THE IMPACT OF COMPENSATION ON EMPLOYEE

PERFORMANCE

Introduction:
The globalization era requires employees to have good performance and results in order to
improve the efficiency and effectiveness of the organization. Therefore, many companies
implement compensation system. Effective compensation is expected to add value to
employee’s satisfaction which motivates employees to always perform better. This research aim
is to determine the effect of compensation (direct and indirect) on employee performance.

Research Objectives:
The overall objective of the research is:
 To investigate the impact of salary on the performance of employee
 To investigate the impact of indirect compensation on the performance of an employee.

 To investigate the impact of reward system on the performance of an employee.

Theoretical Framework:
There were 3 Independent variables and 1 Dependent variable involved.
Independent: Salary, Rewards and indirect compensation.
Dependent Variable: Employee Performance

Hypothesis:
Based on the research objectives, following hypothesis was developed:
 There is a significant impact of salary on employee performance.
 Rewards have significant impact on employee performance
 There is a significant impact of indirect compensation on employee performance.
 SALARY

EMPLOYEE
REWARDS
PRFORMANCE

INDIRECT
COMPENSATION

1- Theoretical Framework
 Research Design

Research design is a plan for the collection, measurement, and analysis of data, which has been
created to answer the research questions.
This research was designed carefully by choosing the appropriate design according the research
objectives. Decisions regarding many research elements were made which are discussed below.

Elements of Research Design

1. Research Strategy:
A research strategy is developed to set the path for achieving research goals. The research
strategy used for this research was “Survey Research”. The survey strategy is most commonly
used in business research, because it allows the researcher to collect quantitative and qualitative
data on various types of research questions. As the research was Descriptive, questionnaire was
used to collect data about people, their experience and situations.
Measurement of Scale:
A 5-point Likert scale was used to examine how strongly subjects agree or disagree with
statements of variables salary, indirect compensation, and employee performance whereas for
reward variable a mix of different types of scale was used to get the desired results from our
respondents .

2. Extent of Researcher Interference:

The extent of interference was “Minimal Interference”. As the study was Correlational (the
impact of compensation system was being studied on employee performance) and a correlational
study is performed in a natural environment. Only descriptive analysis was done and none of the
variables were manipulated.

3. Study Setting:
This study setting of this descriptive study was “Non-contrived” because it was done with
normal flow of events without disturbing the natural settings. It was also a “Field study”
because no experiment was performed during the research.
4. Unit of Analysis
It refers to the collection of the data which has to be studied during the data analysis stage of the
research. As the objective was to study the impact of compensation on employee performance,
the researcher’s interest was on employee of different sectors. Hence the unit of analysis was
“Individuals”.

5. Time Horizon:
As it was a one-time study, the data was gathered at one point in time. So the time horizon was
“Cross-sectional” and 60 responses were collected from employee of different government and
private sector especially banking sector, in the span of 7 days.

6. Sampling Type:
In the investigation, Random sampling method was used because it is not complicated, and is
very economical. It involves picking the desired sample size from the large sample with equal
probability. The respondents were selected randomly without any criteria. The sampling size was
60 employees. We sent the electronic form link to the employee who were available and were
willing to participate in the research.
 Quantitative Data Analysis

In quantitative data analysis we are expected to turn raw numbers into meaningful data through
the application of rational and critical thinking. Quantitative data analysis may include the
calculation of frequencies of variables and differences between variables. A quantitative
approach is usually associated with finding evidence to either support or reject hypotheses you
have formulated at the earlier stages of our research process.

We performed Quantitative Data Analysis of the data gathered through questionnaire. Following
analysis was performed using SPSS software.

1) DESCRIPTIVE ANALYSIS:

 FREQUENCY STATISTICS:

VALIDITY:
From statistics table we identified that the total number of respondent for the Gender
demographic were 60 all of the responses are valid without any missing value.
Similarly, for other remaining demographics that are age, work experience and position
responsibility all 60 responses are valid without any missing value.
RANGE:
1. Gender
From the descriptive analysis we identified that the range for gender is 1 to 2 that is from male to
female.

 1 as male
 2 as female
 3 as prefer not to say

2. Age
From descriptive analysis we identified that the range for age lies from 1 to 3 where:
 1 as 18-30
 2 as 31-40
 3 as Above 40

3. Work experience
From descriptive analysis we identified that the range for work experience lies from 1 to 4
where:

 1 as Less than 2 years

 2 as 2-5 years
 3 as 6-10 years
 4 as Above 10 years

4. Position responsibility
From descriptive analysis we identified that the range for position responsibility lies from 1 to 4
where:

 1 as Top level management

 2 as Middle level management
 3 as Clerical staff
 4 as Non clerical staff
AVERAGE:

1. Gender:
From the above description table, we identified that the average respondents are male with the
median and mode value of 1, which means that we have majority proportion of male out of 60
responses who has filled the form.

2. Age:
The average respondents’ age lies between 18 years to 40 years with the mean value of 1.6 that
lies between 1 and 2.

3. Work experience:
The average respondent work experience lies between 2 to 10 years with the mean value of 2.45
that is between 2 and 3.

4. Position responsibility:
The average respondent position responsibility is Middle level management with the mode and
median value of 2.

 FREQUENCY TABLE

1. Gender :
From the frequency table we identified that out of 60 respondents 45 are male and 15 are
females. In percentage 75% were male and 25% were female.

2. Age:
Out of 60 respondents the age of 35 respondents lies from 18 to 30 years (58.3%), 12 are of 31 to
40years (25%) and 13 are of above 40 years (21.7%).

3. Work experience:

Out of 60 respondents 19 respondent have experience of less than 2 years i.e. (31.7%) ,15
respondents have 2 to 5 years i.e. (25%), 6 respondents have 6 to 10 years i.e. (10%) and 20
respondents have experience above 10 years i.e. (33.3%).
 4. Performance responsibility :

Out of 60 respondents 2 respondents are of post top level management i.e. (3.3%), 51
respondents are of middle level management i.e. (85%), 2 are of clerical staff i.e.(3.3%), and
remaining 5 respondents are of non-clerical staff. i.e. (8.3%).
 2) RELIABILITY CHECK:

The reliability or consistency of a measure shows the extent to which it is without any kind of
biasness and thus ensures consistent measurement across the different items in the instrument.
The consistency of the measurement was examined through “reliability test”.

Reliability Test/ Statistics:

Reliability test measures the consistency of respondents’ answers to all the items in a measure.
The most dominant test of inter item consistency reliability is Cronbach’s coefficient alpha
which is used for multipoint-scaled items. We run this test using SPSS and results of all the
variables were gathered. The higher the Cronbach coefficients, the better will be the measuring
instrument used on the research.

Cronbach Alpha Values:

The general rule of thumb for Cronbach’s alpha is:

 0.6 to 0.7 is acceptable level of reliability

 0.70 and above is good,
 0.80 and above is better, and
 0.90 and above is best.

Cronbach’s alpha does come with some limitations: scores that have a low number of items
associated with them tend to have lower reliability, and sample size can also influence your
results for better or worse.

Item Total Statistics:

In this table we are given “Cronbach’s Alpha if item deleted” against every question. So that we
would know that which questions are the most relevant one. For example, I am pasting one of
the tables of this item total statistics against salary variable.
 Item-Total Statistics
Scale Mean if Scale Variance if Corrected Item- Cronbach's Alpha
Item Deleted Item Deleted Total Correlation if Item Deleted
The physical conditions in whic 11.5833 19.501 .711 .863
h you work
I enjoy working for the 11.7667 20.351 .750 .857
organization
I understand the measures used 11.6333 20.473 .616 .878
to evaluate my performance
The best workers receive the 11.4000 21.058 .590 .882
highest evaluation scores.
I feel my work adds value to the 11.9000 19.549 .825 .845
organization
I try to achieve my goals by 11.9667 19.931 .713 .862
satisfying customers

 Salary questions:

According to the table, the number of questions that were asked for the salary variable were 5.
From the summary we can see that all the values are valid no value has been excluded than
means 100% validity.
For the number of questions, the value of Cronbach alpha is 0.838 that is 83.8%. As our value
is above 0.7 or 70% our instrument used is reliable that the questions to determine the impact of
salary on employee performance are reliable.

 Rewards:

Reliability Statistics
Cronbach's
Alpha N of Items
.635 10

According to the table the number of questions that were asked for the salary variable was 10.
From the summary we can see that there are some missing values in it. And these are because of
the type of questions asked. For example; some questions asked are that HAVE YOU BEEN
REWARDED BEFORE? And you have to reply in YES or NO. And those whose response
would be no, will not be able to attempt the next question. So that’s why some responses are
missing.
For the number of questions, the value of Cronbach alpha is 0.635 that is 63.5%. A general
accepted rule is that α of 0.6-0.7 indicates an acceptable level of reliability. Our instrument
used is reliable that the questions to determine the impact of rewards on employee performance
are reliable.

 Indirect compensation:

According to the table the number of questions that were asked for the salary variable was 7.
From the summary we can see that all the values are valid no value has been excluded i.e. 100%
validity.
For the number of questions, the value of Cronbach alpha is 0.927 that is 92.7%. As our value
is above 0.7 or 70% our instrument used is reliable that the questions to determine the impact of
indirect compensation on employee performance are reliable.

 Employee performance:

According to the table the number of questions that were asked for the salary variable was 6.
From the summary we can see that all the values are valid no value has been excluded i.e. 100%
validity.
For the number of questions, the value of Cronbach alpha is 0.885 that is 88.5%. As our value
is above 0.7 or 70% our instrument used is reliable.
 3. CORRELATION ANALYSIS:

The word Correlation is made of Co- (meaning "together"), and Relation. In statistics, correlation
or dependence is any statistical relationship, whether causal or not, between two random
variables or bivariate data. We can say that correlation is any statistical association, though it
commonly refers to the degree to which a pair of variables is linearly related. When two sets of
data are strongly linked together we say they have a High Correlation.
Correlation is Positive when the values increase together, and correlation is Negative when one
value decreases as the other increases..

1. Pearson Correlation:

Pearson coefficient is a measure of the strength of the association between two continuous
variables. It represents the relationship between two variables that are measured on the same
interval or ratio scale. These numbers measure the strength and direction of the linear
relationship between the two variables. The correlation coefficient can range from -1 to +1, with
-1 indicating a perfect negative correlation, +1 indicating a perfect positive correlation, and 0
indicating no correlation at all.
Anything above 0.7 has strong correlation, between 0.5 and 0.7 is a moderate correlation,
and anything less than 0.4 is considered a weak or no correlation.

2. Significance (2- tailed):

To determine whether the correlation between variables is significant, compare the p-value to

your significance level. Usually, a significance level (denoted as α or alpha) of 0.05 and less
works well.

 Correlations Table:
 Correlations
SAL_MEAN RW_MEAN IC_MEAN EP_MEAN
SAL_MEAN Pearson Correlation 1
Sig. (2-tailed) .
N 60
RW_MEAN Pearson Correlation .262* 1
Sig. (2-tailed) .043
N 60 60
IC_MEAN Pearson Correlation .309* .286 1
Sig. (2-tailed) .016 .054
N 60 60 60
EP_MEAN Pearson Correlation .493** .410** .721** 1
Sig. (2-tailed) .002 .050 <.001
N 60 60 60 60

Correlation between Employee Performance and Salary:

From the correlation table we can see that:

 Pearson Correlation: 0.493

 Significance: 0.002

Pearson correlation value denotes that there is moderate positive correlation between these two
variables i.e. Salary and Employee Performance. And the correlation between these two
variables is significant because their significance is less than 0.05. It means that if there is an
increase in salary then employee performance will also increase moderately. So there is a direct
relationship between these two variables.

Correlation between Employee Performance and Rewards:

From the correlation table we can see that:

 Pearson Correlation: 0.410

 Significance: 0.05

Pearson correlation value denotes that there is moderate positive correlation between these two
variables i.e. Rewards and Employee Performance. And the correlation between these two
variables is significant because their significance is less than 0.05. It means that if there is an
increase in rewards then employee performance will also increase moderately. So there is a
direct relationship between these two variables.
Correlation between Employee Performance and Indirect Compensation:
From the correlation table we can see that:

 Pearson Correlation: 0.721

 Significance: <0.001

Pearson correlation value denotes that there is strong positive correlation between these two
variables i.e. Indirect Compensation and Employee Performance. And the correlation between
these two variables is significant because their significance is less than 0.05. It means that if
there is an increase in indirect compensation then employee performance will also increase
strongly. So there is a direct relationship between these two variables.

Correlation between Salary and Rewards:

From the correlation table we can see that:

 Pearson Correlation: 0.262

 Significance: 0.043

Pearson correlation value denotes that there is weak positive correlation between these two
variables i.e. Salary and Rewards. And the correlation between these two variables is significant
because their significance is less than 0.05. It means that if there is an increase in salary then
rewards will also increase but increase will be minor. So there is a direct relationship between
these two variables.

Correlation between Salary and Indirect Compensation:

From the correlation table we can see that:

 Pearson Correlation: 0.309

 Significance: 0.016

Pearson correlation value denotes that there is weak positive correlation between these two
variables i.e. Salary and Indirect Compensation. And the correlation between these two variables
is significant because their significance is less than 0.05. It means that if there is an increase in
salary then indirect compensation will also increase but increase will be minor. So there is a
direct relationship between these two variables.

Correlation between Rewards and Indirect Compensation:

From the correlation table we can see that:
  Pearson Correlation: 0.286
 Significance: 0.054

Pearson correlation value denotes that there is weak positive correlation between these two
variables i.e. Salary and Rewards. It means that if there is an increase in salary then rewards will
also increase but increase will be minor. So there is a direct relationship between these two
variables.

4. Descriptive Analysis:

Mean is used to describe the sample with a single value that represents the center of the data.
The standard deviation is the "average" degree to which scores deviate from the mean. More
precisely, you measure how far all your measurements are from the mean, square each one, and
add them all up. The result is called the variance. Take the square root of the variance, and you
have the standard deviation.

Descriptive Statistics
Mean Std. Deviation N
SAL_MEAN 2.9867 .93000 60
RW_MEAN 1.9777 .53471 60
IC_MEAN 2.3476 .95429 60
EP_MEAN 2.3417 .88747 60

According to the descriptive analysis the answer of salary, rewards, indirect compensation and
employee performance show agreeableness. Hence it means that all the independent variables
will increase the employee performance. The Results of Standard deviation shows the variation
in data.
So in the above table we can see that Rewards Standard Deviation is closer to 0, which means
that that most of the numbers are close to the average. While high standard deviation of Indirect
Compensation denotes that the numbers are more spread out

5. REGRESSION ANALYSIS:
Regression analysis is a reliable method of identifying which variables have impact on a topic of
interest. This process determines which factors matter most, which factors can be ignored, and
how these factors influence each other.

(i) MODEL SUMMARY:

The model summary table reports the strength of the relationship between the model and the
dependent variable. R, the multiple correlation coefficients is the linear correlation between the
observed and model-predicted values of the dependent variable. Its large value indicates a strong
relationship.
 If R-squared value 0.5 < r < 0.7 this value is generally considered a Moderate effect size
 If R-squared value r > 0.7 this value is generally considered strong effect size.

Model Summary
Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .745a .655 .631 .50777
a. Predictors: (Constant), IC_MEAN, RW_MEAN, SAL_MEAN

From the model summary table, we can access that the R-square value of our model is 0.655 or
65.5% which means that the variables are Moderately Positively Correlated to each other.

(ii) ANOVA ANALYSIS:

Anova table tells us about the fitness of the model. As from the above table, we can say that
the Significance value of our model is less than 0.001 which means that our research model is
fit.

ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 25.782 3 8.594 23.266 <.001b
Residual 20.686 56 .369
Total 46.468 59
a. Dependent Variable: EP_MEAN
b. Predictors: (Constant), IC_MEAN, RW_MEAN, SAL_MEAN
 (iii) REGRESSION COEFFICIENT ANALYSIS:

The table shows the impact of the independent variables (salary, rewards, indirect compensation)
on dependent variable (employee performance). This table tells us about the significance value
of each variable. The standard acceptable significance value or Cronbach’s alpha value should
be equal or less than 0.05.. The impact of these variables is given below:

Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) .145 .379 .302 .464
SAL_MEAN .169 .092 .177 1.838 .050
RW_MEAN .138 .147 .052 .560 .278
IC_MEAN .611 .088 .657 6.963 <.001
a. Dependent Variable: EP_MEAN

Salary:
H1.There is a significant impact of salary on employee performance.

As table shows that value of significance for the variable job salary is 0.050 which is equal to
Alpha. So result is significant and hence the hypothesis is accepted. So we can say that Salary
has positive significant impact on performance of the employees.

Rewards :
H2.Rewards has significant impact on employee performance.
The value of rewards is greater than alpha (0.278>0.05) therefore the results are insignificant and
hypothesis is rejected. So from the regression results it can be concluded that rewards has
positive and insignificant impact on employee performance.

Indirect Compensation:
H3. There is a significant impact of indirect compensation on employee performance.
The value of indirect compensation is less than 0.01, that is lesser than Alpha. So the results are
significant and hypothesis is accepted. The regression results also show significant impact of
indirect compensation on employee performance. So, indirect compensation has positive impact
on employee performance.
  Regression Equation:

Employee Performance = 0.145 + 0.169 Salary + 0.138 Rewards + 0.611 Indirect Compensation