COLLEGE OF BUSINESS AND ECONOMICS

DEPARTEMENT OF MANAGEMENT

THE ROLE OF COMPENSATION ON EMPLOYEE’S PERFORMANCE (IN

CASE OF COMMERCIAL BANK OF ETHIOPIA PAWI BRANCH)

A THESIS SUBMITED TO THE DEPARTMENT OF MANAGEMENT IN

PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE BACHELOR
OF ART (BA DEGREE IN MANAGEMENT)

PREPERED BY: ID NUMBER

1. GashawGebrie ……………………………………..……38

2. BirtukanAsamen……………………………………..….27

3. AtalayAlemu……………………….……………………..20

4. BeleteTakele………………………………………..……25

5. GashawArega……………………………………….……37

6. EbaMawra………………………………………….….…31

ADVISOR: Melaku.M(BA)

JUNE; 2020
G/Beless,ETHIOPIA
 ACKNOWLEDGEMENT

First, we would to express our heartfelt graduated to almighty God who makes to stay until today and
his mother holy of holist saint virgin merry.

Secondly, we would to express our heartfelt graduated to our advisor melaku for her valuable and continue
suggestions, constrictive comments, unreserved guidance and directions for over all preparations for writing this
research paper.

Thirdly, we would to express our heartfelt graduated for our family to support by morally and financially.

Last but least, we would like also to thanks for the employers of the Commercial bank of Ethiopia pawi branch
of Ethiopia in pawi branch

those who provides to our all the necessary information whenever we need it and filling to questionnaires with
great collaboration.

ABSTRACT

Total compensation is a concept which is not usually given attention in many organizations. Compensation is
mostly viewed as cash and therefore other aspects are neglected. Viewing compensation as a holistic system to
manage for productivity is pertinent to organizational development. This study looks at the total compensation
system and its management in the Commercial Bank of Ethiopia Pawi branch . To accomplish this, the study
made use of compensation manuals and collective bargaining agreement of the Bank and also solicited
responses to questionnaires from a cross-section of the employees. It was found out that though there were a lot
of compensation packages available in the manuals of the Bank, employees were not fully aware of them. The
study also revealed that communication regarding issues of compensation was poor with no avenues for
employees to be heard on issues related to compensation. Policy manuals were not available for employees to
educate themselves. The grass root therefore was not involved in any way in the formulation and
implementation of the policies on compensation. The study therefore recommended to management to
incorporate education on compensation packages in the orientation of new staff and organize periodic education
programmes for existing employee. Also making available the compensation manuals to all employees was
recommended as a means of self-education to reduce the unawareness. The study also recommended that
management creates avenues for the employee to air their concerns on issues pertaining to compensation
through periodic staff durbars. These coupled with verbal commendation of employees when implemented the
study believes will go a long way to boost the morale of employees and in the long run have a positive influence
on their performance and productivity
 TABLE OF CONTENT
ACKNOWLEDGEMENT................................................................................................................................... i

CHAPTER ONE................................................................................................................................................. 5

INTRODACTION............................................................................................................................................... 5

1.1Background of the study............................................................................................................................ 5

1.2Statement of the Problem ............................................................................................................................ 5

1.3 Research Questions................................................................................................................................... 6

1.4. Objective of the study............................................................................................................................... 7

1.4.1. General objective............................................................................................................................... 7

1.4.2. Specific objective............................................................................................................................... 7

1.5. Scope of the Study.................................................................................................................................... 7

1.6 Significance of the Study........................................................................................................................... 7

1.7 limitation of the study------------------------------------------------------------------------------------------------------8

1.8 Organization of the Paper......................................................................................................................... 7

.CHAPTER TWO............................................................................................................................................... 8

REVIEW OF RELATED LITTRATURE......................................................................................................... 8

2.1 Definition of Compensation.................................................................................................................... 8

2.2. Objective of Compensation...................................................................................................................... 8

2.3. Types of Compensation......................................................................................................................... 9

2.3.1. Direct Compensation....................................................................................................................... 9

2.3.2. Indirect Compensation...................................................................................................................... 9

2.4. Compensation Responsibilities.............................................................................................................. 9

2.5. Compensation Philosophy...................................................................................................................... 10

2.6. Compensation Decisions......................................................................................................................... 11

2.7. The Legal Environment and Pay System Governance.......................................................................11

2.7.1. The Fair Labor Standards Act....................................................................................................... 11

2.7.2. The Equal Pay Act........................................................................................................................... 12

2.7.3. The Internal Revenue Code............................................................................................................ 12

 2.8. Factors Affecting Compensation and Result........................................................................................ 13

2.8.1. External Influences an Pay Level................................................................................................... 13

2.8.2. Organizational (Internal) Influence on Pay Levels.......................................................................14

CHAPTER THREE.......................................................................................................................................... 15

RESEARCH METHOLO GY.......................................................................................................................... 15

3.1Research Design....................................................................................................................................... 15

3.2. Research Method.................................................................................................................................... 15

3.3. Data Source............................................................................................................................................. 15

3.4. Method of Data Collection..................................................................................................................... 15

3.5. Target Population................................................................................................................................... 15

3.6. Sample Size Technique........................................................................................................................... 16

3.7. Methods of Data Presentation Analysis................................................................................................ 16

CHAPTER 4

Titlepage i
DECLARATION..........................................................................................................ii
ACKNOWLEDGEMENT..........................................................................................iii
DEDICATION.............................................................................................................iv
ABSTRACT..................................................................................................................v
LISTOFTABLES........................................................................................................ix
LISTOFFIGURES.......................................................................................................x

CHAPTERONE............................................................................................................1
INTRODUCTION........................................................................................................1
Background of thestudy...............................................................................................1
Problemstatement.........................................................................................................4
Objectives of thestudy..................................................................................................4
GeneralObjective..........................................................................................................5
Specificobjectives..........................................................................................................5
ResearchQuestion.........................................................................................................5
Justification forthestudy..............................................................................................6
BriefMethodology.........................................................................................................6
Scope ofthestudy...........................................................................................................6
Limitations ofthestudy.................................................................................................7
Organisation ofthestudy..............................................................................................7

CHAPTERTWO...........................................................................................................8
LITERATUREREVIEW.............................................................................................8
Introduction..................................................................................................................8
Definingcompensation..................................................................................................9
The Importance of Compensation Management on EmployeePerformance11
Relating Compensation andemployee performance...............................................18
Types ofCompensationPackages...............................................................................20
DirectCompensation...................................................................................................21
IndirectCompensation...............................................................................................21
Performance Indicators.............................................................................................24
Challenges associated withcompensationmanagement...........................................25
CHAPTERTHREE....................................................................................................27
METHODOLOGY ANDORGANISATIONALPROFILE....................................27
Introductiontomethodology.......................................................................................27
ResearchDesign...........................................................................................................28
StudyPopulation.........................................................................................................29
Sample andSamplingProcedure................................................................................29
Datacollectioninstruments.........................................................................................30
Questionnaires............................................................................................................31
Interviews....................................................................................................................31
Dataanalysistechnique...............................................................................................32
ORGANISATIONALPROFILE...............................................................................32
History ofOrganisation..............................................................................................32
Staffingsituation.........................................................................................................33
Services provided bytheBank....................................................................................33
3.3.4 Relevance of subject matter toorganization..............................................33

CHAPTERFOUR.......................................................................................................34
DATA PRESENTATION, ANALYSIS AND DISCUSSIONOFFINDINGS.......34
Introduction..................................................................................................................34
TypeofRespondents....................................................................................................34
Background of respondentsbySex................................................................................35
Background of respondentsbyAge...............................................................................36
Department of respondents.......................................................................................37
Length of serviceofrespondents.................................................................................38
Importance of compensation management on employee performance.39
4.6.2 Employee opinion on how effective compensation
managementinfluences...............................................................................................43
Employee awareness of compensation packages and satisfaction with
theirmanagement......................................................................................................45
Awareness ofCompensationPackages.......................................................................45

Identifying the Compensation Packages available at the Commercial Bank of Ethiopia

pawi branch Bank.........................................................................................................47
OthercompensationPackages....................................................................................55
Challenges in the managementofCompensation......................................................59
Some employee concerns regardingcompensationmanagement............................63
CHAPTERFIVE.........................................................................................................64
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
645.0 Introduction.................................................................................................64
Summaryoffindings....................................................................................................64
Lack of awareness of total compensationpackages.................................................64
Inefficient or no communication oncompensationissues........................................65
Lack of a system to measureemployeeperformance................................................65
Delays and human errorscompensationmanagement.............................................65
Lack of social events and othernon-financialcompensation...................................65
Lack of proper categorization oncompensation packages......................................66
Lack of attention towards certaincompensationpackages......................................66
Conclusion...................................................................................................................66
Recommendations......................................................................................................67
Awareness ofcompensation packages.......................................................................67
Inefficient or no communication oncompensationissues........................................68
Lack of a system to measureemployeeperformance................................................68
Absence of software forcompensationmanagement................................................68
Lack of social events and othernon-financial compensation..................................69
Lack of proper categorization oncompensation packages......................................69
Lack of attention towards certaincompensationpackages......................................69

REFERENCES...........................................................................................................70
APPENDIX:RESEARCHQUESTIONNAIRE........................................................74
 LIST OF TABLES
Table 3.1 SampleofPopulation.....................................................................................30

Table 4.2.1a: To meet organisation's legal obligation / Typeofrespondent.................39

Table 4.2.1b: To encourage employee to work hard / TypeofRespondent..................40

Table 4.2.1c: To help employees meet basic needs / TypeofRespondent....................41

Table 4.2.1d: To enhance organisational image / TypeofRespondent.........................42

Table 4.2.2: Summary of responses of how effective compensation

managementinfluencesemployee performance.........................................44

Table 4.3.2:Awareness of Respondents ofcompensationpackages..............................57

Table 4.3.3:Employee views on level of satisfaction with management

ofcompensationpackages..........................................................................60

Table4.3.4:Meansofresponsestoidentifychallengesofcompensationmanagement
..................................................................................................................61
 LIST OF FIGURES

Figure 4.1.1 Typeof Respondent..................................................................................34

Figure 4.1.2: Categorization of Respondentsbysex......................................................35

Figure 4.1.3: Background of respondentsbyage...........................................................36

Figure 4.1.4 Department of respondent........................................................................37

Figure 4.1.5 Length of serviceof respondents..............................................................38

Figure 4.3.1a: Respondents awareness ofCompensation policy..................................45

Figure4.3.1b:RespondentsawarenessofadministrationofCompensationpackages46
CHAPTER ONE
 INTRODACTION
Background of the study
Many scholars defined Compensation in different way According to (Monday 2008)
Compensation is any type of reward that individuals receive in return for their labor. There are
two main form of compensation; these are direct compensation and indirect compensation.
Direct compensation is wage and salary or more simples pay. Indirect compensation refers to
various types of benefits then the organization provides valuation, pay holy day, health
insurance, pension, life insurance and hiring one among others. Compensation is the systematic
approach to provide monetary value to employees in return for work performed by employees. It
is the major cost of doing business for many organizations at the start of 21 century
(Uvanchuich, 2007). Compensation refers to all extrinsic reward employers receive in exchange
for their work (Liold Byers 2004).

Compensation is an important factor affecting how and why people choose to work at one
organization over others. Employers must be reasonably competitive with several types of
compensation in order to hire, keep and reward the performance of individuals in the
organization (Mathis Robert L.2000). Compensation activities are very important for human
resource professional to develop administers and maintain compensation program that are
perceived equitably by employees. The consequence of an equitable compensation program is
that individuals are more likely to be attracted and take jobs in organization where employees do
not voice wide spread concern about equity)

compensation package dose not necessary means of rewarding in the monetary form of it all so
include flexible benefit medical care work life insurance as well as employee perk today
employee not only work for money but all so place equal emphasis on the other aspect of
compensation.

1.2. Statement of the Problem

Compensation system motives employees to greater performance higher quality performance or
greater employee satisfaction. All will be agree that effective compensation administration are
desirable in efforts to increase employee satisfaction and satisfaction with pay is important
because if pay satisfaction is low, job satisfaction is low ,as result, absents and turn over will be
higher and more costly (Ivancevich1989).

The compensation plan shows further, the firm strategy to provide appropriate reward system.
When employee becomes aware or inequities in the system they may be disappointed and their
contribution to achieve the organization’s goal is very less. Therefore compensation plan in the
organization is computable with employee’s profession and achievement; otherwise employees
become idle resources of the organization (Ivancevich, 1989).

The prominent reason that motivates the researcher to conduct this study to see the role of
compensation on employee performance. All so the researcher see the compensation law aims to
provide sure prompt income and other benefit relates to work must be appropriate. In general
organizations receive their pay practice in market average although there are situation when
organizations to pay above or below average strategy.

1.3 Research Questions

1. What are general compensation practice Commercial bank of Ethiopia pawi branch of
Ethiopia in pawi branch?

2. What evaluation methods are used for compensation in commercial bank of Ethiopia pawi
branch of Ethiopia pawi branch?

3. Is employee satisfied with the compensation policy on the bank?

 1.4.Objective of the study

1.4.1. General objective

The general objective of the study was to assess the role of compensation on employee
performance in Commercial bank of Ethiopia pawi branch of Ethiopia in pawi branch

1.4.2. Specific objective

The specific objective of this study will conduct

1.To assess the compensation practice used in Commercial bank of Ethiopia pawi branch

2.To examine method of compensation used in Commercial bank of Ethiopia pawi branch in
pawi district.

3.To identify whether the compensation policy is satisfactory for employee performance or not in
Commercial bank of Ethiopia pawi branch of Ethiopia in pawi branch

1.5 . Significance of the Study

The study has the following significance. The major significance of the study is

It helps as a reference other researcher on related top level managers.

It helps for manager of organizations to recognize the role of compensation on
employee performance system with the standard rule and regulation to make decisions

The result of this study would have the following significance:

Providing an opportunity for the office of revenue agency to identify compensation and
employees performance

Giving important feedbacks for different compensation and employees performance

It is also hope that, this study will be used as input for further study in the topic.
 1.6 Scope of the Study
The scope of the study is limited on the role of compensation and employees performance and
the study is restricted on employees of Commercial bank of Ethiopia pawi branch of Ethiopia in
pawibranch.Theperoposalwill be carring out taking companions of employee to consideration in
commercial bank of Ethiopia pawi branch of Ethiopia . The challenges observed with the side of
(CBE).

1.7 limitation of the study

The study has faced a number of limitations that will beyond the researcher knowledge. The
followings were some of the limitations that the researcher faced during data gathering. Shortage
of reference book, insufficient written document in the organization .All questionnaire
distributed to respondents were not fully returned back.

1.8. Organization of the Paper

This study will organized in to 5 chapters. The first chapter includes introduction part that
introduce about back ground of the study, back ground of the organization, statement of the
problem, objective of the study, scope of the study, significant of the study. The second chapter
deals with giving theoretical frame work for the title under the study that is review literature. The
third chapter deals about research methodology. The fourth chapter includes presentation and
analysis of data which are collected from primary source And Secondary Sources. The fifth
chapter includes the conclusion and recommendation based on the finding
 CHAPTER TWO

REVIEW OF RELATED LITTRATURE

2.1 Definition of Compensation
Compensation is an important factors affecting how and why people choose to work at one
organization over others. Employers must be reasonable competitive with several types of
compensation in order to heir, reap and reward performance of individuals in the organization
(Mathis Robert L 2000).
Compensation is a part of transaction between an employer and employees that result in
employment contract from employer point of view pay is a necessity in life. The compensation
received from work is one of the chief reasons people seek employment, pay is the means by
which they provide for their own and their family need (Mathis Robert L 2000).
2.2. Objective of Compensation
The objective of compensation system is to attract a system of reward that is equitable to the
employer and employee alike, so that the employer is attracted to the work and motivated to do
a good job for the employer Patton suggests that in compensation policy there are seven criteria
for effectiveness .The compensation should be:-

Adequate:-Minimum governmental, union and managerial levels should be met.

Equitable: - Each person should be paid fairly, in line with his or her effort abilities and training.

Balanced:- pay, benefits, and other rewards should provide a reasonable total reward package.

Cost effective: - pay is not excessive considering what the organization can afford to pay.
Secure: - pay should be enough to help an employee feel secure and aid him or her in
satisfying basic needs.

Incentive providing: - Pay should motivate effective and productive work

Acceptable to the employee: - The employee should understand the pay system and fell it is a
reasonable system for the enterprise and himself or herself (Ivancevich, 1989).

2.3. Types of Compensation

2.3.1. Direct Compensation
Direct types of compensation, monetary rewards are provided by the employer.

Bas pay: - The basic compensation that an employee receives, usually as wage or salary, is
called base pay many organization use two base pay categories hourly and salaried which are
identified according to the way pay is distributed and the nature of the jobs. Hourly pay is the
most common means of payments based on time; employees who are paid hourly are said to
receive wage, which are payments directly calculated on the amount of the time worked. In
contrast, people who are paid salaries receive payments that are consistent from period to period
despite the number of hours worked. Being salaries typically has carried higher status for
employees than being paid wage. Some organizations have switched to an all salaries approach
with their manufacturing and clerical employees in order to create a greater sense of loyalty and
organizational commitment (Ivancevich 1989).

Variable pay:-Another type of direct pay is variable pay, which is compensation linked directly
to performance accomplishment. The most common types of variable pay for most employees
are bonuses and incentive program payment .For executive, it is common to have longer tern
rewards such are stock options.

2.3.2. Indirect Compensation

Indirect Types of Compensation Commonly Consist

Benefit; many organizations provide numerous extrinsic rewards in an indirect manner. With
indirect compensation, employees receive the tangible value of the rewards without receiving the
actual cash. Benefit is an indirect reward such as health insurance vacation pay, or retirement
.pensions, give to an employees or group of employees as a part of organizational membership
(Mathis Robert L. 2000).

2.4. Compensation Responsibilities

Compensation cost is significant expenditures in most organizations for instance, at one large
organization, employee payroll and benefits expenditures comprise about 50% of all costs.
Although compensation costs are relatively easy to calculate, the value derived by employers and
employees is more difficult to identify .

To administration these expenditure wisely, Human resource specialists and other manager must
work together (Mathis Robert L. 2000).

2.5. Compensation Philosophy

There are two compensation philosophies which should be seen as opposite ends of continuum. .
Entitlement orientation: - The entitlement philosophies can be seen in many organizations that
traditionally have given automatic incenses to their employees every year further most of that
employee receives the some or nearly the same percentage increase each year. Employees and
managers who subscribe to the entitlement philosophy believe that individual who have worked
another year are entities to arias in base pay and that all incentive and benefit programs should
continuous and be increased , regardless of changing industry or economic condition .
Commonly in organizations following an entitlement philosophy pay increase are referred to as
cost of living raises, whether or not are tied specifically to economic indicators. Market
comparisons tend to be made within an industry rather than more broadly considering
compensation in firm all types. Bonuses in many entitlement oriented organizations are
determined very paternalistic and often do not reflect operating results. Therefore employees
“except” to receive the bonuses as another form of entitlement (Mathis Robert L 2000)

Performance orientation:- where performance orientation philosophy is followed, no one is

guaranteed compensation just for adding another year to organizational service .Instead ,pay and
incentives are based on performance difference among employees who perform well get larger
compensation increase those who do not perform satisfactorily receive little or non- increases in
compensation .Thus employees who perform satisfactorily should keep up advance in relation to
abroad view of the labor market for their job where as poor of marginal performance should fall
being (Ivancevich 1989)

Bonuses are paid based on individual, group and organizational performance results. Few
organization ages totally performance oriented in all facets of their compensation practices.
However, breaking the entitlement mode is increasingly occurring in the organizational
restructuring common throughout many industries (Mathis Robert L.2000).

2.6. CompensationDecisions
In fact pay is influenced by a series of internal and external factors. The diagnostic approach and
be used to help you interested these factors better. Pay can be determined absolutely or
relatively. Some people have argued that a pay system by simple criteria for the whole nations or
the world. The absolute control of pay is the bed procedure science absolute par system are not
used the pay for each individuals is set relative to the pay of others.

Nash and Carroll point out that pay for a particular position is set relatives to three groups these
are:-

Employees working on similar jobs in other organization (Group A)

Employees working on different jobs within the organization (Group B)
Employees working on the same job within the organization (Group C)
The decision to examine pay relative to group A is called the par – level decision. The objective
of pay level decision is to keep the organization competitive in the labor market. The major tool
used in the decision is the pay survey. The pay decision in relative to Group B is called the pay
structure decision. This use an approach called job evaluation. The decision involving pay
relative to Group C is called individual pay determination (Mathis Robert L.2000).

2.7. The Legal Environment and Pay System Governance

As in most human resource management piracies the legal framework exerts substantial
influence on the design and administration of compensation system, the key federal laws that
govern compensation criteria and procedures are fair labor standard Act the equal pay Act, and
the internal revenue code. In addition to these each state has its own sets of regulations that
complement federal law (Mathis, Robert L 2000).

2.7.1. The Fair Labor Standards Act

The fair labor standard Act defines two categories of employees exempt and nonexempt. Exempt
employees are those who are not covered by the provisions of the act; nonexempt employees are
these who are .However, there are heavy penalties for employees who are found to have
classified nonexempt jobs as exempt.

Minimum wage; the minimum page set by the fair labor standard Act is 54.25 per hour
,Minimum wage legislation is controversial .Theses who favor it believe that it raised the
standard of living for the poorest member of the society . Those who oppose are arguing that is
result in higher level of unemployment. And poverty among law-skilled workers because item a
wages firms to save labor cases by hiring or relining fewer workers.

Over time the fair labor standard act requires that none exempted employees by paid and half
time the standard wage for each hour work over 40 hours a week. This provision was intended to
simulate hiring by making if modestly to expand production using existing employees. In fact
however costly to expand production using pay overtime than incurs the costs associated with
hiring additional employees (recruitment, training benefits). (Gomez- Maria- Luis K. 1995)

2.7.2. The Equal Pay Act

The equal pay Act. It requires that men and women by paid the same amount of money if they
hold similar jobs that are “substantially equal” in terms of skill effort, responsibility and
working conditions. The equal pay act includes four expectations that employees to pay one
gender more than the other (1) more seniority ;( 2) better job performance; (3) greater quantity or
quality of production and (4) certain other factors such as paying extra compensation to
employees for working the night shift. If there is a discrepancy in the average page of man and
women holding similar job managers should examine the reason for the difference to ensure that
atavist one of the four exceptions to the equal pay act applier. If none of the four apples, the
company may fall stiff penalties in the form of legal cases and back pay to affected employees.
(Gomez- Majia Luis R.1995).
 2.7.3. The Internal Revenue Code
The internal revenue code affects how much of their earring employees can keep. The internal
revenue required the company to withhold a portion of each employee in come to meet federal
tax obligation.

The tax change from time to time and these changes affect employees take home pay as well as
what forms of compensation can be sheltered from taxes. An employer’s failure to take
advantage of internal revenue code legislation many result in wasted payroll dollars. For
instance, the tax laws currently treat capital gain (profits) on the sale of stock as ordinary income.
This reduces the motivational value of stock as a large term pay incentive because employee bear
more risk with stork than with a cash based form of par (Gomez-Mesial is R-1995).

2.8. Factors Affecting Compensation and Result

One of the most significant factors in compensation is the nature of the employee. How
employee attitudes and preferences directly affect performance.

There are other factors affecting compensation. Factors external to the organization is the
government, unions, economic condition and labor market .Organizational factors are managerial
goals and pay structures ,lab or budgets, and age of the organization.(Mathis Robert L 2000).

2.8.1. External Influences an Pay Level

Among the factors that influence pay and compensation policies are those outside the
organization, the government, union’s economy, and labor market.

Government, influence: - the government directly affects compensation through wage controls
and guidelines, which prohibit an increase in compensation for certain workers at certain time
and laws directed at the establishment of minimum wage rates, wage and hours regulations, and
the prevention of discrimination directed at certain groups.

Union influence on compensation. Union have an effect whether or not the organization’s
employees are unionized, if the organization is an area where unionize and enterprises exist
.Unions have tended to be pacesetters in demands for pay benefits, and working conditions .If the
organization elects to stay in an area where unions are strong its compensation police will be
affected.(Ivancevich,1989).

Economic condition and compensation: Also affecting compensation as on external factor are
economic conditions of the industry especially the degree of competitiveness, which affects the
organization’s ability to pay high wage. The more commutative the situation, the less able is the
organization to pay higher wages. Ability to pay is also a consequence of the relative
productivity of the organization industry or sector. If a firm is very productivity, it can pay
higher wages. Productivity can be increased by advanced technology, more efficient operating
methods, a harder working and more talented work force, or a combination of the factor. (Mathis
Robert L.2000).

Nature of the labor markets the final external factor affecting compensation is the state of the
labor market. In time of full employment wage, and salaries may have to be higher to attract and
ration enough qualities of employee, in digressions the revenue is true pay may be higher if few
skilled employees are avoidable in job market (Ivancevich, 1989).

2.8.2. Organizational (Internal) Influence on Pay Levels

Internal influence that affect pay levels, the size and age of the organization, the lab or budget,
and the goals of its controlling interest.

The labor beget:-the labor budget of organization normally identifies the amount of money
available for annual employee compensation. A firm’s budget normally does not state the exact
amount of money to be allocated the employee, but it does state how much is available to the
unit. The discretions in allocating pay then left to department heads and super visors. These
allocations from the basis of a manager’s strategy (Mathis Robert L.2000).

Goals of controlling interest and managerial pay strategies: essentially, three pay level
strategies-high-law or comparable can be chosen by supervisors and managers.

The high pay level strategy:-The managers choose to supervisors and managers choose to
higher pay than average pay level. Organizations that use this strategy are sometimes called pace
settlers. (Invancevich, 19890).
The low pay level, strategy: in this case, the manager may choose to pay minimum level needed
to hire enough employees. These strategy may be used because this is all the organization can
pay the ability to pay is restricted by other internal or external factors such as a limited labor
budget or forecasted decline in sales and profit(Mathis Rook L.1.2000).

The comparable pay level, strategy: The most frequently used strategy is to set the pay level at
the going wage level. The wage criteria are comparable wages, adjustments. (Ivancevich 1989).

CHAPTER THREE

RESEARCH METHOLOGY
Research Design
Research design is a tram work or blueprint for conducting research project. The study will be
conduct by using descriptive design metrology this type of research is more appropriate to
describe the static of affair of the topic and is necessary to describe the condition of problem
under institution (W. zikm and 1998P. 289).

3.2. Research Method

This study will employee quantitative approach for the data collect by close ended (using ‘yes
or No ‘questions )and will conduct descriptive type of research through survey strategy and
qualitative research method used to analyze open ended (using “WH” questions).

3.3. Data Source

To conduct this study the research used both primary and secondary data. To collect primary data
the research will be conducting through well designed questionnaire. The primary data is
gathering through questionnaire. The questioner will presenting using a simple language and
arranged on sequential manner to help for decision and analysis. The primary data will collect
through questioner from employees of the organization and also the secondary data will collect
from Internet
Primary data source is an original data source, that is, one in which the data are collected
firsthand by the researcher for a specific research purpose or project. Primary data can be
collected in a number of ways. ... In the conduct of research, researchers rely on two kinds ofdata
sources—primary and secondary., book and magazine.

Secondary data refers to data that is collected by someone other than the user. Common
sources ofsecondarydata for social science include censuses, information collected by
government departments, organizational records and data that was originally collected for other
research purposes.

3.4. Method of Data Collection

In order to achieve this study data will use to collect from both primary and secondary data
source. Data will be gathering through primary sources incases questionnaires and secondary
data are gathering from different publication, articles reports and books.

3.5. Target Population

The area of the study will be the employees of commercial bank of Ethiopia pawi branch of
Ethiopia pawibranch with total population 8(eight) employers.

3.6. Sample Size Technique

The researcher will be use census techniques to collect data from employees. The reason for
using census method is because the total employees or the total population of commercial bank
of Ethiopia pawi branch of Ethiopia pawi branch is 8(eight) and it helps to increase accuracy of
the research.

3.7. Methods of Data Presentation Analysis

Data collection through questionnaire will presenting in tabulate and analysis using percentage
and descriptive analysis method while data gathering with interview will analyzing qualitatively.
 CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4. Introduction
Pie chart form
In this chapter the researcher presents the data gathered from the field in the form of
frequencies and percentage and pictorially with bar charts and pie charts. All 100
respondent questionnaires were retrieved and the researcher discusses the responses
in the light of the research topic on the effect of compensation management on
employee performance. These discussions are also done in cognizance of the
literature reviewed in chapter two and with relevant modern day global issues
identified on the subject matter.

Type of Respondents
The categorization of the respondents was done into four groups, thus management staff, senior
non-management staff, middle level staff and junior staff. From these respondents 4 (4%) were
management staff, 21 (21%) were senior non-management staff, 29 (29%) middle level staff
and 46 (46%) were junior staff. It can therefore be observed that most of the respondents were
in the junior staff brackets in agreement with the situation on the ground as regards
Commercial Bank of Ethiopia pawi branch. In many organizations a greater percentage of the
staff are usually in this category of staff. As shown in figure 4.1.1 above.

Background of respondents by Sex

The researcher collected data on the gender of the respondents. We can see from figure 4.1.2
above that there were more female 55 (55%) respondents than male 45(45%). This is
expected since the institution is a Bank and is dominated by female gender in the profession
of nursing. Also it agrees with the National Population and Housing Census of 2010 which
places the population of female higher than that of their male counterparts in Ethiopia but at
variance with the outcome of males being more than females in the formal sector of Ethiopia.
4.3 Background of respondents by Age
The age of the respondents was classified into four, 20-30, 31-40, 41-50 and 51-60.
As evident in the bulk of the respondents were between the ages of 20-30 years 56
(56%), a little below half in that number 27 (27%) were between the ages of 31-40
years and afew7(7%)are in the range of 41-50years.Asizable1(10%) of the
respondents have at least nine year to compulsory retirement falling between 51 –
60 years.The figure shows that the organization has as much as 55 (55%) of its
employees within the age range of 20 – 30 years. This is a clear indication that the
organization has guaranteed youthful employees. The organization must therefore
put in place very good staff retention systems to retain them.

4.4 Department of respondents

The respondents were selected and categorized into seven departments, namely
Generally
The results reflect the nature of the healthcare industry in Ethiopia and globally with nurses
dominating the Banks and the nursing profession also being dominated by females. The
Commercial Bank of Ethiopia Pawi branches also follows the same trend, dominated by nursing
staff who are mostly posted to the institution as junior staff and the crust of them would not have
qualified to senior staff by the time this research was being conducted. They constitute the bulk.

4.5 Length of service of respondents

The data indicated that staff who had served between1-5 years formed the greater number of the
respondents scoring 49 (49%), followed by staff who had served above 10 years. They scored 23
(23%). Staff who had served 5-10 years and less than one year scored 12 (12%) and 16 (16%)
 respectively. Refer to the figure 4.1.5 above.This agrees with the trend in environments where
unemployment rate is high; people are expected to stay longer in one job as compared with other
environments where the unemployment rate is relatively lower and the turnover rate is higher
due to the ease with which people can find employment. So the number of employees who have
served 5 years and above is significant 35 (35%) to support this assertion.

4.6 Importance of compensation management on employee performance

Respondents were asked to give their opinion on what role they thought compensation played
in the organization. They were to select as many as applied to their understanding of the role
of compensation in the institution and the results are summarized in the cross tabulations
below as per type of respondent.

Table 4.2.1a

To meet organisation's legal obligation / Type of respondent

Responses Type of Respondent Total
Management Staff Senior non- Middle level Junior
management Staff Staff
Staff
NO 0 9 14 28 51
YES 4 12 15 18 49
Total 4 21 29 46 100
Source: Field study 2013

The above Table 4.6.1.1 shows that 4 (100%) of the management sample stating their position
on the fact that they understood compensation as a means of the organization meeting its legal
obligation. This tied in with the fact that management is to be the implementers on the policies
and must ensure that they are working within theconfines of the laws governing employment in
the country where they operate. A slight majority of senior non-management and middle level
staff constituting 12 (57%) and 15 (51%) respectively also share the same opinion as the
management staff. With the junior staff a lesser number 18 (39%) of them sided with this
position. Generally 49% of the respondents see the role of compensation in the organization as
a step on meeting the organization’s legal obligation towards its employees.
 Table 4.2.1b
To encourage employee to work hard / Type of Respondent

Responses Type of Respondent Total

Management Staff Senior non- Middle level Junior
management Staff Staff Staff
NO 0 2 5 6 13
YES 4 19 24 40 87
Total 4 21 29 46 100
Source: field study 2013

Concerning whether respondents thought compensation was a means to encourage employees

to work hard, Table 4.6.1.2 again stated 100% of the management respondents, 19 (91%) of
senior non-management respondents, 24 (83%) of middle level staff respondents and 40 (87%)
of junior staff siding with this statement. This leads to an 87% of the total number of
respondents agreeing with the statement that compensation is a means to encourage employees
to work hard.These ties in with the literature reviewed on Cho et al. 2005 who identified
performance-based compensation as a means to improving individual performance and
retention. It also agrees with the longitudinal study by Banker et al. (2001) in the effectiveness
of incentive plans in the bank industry and found out that the incentiveplans were related to
higher revenue, profit increases and lower costs. Paul and Anantharaman (2003) also found that
compensation packages were related to effective operational performance which agrees with the
find finding discussed above.
 Table 4.2.1c

To help employees meet basic needs / Type of Respondent

Responses Type of Respondent Total

Management Staff Senior non- Middle level Junior
management Staff Staff
Staff
NO 3 10 14 23 50
YES 1 11 15 23 50
Total 4 21 29 46 100

Source: field study 2013

From Table 4.6.1.3, the general opinions were divided in a 50/50 manner in the understanding of
compensation as a means of employees meeting basic needs. Management staff respondents had
a 25% supporting the statement and 75% otherwise. Senior non-management and middle level
staff both responded in a 48% not supporting the statement and 52% agreeing with it. For the
junior staff however, the responses amount to 50% on each side of the statement. This does not
agree with Aswathappa (2007) who mentions that employees see the compensation as a means to
meet their needs and because of lack of participation the make huge demands to meet those
needs.In the opinion of the researcher employees’ continuous working in a manner to keep their
jobs is an indication that the cherish it and recognize that it provides them the means to meet
their basic needs. Therefore results presented above could have other reasons why there is a split
opinion especially concerning junior staff respondents.
 Table 4.2.1d

To enhance organizational image / Type of Respondent

Responses Type of Respondent Total

Management Staff Senior non- Middle Junior

management Staff level Staff Staff
NO 2 13 15 23 53

YES 2 8 14 23 47

Total 4 21 29 46 100
Source: field study 2013

Table 4.6.1.4 shows that part of the management staff respondents, (50%) believe compensation
as a means to enhance the image of the organization and 38% of senior non-management staff
also side with that statement. The middle level staff had 48% supporting and the and for junior
staff the opinions were split by 50%. Potential employees have been known to compare the
compensation packages of organisations before making a decision to either take appointment
into them or otherwise. The kind of compensation package an organization provides for its
employee therefore has the potential to enhance the image of the organization hence attracts
prospective employees into the organization.
All the responses gathered indicated that employees acknowledged that fact that there was a
link between compensation management and the continuous performance of employees within
the Commercial Bank of Ethiopia pawi branch. The discussions that follow would try to
further establish that fact and also delve into some of the practices of compensation
management that has an influence one way or the other on employee performance.
 CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

Introduction
The study looked into the effect of compensation management on employee performance. In
order to address the study objectives the researcher distributed questionnaires to 100
respondents at the Commercial Bank of Ethiopia Pawi branchand the results analyzed and
discussed in the preceding chapter. This Chapter presents a summary and conclusion of the
findings of the study and recommendations which are based on the findings.

Summary

The study has revealed that there are a lot of compensation packages that are enshrined in
the manuals on compensation of the Bank but employees (even some management staff)
are not aware of these compensation packages which they are entitled to. This was found to
be as a result of the fact that the compensation manuals where not readily available to the
employees for their reading and reference. The study also showed that there were either no
avenues for the available compensation packages to be communicated to employees or the
avenues existed but were not being managedproperly.
The study revealed that issues concerning employee compensation were not communicated
effectively through the institution and employees also did not have a forum to be heard on the
issues they have concerning their compensation packages and their management. Employees
therefore were not involved in the formulation and implementation of policies concerning
compensation in the Bank.

According to the study the Bank did not have an effective performance management system
with which to manage, monitor and measure the performance of the employees. And since a
good compensation system works hand in hand with a good performance management system
its absence hampers the smooth administration of the compensation in theBank.
The study found out that the managers of compensation do everything manually and
therefore generate many errors and omissions. The entire compensation system is run
manually which also delays the timely payment of such compensations hence its
effectiveness.
The study has showed that employees not only desire the financial compensations and benefits
but also would appreciate commendations form their supervisors in appreciation for the effort
they put into their work. There was also no social event where employees could interact with
the other employees from other departments and also their subordinates and superiors.

The study revealed that some of the employees had equity issues with the distribution of
compensation packages which stemmed from the fact that their colleagues on the same scale
and with the same qualification had more in relation to some compensationpackages.

The research revealed that the management of the compensation packages had focus on certain
aspects and had completely neglected some of the packages which employees found to be
equally important. Some of which were the Retirement benefit package and Long service award
package.

Conclusion
The results of this study have mapped a link between total compensation and its management
and the performance of employees. Employees usually do not have the whole picture of their
entitlement when it comes to compensation and this could be as a result of their employer’s not
providing them with the relevant policy manuals to read and educate themselves or their own
lack of interest in reading those manuals when they are provided for them. Whichever reason can
be attributed to this lack of awareness of the total compensation package of employees, it
beholds on management to ensure that they create the avenues for the employees to get abreast
with the policies and compensation packages as they also di samethemselves.
It can be said that management’s burden in dealing with some of the industrial unrests that has
plagued many countries including Ethiopia could have turned out different if the employees
were well educated on the policies on managing their compensation and also if there were very
effective communication lines established between managers and theiremployees.
An effective performance management system which is absent in many organizations including
the Commercial Bank of Ethiopia Pawi branchgoes a long way to ensure equity n the
distribution of compensation packages and in the actual evaluation of the whole compensation
system for its review to be abreast with the situation on the job floor and hence achieve the
desired outcome. This study sets the tone for further research into the link between
compensation systems, performance management and the productivity of employees. It could
also be the basis for comparing data from similar institutions on the subjectmatter.

Recommendations
Based on the study findings the following recommendation could be considered to address the
issues revealed by the study.

Awareness of compensationpackages
It was found out from the study that though there were many compensation packages available
the employees were not aware of these packages because no avenues were provided to educate
them on such packages. It is therefore recommended that the management of the institution
should provide for every new employee a copy of the compensation manual and discuss the
items therein during orientation. And forexisting employees periodic workshops and training
should be organized to get them educated on the compensation policies and packages.Inefficient
or no communication on compensationissues
The study showed that general communication within the institution was satisfactory but as
concerns compensation it was not as desired. It is based on this that the researcher recommends
that communication should be improved to cover issues that have to do with compensation by
involving the various heads of units in the formulation and implementation process of policies
concerning compensation. The entire employee populace could also be involved by organizing
quarterly staff durbars where issues concerning compensation in general could be discussed.

Lack of a system to measure employeeperformance

The study revealed a lack of performance management system in the Bank hence a deficiency
in the administering of performance. It is therefore recommended that management prioritizes
the implementation of a performance management system to measure the output of employees
and that should be used as a tool to award the compensation packages to employees. The
researcher believes this will ensure fairness.

Absence of software for compensationmanagement

It has emerged from the study that all administration and implementation of compensation was
done manually which caused delays and errors in the management of compensation. It is based
on the views of the respondents that the researcher recommends that management should
consider acquiring software to facilitate the administering on the compensation packages and
also eliminate the human errors.

Lack of social events and other non-financialcompensation

The study revealed also that employees did not only desire financial benefits as compensation to
motivate them to perform but also non-financial benefits as well. It is in the light of this that the
researcher recommends that verbal commendations and a putting the shoulders of deserving
employees should be added to the culture of the organization and social events like staff annual
get-together showing be introduced to afford the employees the opportunity to interact with
superiors and colleagues from other departments

Lack of proper categorization on compensationpackages.

It was found out from the study that there was no clear cut categorization of compensation
packages and employees did not know how they were administered. It is therefore
recommended that management should develop a manual that clearly spells out the
categorization of the compensation packages and their administrative procedure and copies of
this manual should be made available to the entire employee population to allay their fears in
thatregard.

Lack of attention towards certain compensationpackages

The study revealed that some compensation packages had been neglected and it is in this light
that the researcher recommends that a review of all compensation packages should be instituted
and undertaken periodically to ensure all packages are given equal attention and developed to
be abreast with current economicsituation.
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 APPENDIX
BELESE PARDISE COLLAGE, FACULITY OF BUSINESS AND ECONOMICS
DEPARTMENT OF MANAGEMENT
Part I Questionnaire
Dear respondent: - I am graduating class student conducting research study on the role of
compensation on employee’s performance in case of commercial bank of Ethiopia Pawi branch
For the purpose of partial fulfillment of bachelor Degree in management. So, you are kindly
requested to give accurate and relevant information, which is the most valuable input for the
success of my study. Please be aware that there is no any political, economical, social or
psychological harm on you due to responding these questions. Therefore, the researcher hopes
that you will be answer all questions confidently and frankly.
Thank you in advance
Part One: General Information
Direction: please select the following information by encircling the appropriate number
1. Sex Male Female
2. Age group: 20-30 31-45 46 and above

3. Education status:
 High school completion
Primary school completed
Certificate
Diploma
Degree and above
4. Service year

Less than 5 years 5 up to 10 years

10 up to 20 years More than 20 years

5. Marital Status: Married

Divorced Widowed

SECTION 2: Importance of compensation management on employees’ Performance

2.1 What role do you think compensation plays in your organization?
(Please tick (√) as many as are applicable)
To meet the employer’s legal obligation [ ]
To encourage employees to work hard [ ]
To help employees meet basic needs [ ]
To enhance the organization’s image [ ]
All the above [ ]
2.2 Employees’ opinion on how effective compensation management influences employee
performance kindly indicate your level of agreement or disagreement with each of the statements
using the following scale: where 1 = Strongly Disagree (SD); 2 = Disagree (D); 3 =
Neutral (N); 4 = Agree (A); and 5 = Strongly Agree (SA),
No Statement Scoring

A well designed compensation policy and its effective management and SD D N A SD

implementation has an effect on employee Performance and it influences
performance in the following ways:

Motivates employees to perform better

No Statement Scoring

Improves employee punctuality to work and reduces employee

absenteeism

Improves employee willingness to do extra work and go the extra

mile

Makes employees committed to the organization and therefore

commitment to work increases

Increases employees’ readiness to learn new skills and

preparedness to transfer skills onto the job

Creates a healthy environment for work and improves the health

(soundness) of employees

Creates very good working relationship between management and

employees to improve performance

Makes employees feel appreciated and they give their best

Attracts and motivates qualified personnel to work better

Rewards hardworking employees to sustain high performance

SECTION 3: Employees awareness of compensation packages and satisfaction with management

of compensation packages in policy manuals.
3.1 To what extent do you agree with the following statements as they apply and as listed below?
1: To little extent; 2: To less extent; 3: Neutral 4; to some extent 5: To a great extent

No Statement Scoring

Awareness of Compensation Packages SD D N A SD

I am aware of the compensation policy of the branch in the

conditions of service manual

I am aware of how the compensation packages are administered