and to continue to prospect and seek new

selling opportunities.

4.4.3 Effects of Bonuses

The study sought to establish the effect of bonuses on performance of microfinance

institutions. The findings were summarised in the table below;

Table 4.4: Effects of Bonuses

39
Effects of Bonuses Mean Std. Deviation

Bonuses pay is based on the time period one has worked in the firm
3.828 .790

Bonuses pay is based on the volume or output produced

3.336 .744

Bonuses based on period of time worked affects employees

performance
2.893 .786

High mean presents majority of the respondents strongly agreeing with the statement

presented to them while low standard deviation translates to low dispersion of their

response. The result shows that pay based on the time period one has worked in the firm

came out as the most form of bonuses payment (M=3.828) and volume based pay

bonuses was second (M=3.336). On the other hand the respondents felt that the bonuses

paid affects performance (M=2.893) with a standard deviation (Std .786). The findings

tallies Barber (2012) study which found that an increase in understanding of benefits

following implementation of a flexible benefit plan generates increased satisfaction and

hence increased performance.

4.4.4 Effects of Job Promotion

The study sought to establish the effects of job promotion on performance of

microfinance institutions. The findings were summarised in the table below;

Table 4.5: Effects of Job Promotion

Mean Std. Deviation

40
Our firm promote employees by changing their job roles and task 3.964 .922

Our company policy does allow switching from a department/Business even

after promotion. 3.229 .604

The company employees changing their job roles and task affects employees
performance 3.643 .558

The company employees changing their job roles 2.535 .508

Source: Research Data (2018)

The descriptive statistic measures considered were mean and standard deviation. Mean

was used to establish the average value of the data while standard deviation gave the

dispersion in the data. High mean presents majority of the respondents strongly agreeing

with the statement presented to them while low standard deviation translates to low

dispersion of their response. The finding show that majority of the microfinance

institutions promote their employees by changing their job roles and task (M=3.964) and

also the study found out that it is the microfinance institutions policy to switch

employees from one depart even after promotion (M=3.229) and standard deviation (Std

.604). The respondents agreed that changing employees job roles and task affects

employees performance while employee switching from department to another does not

affect performance of microfinance institutions (M=2.535) and a standard deviation (Std

.508). The findings of this study concur with Pergamit and Veum (2010) study on effects

of job promotion on employee performance which found that there is a positive

correlation between promotions and employee performance.

41
4.5 Employees Performance

Table 4.6 Employees Performance

Employees Performance Mean Std Deviation

Employee performance is indicated

by the number of units produced? 3.97 0.92

Employees in our MFIs were able to

achieve the target by producing the 3.92 0.98
units allocated?
The employees’ time taken per task
is an indicator of performance? 4.02 0.94

Our employees were able to take the 3.89 0.95

time allocated per task?

Source: Researcher, (2018)

The descriptive statistic measures considered were mean and standard deviation. Mean

was used to establish the average value of the data while standard deviation gave the

dispersion in the data. High mean presents majority of the respondents strongly agreeing

with the statement presented to them while low standard deviation translates to low

dispersion of their response. Table (4.6) Clarifies the employees performance in

microfinance institutions, where the arithmetic mean ranges between (3.89 - 4.06).We

observe that the highest mean for the item “the employees time taken per task is an

indicator of performance?” with arithmetic mean (4.02) and standard deviation (0.94)

While the lowest arithmetic mean was for the item “Our employees were able to take the

time allocated per task?” with arithmetic mean of (3.89) and standard deviation (0.95). In

general means are high with average (3.96) and standard deviation (0.93).This is in

accordance with Nyaribo (2016) who states that workers in a skill based pay system have

strong incentives to increase knowledge and skill since higher skill levels are associated

with both higher status and with pay.

42
4.6 Qualitative Analysis
The study respondents were requested to comment on commissionand its influence

employee performance and many of them argued that the commission paid is not enough

and the target is set high and at times unachievable for one to qualify for

commission.Majority of the respondents also posited that thebonusesare paid only once a

year and after the financial results are announced and mostly depends on someone’s

score in the balance scorecard. Majority of the employees also argued that promotion

depends on the length of time worked other than work experience.

4.7Correlation Analysis

4.7.1 Relationship between Salary and Performance of Employees

Table 4.7Salary and Performance of Employees

Chi-square tests

Value Df Asymp. sig. (2-sided)

Pearson Chi-Square 45.146a 12 .0001

Likelihood ratio 21.117 12 .023

Linear-by-linear
5.114 1 .041
Association

N of Valid cases 173

a. 18 cells (90.0%) have expected count less than 5. The maximum expected count is .06

43
The study sought to establish whether there exists a relationship between salary and

performance of employees. The computed chi-square value (45.146) at 12 degrees of

freedom the study found that there is a significant relationship between salary and

performance of employees since the computed p-value (0.0001) was less than 0.05 at

95% confidence level. The findings tallies with Awasthi and Pratt (2010) study which

found a significant result on their hypothesis that monetary incentive are positively

related to time spent on decision tasks

4.7.2 Relationship between Commission and Performance of Employees

Table 4.8 Commission and Performance of Employees

Chi-square tests

Value Df Asymp. sig. (2-sided)

Pearson Chi-Square 21.317a 12 0.021

Likelihood ratio 20.729 12 .005

Linear-by-linear
5.161 1 0.032
Association

N of Valid cases 173

a. 18 cells (90.0%) have expected count less than 5. The maximum expected count is
.09
Source: Research Data, (2018)

The study sought to establish whether there exists a relationship between commission

and performance of employees. The computed chi-square value (21.317) at 12 degrees of

44
freedom the study found that there is a significant relationship between commission and

performance of employeessince the computed p-value (0.021) is less than 0.05 at 95%

confidence level. The findings concur with Murray and Gerhart (2011) which found that

there is a strong positive correlation between commission paid and employee

performance.

4.7.3 Relationship between Bonuses and Employees Performance

Table 4.9Bonuses and Employees Performance

Chi-square tests

Value Df Asymp. sig. (2-sided)

Pearson Chi-Square 24.177a 12 .0014

Likelihood ratio 25.887 12 .023

Linear-by-linear
5.189 1 .014
Association

N of Valid cases 173

a. 23 cells (92.0%) have expected count less than 5. The maximum expected count is
.06
Source: Research Data, (2018)

The study sought to establish whether there exists a relationship between bonuses and

employee’s performance. The computed chi-square value (24.177) at 12 degrees of

45
freedom the study found that there is a significant relationship between bonuses and

employees performancesince the computed p-value (0.0014) is less than 0.05 at 95%

confidence level. The findings of this study concur with Pergamit and Veum (2010)

study on effects of bonuses on employee performance which found that there is a

positive correlation between bonus and employee performance.

4.8 Regression analysis

Table 4. 10 Model Summary

R Adjusted R
Model R Square Square Std. Error of the estimate

1 .845(a) 0.714 . 703 0.6944

Adjusted R squared is coefficient of determination which tells us the variation in the

dependent variable due to changes in the independent variable, from the findings in the

above table the value of R squared was 0.714 an indication that there was variation of

71.4% on the employees performance due to changes salary, commission, bonuses and

job promotion at 95% confidence interval. This shows that 71.4% changes in employee

performance could be accounted to changes salary, commission, bonuses and job

promotion. R is the correlation coefficient which shows the relationship between the
46
study variables. From the findings shown in the table above there was a strong positive

relationship between the study variables as shown by 0.845. This tallies with Clark

(2011) study on effects of compensation on employee’s performance which found that

there is a strong positive correlation between compensation and employee’s

performance.

Table 4.11: Regression analysis

Model Unstandardized Standardized T Sig.

Coefficients Coefficients

B Std. Error Beta

(Constant) 3.15 .231 1.973 .106

Salary .404 .240 .230 .850 .0028

Commission .182 .050 1.231 3.616 .036

Bonuses .253 .117 1.012 3.212 .0012

Job Promotion .153 .017 1.075 3.159 .025

The model adopted was; - Y = 3.15 + 0.404X1 + 0.182 X2 + 0.253 X3+ 0.153X4

47
From the above regression equation it was revealed that holding salary, commission,

bonuses and job promotion to a constant zero, employee performance in microfinance

institutions would be at 3.15 units. A unit increase in salary would lead to increase in

employee performance by a factor of 0.404, a unit increase in commission would lead to

increase in employee performance by a factor of 0.182, a unit increase in bonuses would

lead to increase in employee performance by a factor of 0.253 and a unit increase in job

promotion would lead to increase in employee performance by a factor of 0.153. The

Significant level for salary is 0.0028, for commission is 0.036, for bonuses is 0.0012and

for job promotion is 0.025. Since all the four variables have significant values of less

than 0.05 they were adopted to predict the employeeperformance. Using cross-sectional

data on British nurses, Shields and Ward (2011) found that Salary, commission, bonuses

and promotion have a stronger effect on employee’s satisfaction which leads to improved

performance.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Introduction

This section presents a summary of the major findings of the study as well as the

conclusions made from them. The section also presents recommendations made by the

researcher as well as suggestions for future studies.

5.2 Summary of findings

This part presents the summarized results and interpretation (findings) based on the study

objective.

5.2.1 Salary and Employee Performance

48
The first objective of the study was to investigate the effects of salary on the employee

performance in microfinance institutions in Nyeri County, Kenya. The study established

that major compensation types in majority of the microfinance institutions considered

were; salary, bonuses, job promotion and commission.The variable that influenced the

employee performance most is the salary of the employee. Salary pay to employees based

on performance was highlighted as the most dominant form of compensation as well as

the pay on a monthly basis reviewed occasionally. This indicates that salary based on

performance is key in keeping the employee in the company for long and therefore it’s

important to develop salary based compensation to enhance survival during turbulent

times.

5.2.2 Commission and Employee Performance

The second objective of the study was to investigate the effects of commission on the

employee performance in microfinance institutions in Nyeri County, Kenya.The finding

suggest that skill based pay and pay based on units produced were found to affect the

performance of microfinance institutions the most. On the other hand, pay based on

skills effects on performance of microfinance institutions and units based pay effects on

performance of microfinance institutions were found to affect performance the least.

5.2.3 Bonuses and Employee Performance

The third objective of the study was to investigate the effects of bonuses on the

employee performance in microfinance institutions in Nyeri County, Kenya.The findings

49
shows that pay based on the time period one has worked in the firm came out as the most

form of bonuses payment.

5.2.4 Job Promotion and Employee Performance

The four objective of the study was to investigate the effects of bonuses on the employee

performance in microfinance institutions in Nyeri County, Kenya. The finding show that

majority of the microfinance institutions promote their employees by changing their job

roles and task and also the study found that it is the microfinance institutions policy to

switch employees from one depart even after promotion. The respondents agreed that

changing employee’s job roles and task affects employee’s performance while employee

switching from department to another does not affect performance of microfinance

institutions.

5.3 Conclusion

The study sought to determine whether salary influences employee performance.

Therefore, it can be concluded that salary greatly influences employee performance. The

study sought to determine whether commission influences employee performance

Therefore, it can be concluded that commission significantly influences employee

performance. The study sought to determine whether bonuses influences employee

performance. Therefore, it can be concluded that bonuses to a great extent influences

employee performance. The study sought to determine whether job promotion influences

employee performance. Therefore, it can be concluded that person culture to a great

extent influences performance of public universities in Kenya.

50
5.4 Recommendations

The study recommends that firms should consider reviewing thesalary pay on a yearly

basis. These will help in keeping the employee in the company for long and enhancing

their loyalty. The study recommends that skill based pay should be encouraged in

microfinance institutions. The study recommends that firms should consider finding a

way of paying bonuses based on the time period one has worked in an organization and

volume or number of units produced. Finally the study recommends that microfinance

institutions should promote their employees by changing their job roles and task and also

the study recommends that job training and transfer is important in the growth and

development of employees.

5.5 Suggestions for Further Studies

The study suggests that more research should be done on the factors affecting

compensation system in Kenya. Since, from R-squared results shows that a proportion of

28.6% which is not explained by compensation systems. The researcher suggests a study

on the effects of compensation systems on employee performance in microfinance

institutions in any other county to be carried out for comparison purposes.

51
 REFERENCES
Agyare, R., Yuhui, G., Mensah, L., Aidoo, Z., &OpokuAnsah, I. (2016). The Impacts of
Performance Appraisal on Employees’ Job Satisfaction and Organizational
Commitment: A Case of Microfinance Institutions in Ghana. International
Journal of Business and Management, 11(9),

Ahmed, S., Ullah, A., & Ahmed, I. (2015). Relationship Between Employee Job
Satisfaction and Turnover Intention in Microfinance Banks in Pakistan.
Paradigms.

Al-Ameryeen, M. F. I. (2015). The effects of monetary, non-monetary and distributive

fairness on employee performance: a study of the Phosphate Mines Co. Jordan.
Universiti Utara Malaysia.

52
Ali, A. A., Edwin, O., &Tirimba, O. I. (2015). Analysis of Extrinsic Rewards and
Employee Satisfaction: Case of Somtel Company in Somaliland. International
Journal of Business Management & Economic Research, 6(6).

Aslam, A., Ghaffar, A., Talha, T., &Musthaq, H. (2015). Impact of compensation and
reward system on the performance of an organization: An empirical study on
banking sector of Pakistan. European Journal of Business and Social Sciences,
4(8).

Bryson, A., Buraimo, B., & Simmons, R. (2011). Do salaries improve worker
performance? Labour Economics, 18(4),

Condly, S. J., Clark, R. E., &Stolovitch, H. D. (2003). The Effects of Incentives on

Workplace Performance: A Meta-analytic Review of Research Studies 1.
Performance Improvement Quarterly, 16(3).

Duda, F. (1987). Developing compensation systems in academic libraries. Allerton Park

Institute (29th: 1987).

EK, K., &Mukuru, E. (2013). Effect of motivation on employee performance in public

middle level technical training institutions in Kenya. International Journal of
Advances in Management and Economics, 2(4), 73–82.

Gerhart, B. A., Minkoff, H. B., & Olsen, R. N. (1995). Employee compensation: Theory,
practice, and evidence. CAHRS Working Paper Series, 194.

Gyimah, C. I. (2010). The Effect Of Motivation On Employee Performance In

Phinphonrat School In Thailand.

Hameed, A., Ramzan, M., Zubair, H. M. K., & others. (2014). Impact of compensation
on employee performance (empirical evidence from banking sector of Pakistan).
International Journal of Business and Social Science, 5(2).

Kirubi, P. W. (2014). Employee Empowerment Practices And Performance Of

Commercial Banks In Kenya. School Of Business, University Of Nairobi.

53
Mamdani, K. F., &Minhaj, S. (2014). Effects Of Motivational Incentives On
Employees’performance: A Case Study Of Banks Of Karachi, Pakistan.

McKim, A., &Hughart, M. (2005). Staff incentive schemes in practice: findings from a
global survey of microfinance institutions. Microfinance Network & CGAP,
Washington DC.

Muchiri, H. (2016). Effects of Rewards on Employee Performance in the Hospitality

Industry: A Case of Nairobi Serena Hotel. United States International University-
Africa.

Mwangi, P. K. (2014). The Effect of Compensation on Employee Motivation: A Case

Study of Chloride Exide. United States International University-Africa.

Nassazi, A., (2013). effects of training on employee performance: evidence from uganda.

Ndung’u, A. W., &Kwasira, J. (2012). ole of reward systems in enhancing employee

motivation in commercial banks in nakuru town, kenya.

Nelson. W, & Gary. S., (2012). The use of performance measures: case studies from the
microfinance sector in Kenya. Qualitative Research in Accounting &
Management, 9(1), 44–65.

Njanja, L. W., Maina, R. N., Kibet, L. K., &Njagi, K. (2013). Effect of Reward on
Employee Performance: A Case of Kenya Power and Lighting Company Ltd.,
Nakuru, Kenya. International Journal of Business and Management, 8(21).

Nnaji-Ihedinmah, N. C., &Egbunike, F. C., (2010). Effect of Rewards on Employee

Performance in Organizations: A Study of Selected Commercial Banks in Awka
Metropolis.

Nyaribo, O. L., (2016). The Effect of Non-Financial Compensation on Employee

Performance of Micro-Finance Institutions: A Case of WakenyaPamoja Sacco,
Kisii County, Kenya. Imperial Journal of Interdisciplinary Research, 2(6).

Odunlami, I. B., & Matthew, A. O., (2014). Compensation Management and Employees
Performance in the Manufacturing Sector, A Case Study of a
54
Okoth, N. H., (2014). Effects of reward management on employee performance in Hotels
in north coast, Kenya. School of business, University of Nairobi.

Ombima, H. P. A. (2014). Factors affecting employee job satisfaction in institutions of

higher education in Kenya: A case study of United States international University
(USIU). United States International University-Africa.

Osibanjo, A. O., Adeniji, A. A., Falola, H. O., &Heirsmac, P. T. (2014). Compensation

packages: a strategic tool for employees’ performance and retention. Leonardo
Journal of Sciences, (25), 65–84.

Reddy, S., & Karim, S. (2014). Impact of Incentive Schemes on Employee Performance:
A Case Study of Singareni Collieries Company Limited, Kothagudem, Andhra
Pradesh, India. Science, Technology and Arts Research Journal, 2(4), 122.

Richard, B. (2014). The effect of motivation on employees’ performance: empirical

evidence from the brongahafo education directorate. citeseer.
Sajuyigbe, A. S., Olaoye, B. O., &Adeyemi, M. A. (2013). Impact of Reward on
Employees Performance in a selected Manufacturing Companies in Ibadan, Oyo
state, Nigeria. International Journal of Arts and Commerce, 2(2), 27–32.

Shilongo, H. N. (2013). The impact of performance related pay on employees-A case

study of the performance incentive bonus scheme at the Motor Vehicle Accident
Fund.

Siramiati, N. W., Hadiwidjojo, D., &Rohman, F. (2009). Performance-based

compensation effect on employee motivation, satisfaction of employees, and
performance of employees (study on private universities in the province of bali):
conceptual frameworks. Korea, 61, 50–5.

Tucker, M., & Miles, G. (2004). Financial performance of microfinance institutions: A

comparison to performance of regional commercial banks by geographic regions.
Journal of Microfinance/ESR Review, 6(1), 41–54.

55
Walela, K. B., &Okwemba, E. M. (2015). Effect Of Leadership Behavior On The
Performance Of Micro-Financial Institutions In Kakamega County. Ekuitas:
International Journal of Scientific & Technology Research, 4(02), 239–252.

Walumbwa, F. O., Lawler, J. J., &Avolio, B. J. (2007). Leadership, Individual

Differences, and Work-related Attitudes: A Cross-Culture Investigation. Applied
Psychology, 56(2), 212–230.

Zeng, Z., &Honig, B. (2017). A study of living wage effects on employees’

performance-related attitudes and behaviour: Living Wage Effects on Work
Performance Indicators. Canadian Journal of Administrative Sciences / Revue
Canadienne Des Sciences de l’Administration, 34(1), 19–32.

APPENDICIES
APPENDIX I
SPECIMEN LETTER TO RESPONDENTS

Catherine Nkatha Kabiru

P.o Box 526-10100, Nyeri.

Dear sir/ madam,

REF: INTRODUCTORY LETTER

56
I am a student at Kenyatta University, pursuing a MBA Degree. I am doing a research on
the effects of compensation system on employee’s performance in microfinance
institutions in Nyeri County, Kenya. I kindly request you to answer the questionnaire as
truthfully as possible. The information gathered will be for academics purposes only.

Your response will be highly appreciated.

Thank you.

Yours Faithfully,

Catherine Nkatha Kabiru

Mobile Number: 0722-883200

APPENDIX II: QUESTIONNAIRE

The purpose of this questionnaire is to solicit data on survey of compensation system on

employee’s performance in microfinance institutions in Nyeri central sub-county, Kenya
and the responses obtained will be used for academic purposes only. The researcher is a
student undertaking his Master in Business Administration Degree in Kenyatta
University.

Fill in the following questions in the space provided by putting a tick (✔) or a cross(X).

57
PART 1: Personal Information
1.What is your gender? Tick one

Male ( ) Female ( )
2.What is your education level?

Secondary school certificate level ( )

Diploma Certificate level ( )

Graduate Degree Holder ( )

Master’s degree level and/or above ( )

Any other (specify) ………………………………..

3.How long have you worked in this firm?

a) 5years or less than [ ] b) 5- 10years [ ]

c) 10years and above [ ]

58
Part II: Effects of Salary

4. In this section, please tick the appropriate option that best reflects the degree to which

the following salary indicators affect your employee’s performance. 5 strongly agree, 4 =

agree, 3 = moderately agree, 2 = disagree, 1 = not at all.

To what extent do the following statements relate to employee’s 5 4 3 2 1

performance: Salary

5. Our company pay salary to employees based on performance

6. Our company pay fix ed salary to employees
7. The pay on a monthly basis is reviewed occasionally equitably
8. The performance based pay affects employees performance
9. Our company fixed salary affects employees

10. Kindly comment briefly on how basic salary can be moderated to ensure improved
employees performance………………………………………………………………..
…………………………………………………………………………………………
…………………………………………………………………………………………

Part III: Effects of Commission

To what extent do the following statements relate to employees 5 4 3 2 1

performance: Commissions

11. As a company pay commissions based on the skill of a

particular employee.

12. This company is always paying bas ed on units produced or

output per employee

13. The commission e pay based on the skill of the employee

affects employee’s performance

14. The commissions e pay based on Unit affects employee’s

performance

59
15. Kindly comment on the employee appreciation rate on the level of commissions
paid……………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

Part IV: Effects of Bonuses

To what extent do you agree with the following statements?

Statement 5 4 3 2 1

16. We pay bonuses in our organization

17. We pay bonuses in our organization based on the time period

one has worked in the firm

18.We pay bonuses in our organization based on the volume or

output produced

19. Bonuses based on period of time worked adversely affects

employees performance

20. Volume/output based bonuses adversely affects employees

performance

21. Kindly comment on how the management can handle bonuses better to improve
employees performance………………………………………………………………..
…………………………………………………………………………………………
…………………………………………………………………………………………

60
Part V: Effects of Job Promotion

In this section, please tick the appropriate section that best reflects the degree to which the

following job promotion indicators affect your employee’s performance. 5 strongly agree, 4

= agree, 3 = moderately agree, 2 = disagree, 1 = not at all.

To what extent do the following statements relate to your 5 4 3 2 1

employees performance :Job Promotion

22. Our firm promote employees by changing their job roles

and task

23. Our company policy does allow switching from a

department/Business even after promotion.

24. The employees position change in the department affects

employees performance

25. The company employees changing their job roles and task
affects employees performance

Part VI: Employees Performance (To be filled by the branch managers)

To what extent do the following statements relate to your 5 4 3 2 1

employees performance

26. Employee performance is indicated by the number of units

produced

27. Employees in our MFIs were able to achieve the target by

producing the units allocated

28. The employees time taken per task is an indicator of

performance

29. Our employees were able to take the time allocated per task

30. In your firm, indicate briefly any other factor which may have led to improved

61
performance of employees…………………………………………………………………
………………………………………………………………………………………………

………………………………………………………………………………………………

31. In your firm, indicate briefly what may have caused the trend of performance

indicated in the above table………………………………………………………………..

………………………………………………………………………………………………

………………………………………………………………………………………………

Thank you for your participation

62