World Applied Sciences Journal 19 (7): 1009-1017, 2012

ISSN 1818-4952
IDOSI Publications, 2012
DOI: 10.5829/idosi.wasj.2012.19.07.1491

Reward System and Performance Within Malaysian Manufacturing Companies

1

Tze San Ong and 2Boon Heng Teh

Faculty of Economics and Management, University Putra Malaysia, Malaysia

2
Faculty of Management, Multimedia University Malaysia

Abstract: This study examines the relationship between the reward system and organizations financial
performance. Data is collected through a questionnaire survey covering 105 manufacturing companies in
Malaysia. Data gathered is analyzed quantitatively such as linear regression analysis is adopted in order to
investigate the interrelationship between research variables. Results and findings of this study include: (1) most
of the manufacturing firms provide both monetary and non-monetary rewards; (2) adoption of reward system
is not influenced by age and size of the company; (3) negative relationship exists between extrinsic rewards and
financial performance of organizations and (4) intrinsic rewards are positively related to financial performance
of organizations. This study has provided important information into the implementation of reward system on
organizations performance.
Key words: Reward system

Intrinsic reward

Extrinsic reward

INTRODUCTION
A well-organized reward system will motivate and
energize employees because it recognizes the
achievements of employees [1]. Reward system
implemented by organization will influence employees
behavior and attitude towards their job if the rewards
satisfy their needs and help them to reach their personal
goals. When employees desire to get the rewards, they
will change their behavior in order to achieve the minimum
level of performance required by organization [2].
Overall
improvement
of
organization
performance helps organizations maintain their
substantial competitive advantages in the worldwide
marketing warfare.
For most organization, reward system is developed
by Human Resource department while organization
performance evaluation is done by Finance department.
There is an integration issue as both of thedepartments
do nothave coordination and tend to isolate with each
other. Most of the companies are excellentin developing
business strategy and organizing human resource
management but unable to achieve a well-implemented
strategy because their performance measurement system
and reward system arenot consistent [3]. Organizations

Financial performance

Malaysia

often design and implement the reward system without

linking it with the ultimate improvement of organizations
performance [4].Therefore, the reward system is unable to
contribute significantly to the performance of an
organization.
Moreover, reward system is usually designed by top
management. They design the reward system based on
their own perception without consulting employees at the
lower level. Rewards and recognition designed may not be
able to satisfy employees needs and expectation. Thus,
employees are not willing to change their behavior
because they feel that their contributions are not well
recognized by the organization. As a result, the reward
system is not able to influence employees behavior to a
better way and it fails to encourage them toachieve a
higher performance.
Due to many organizations fail to realize the
relationship between reward system and organization
performance, this study intends to overcome this
problem.This study aims to provide insight and advices
for organizations on this problem. By assuming reward
system as the independent variable and organization
performance as the dependent variable, this study is
designed to determine how reward system influences the
performance of an organization.

Corresponding Author: Tze San Ong, Department of Accounting and Finance, Faculty of Economics and Management,
University Putra Malaysia, Malaysia.

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World Appl. Sci. J., 19 (7): 1009-1017, 2012

Objectives of the Study: Based on the research problem,

objectives of the study have been developed. The
research objectives are:
To discover different types of reward system
adopted by the Malaysian manufacturing industry.
To determine the relationship between reward system
and performance of the Malaysian manufacturing
industry.
Literature Review
The Nature of Reward System: Reward is defined as
anything that extrinsically or intrinsically reinforced,
maintain and improve the employees behavior in an
organization [5]. Reward is the compensation which an
employee receives from an organization for exchanging of
the service offered by the employee or as the return for
the work done [6]. The term of reward is broader than
compensation and it encompasses everything given by
the organization and will satisfy the employees needs
[7, 8] claim that reward and incentive systems exist from
the inception of an organization.
[9] give examples such as a fixed base salary,
variable allowance and employee stock ownership
plans which can be used to reward achievements of
employees. [6] further states that rewards are not
simply expressed in the monetary form, but it also
includes
those difficult to measure in monetary
currencies. Several examples given are comfortable
working conditions, involvement in decision-making
process and future growth opportunities. At a minimum
level, employees usually expect their organization to
provide them fair pay, secure working environment and
fair treatment [10].
Reward system is crucial for attracting and retaining
employees with competence, knowledge and skills in
order to achieve organization's strategic goals and create
a supportive culture [11]. The results of research done by
[12] shows that a strong relationship exists between the
rewards provided to employees and financial performance
of organization. Reward system is the key to lead and
reinforce employees behaviors to support organizations
strategy and this hasa substantial effect on organizations
performance [13], [14].
Extrinsic Rewards Approach: Extrinsic rewards are
usually referred to the monetary rewards that are provided
by an organization through the person who has a high

position in that organization [15]. In the classic point of

view, the uses and effects of extrinsic motivation are
strictly different with intrinsic motivation [16].
According to [17], extrinsic motivation can be
categorized as a set of monetary rewards whichis given
directly to employees through salary and incentives or
provided indirectly through contributions to employees
benefit plans such as medical benefits and life insurance.
Other examples of extrinsic rewards such as pay and
fringe benefits, promotion or advancement opportunities
within the organization should be offered in the
organizations rewards system [18].
[19] havedeveloped a framework to distinguishfour
types of extrinsic motivation, which are referred as
external regulation, introjections, identification and
integration. These represent different level of
internalization and self-determination. According to the
framework, external regulation is the classical extrinsic
motivation where the individuals behavior is being
altered and controlled when the individual assimilates the
external regulations. On the other hand, introjection
means a relatively externally controlled form of extrinsic
motivation, which affects and influences regulation within
an individual.
The third type of extrinsic motivation introduced by
[19] is identification. This refers to an individuals
perspective with the value of a behavior based on the
individuals personal goals and identity. Individual feels
the cause of the behavior comes from him or herself.
It is classified as extrinsic motivation because the
behavior is still instrumental instead of spontaneous
enjoyment [19, 20]. The last type of extrinsic motivation is
the integration which is classified as the highest degree of
internalization of extrinsic motivation. This motivation
means an individual fully identifies the value of a behavior
and integrates the identification with other aspects.
There is an enhanced attention to various forms of
extrinsic motivation because most of the activities
involved by people are not inherently attracting and
interesting [19-21]. Due to most organizational activities
are not intrinsically motivating [20], greater focus on
extrinsic motivation and in particular the emphasis on
different types of extrinsic motivation is essential for a
better understanding of motivation and employees
behavior in organizations.
Monetary rewards will extrinsically motivate
employees when it can satisfy their needs [17]. Financial
rewards offered from the management are very important

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and have significant influences on employees working

behavior [3, 22] states that providing monetary rewards
has greater effects than solely using goal setting and job
enrichment in motivating employees to improve their
performance.
Extrinsic rewards are proved to have strong
association with continuance commitment of employees
to the organization [23, 24]. The external rewards motivate
employees to perform value-added tasks toorganization
they served [25, 26]. Thus, extrinsic rewards will motivate
individuals to spend more time and efforts on a task [27]
and ultimately improve their task performance [28].
Intrinsic Rewards Approach: Some organizations believe
that non-monetary rewards or intrinsic rewards are easier
to implement than monetary rewards and useful for
company success [29]. Intrinsic rewards may be just as
important as extrinsic rewards in motivating employees to
have a better performance [30].
[31] define the intrinsic motivation as the effort
expended in employees work to satisfy their growth
needs such as achievement, capabilities and self
improvement. [32] further states that people will be
intrinsically motivated when they experience interest,
happiness and enjoyment in performing an activity.
Intrinsic motivation exists in the activity itself without
giving any apparent reward.
Additionally, [33] argues that employees will be
intrinsically motivated in the workplace if it maximizes their
feelings of competence and self-determination.
[34]expresses similarly that higher level of feelings of
competence and personal control over the job
performance will provide greater intrinsic motivation to
employees.
[6] mentions that people are no longer working
simply for pay. They pay attention on personal growth
such as improvement of capabilities, acquirement of new
knowledge and valuable skills. Non-financial rewards
such as support and recognition given by leaders are
important to motivate the organization members [35].
Moreover, [36] states that several intrinsic rewards
such as great autonomy, recognition, flexibility in the
work schedule can be used extensively by organizations
in order to motivate employees. Accordingly to [37],
recognition of employees performance can be in the form
of praise, awards or through ceremonies.
Recognition of employees efforts and performance
has positive impacts on the employees commitment, job

satisfaction and organizational involvement [38].

Implementation of reward system which emphasizes on
intrinsic motivation leads to a higher job satisfaction and
efficiency levels of employees [39].
[40] claimes that intrinsic motivation is relatively
effective to trigger non-routine behaviors than extrinsic
rewards. The Human Resource Management (HRM)
which includes the rewards management should
emphasize on employees self-motivation in order to
improve their innovative behaviors [19]. Previous
researches provide further support that intrinsic
motivation improves creativity and innovative
performance of employees [41].
Intrinsic rewards are perceived as useful methods
which leadto valuable outcomes in terms of the quality,
spontaneity and vitality [16, 42]. Intrinsic rewards
provided create a sustainable motivation and win-win
situation to both employees and organization they served
[43]. Therefore, study done by [36] concludes that
intrinsic motivation derived from non-cash rewards will
effectively drive-up the performance level among
employees.
Relationship Between Reward System and
Organizational Performance: Reward system illustrates
the exchange relationship between the organization and
employees. It defines the contributions from employees
and the responses an individual can expect to receive
from the company as a return for their performance [44].
The purpose of reward systems is to motivate and reward
the desirable behavior [45,46]. Rewarding the excellent
and outstanding performance is to appreciate
contributions of employees and acknowledge their efforts
publicly [47].
The empirical research conducted by [12] finds that
organizations that introduce the total rewards strategy
have better performance than companies that do not
apply the strategy. Moreover, [48] propose that there is a
positive relationship between reward system, strategy and
organization performance. This proposition is supported
by [2] because reward system is needed to motivate
performance and encourage employees and organization
to improve their skills and capabilities.
Reward systems can be developed to motivate and
improve both short-term and long-term performance of
organization [3]. The uses of total rewards bolster the
extrinsic and intrinsic motivation of employees to behave
innovatively and creatively [48]. Measurement and reward

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systems communicate the performance achieved with

employees and motivate them to take appropriate action
to help organization reach its strategic goals [3].
Similarly, [49] add that reward like expressions of
appreciation from top management will intrinsically
motivate employees and influence their behavior. This is
important to help the organization move towards reaching
its strategic objectives. [50] describes that motivation is
a strong incentive for employees to achieve excellent
performance achievement in their daily work so that they
will get the predicated commend. [51] states that, in order
to enhance morale and motivation of employees, rewards
and recognition should be provided instantly when
employees achieve the required performance.
[52] declares that no inherent relationship exists
between employees satisfaction and performance
because their performance is usually influenced by
particular reward contingencies that are in force [53].
states that the employee satisfaction is the magnitude
of an employees affective orientation toward their job in
the organization when their needs are fulfilled.
[54] further add that the imbalance between
employees contributions and the returns of their
performance cause employees tend to be unsatisfied with
the workplace and not motivated. If the reward system is
attractive and employees perceive they may get the
rewards, they will change their behaviors and tend to exert
more effort into their work in order to achieve the required
performance [6]. Motivated employees are more willing to
contribute vigor and dynamism to the organization. This
improves the quality and quantity of work performed and
subsequently brings significant improvement to the
productivity and competitive advantages of the
organization [51, 55].
[51] suggests that organization should recognize
employees satisfaction as a vital goal to achieve because
it affects the organizations profitability, productivity,
employee retention and customer satisfaction. It is
believed that satisfied and motivated employees will
generate better customer satisfaction and subsequently
bring positive impact to the organizational performance
[56, 51].
Several researchers express that improved customer
satisfaction implies reduced marketing expenses, less
price elasticity and enhanced customer loyalty, which in
turn improve the financial performance of organizations
[57]. In addition, enhanced customer satisfaction
encourages customers to buy more products from the

organization. This will increase organization profitability

due to the positive impact on the sales amount and market
share compare to competitor [58].
Study of [4] mention that many organizations do not
realize the causal relationship between their lackluster
performance and a misaligned reward strategy. In order to
attract and retain the top performers at the affordable and
sustainable costs, management needs to ensure their total
rewards strategy is properly aligned with the organization
strategy [59, 60]. Therefore, [61, 62] conclude that the
implementation of reward system enables both of the
employees and organization achieve a higher level of
performance.
Previous researches provide strong evidences and
empirically suggest that reward system will influence the
employees behavior and encourage them achieve better
performance. Individual performance improvement will
subsequently boost the organization performance. Hence,
reward system must be linked to performance
measurement system in order to motivate and maximize
employees performance.
Multiple Regression Model: This study utilized the
multiple regression technique to determine the
relationship among extrinsic rewards, intrinsic rewards
and firm performance as follows.
Yit =
0+

1 X 1it

2 X 2it

3 X 3it

4 X 4it

+ eit

Where Yit= total annual sales or shareholders fund or

total assets
= Constant
0
= Coefficient of the explanatory variable
1
X1it = Extrinsic rewards (ER)
X2it = Intrinsic rewards (IR)
X3it = Firm Size (BSize)
X4it = Firm Age (FAge)
eit = Error term
RESULTS AND DISCUSSION
The target population of this study is firms operating
in Malaysias manufacturing sector. Profiles of the survey
companies are indicated in Table 1-4. Most of the
companies are small in size, followed by big firms and
medium in size. The sample was divided reasonably
evenly between three main ownership types (local-owned,
joint venture and foreign-owned).

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Table 1: Types of Business Activity
Business Activity

Frequency

Percent (%)

Manufacturing Products

34

32

Electronic and Electrical Products

22

21

Medical Products

16

15

Infrastructure Products

12

11

Chemical and Petroleum Products

Agriculture Products

10

10

Other Products

Total

105

100

Fig. 1: Attitude of respondents towards effectiveness of

rewards system

Table 2: Age of the company

Age of Company

Frequency

Percent (%)

Newly established (<10 years)

25

24

Moderately established (11 to 20 years)

32

30

Established (>20 years)

48

46

Total

105

100

Table 3: Size of the company

Size of Company

Frequency Percent (%)

Small firm (< or equal to 50 full time employees)

42

Medium firm ( 51 to 150 full time employees)

25

40
24

Big firm (> or equal to 151 full time employees)

38

36

Total

105

100

Fig. 2: Frequency of rewards used as motivational tool

Table 4: Ownership of the company

Ownership

Frequency

Percent (%)

Local owned company

84

80

Foreign owned company

Joint venture

17

16

Total

105

100

Fig. 3: Type of rewards system used

Attitude Towards Effectiveness of Rewards System:
As shown in Fig. 1, 98% of respondents agreed that their
companies performance is influenced by the reward
system. On the other hand, only 2% of respondents did
not agree that performance-related reward system will
improve performance of their companies. The result
indicates that most of the Malaysian companies are
influencing employees behaviors by linking reward
system and companys objectives. Reward system is the
main tool to drive employees performance.

This result demonstrates that most of the respondents

have utilized rewards as a motivational toolfor their
employees.In
Malaysia
manufacturing
context,
employees motivation is highly influenced by the
organisations reward system.

Frequency of Rewards Used: As illustrated in Fig. 2, 10%

of the respondents seldom used the rewards system.
However, almost half of the respondents (48%) have
answered that rewards will provide sometimes to
employees as motivational tools.While 38% of
respondents have frequently used the rewards
system, only 4% of the respondents used rewards
system very frequently to motivate their employees.

Type of Reward System Used: Different type of reward

system have been used by respondents in oder to attract,
motivate and retain employees. As shown in Fig. 3, 32%
of the respondents have provided monetary rewards to
their employees. However, only 4% of the respondents
offered non-monetary rewards to their emloyees. The
largest portion of respondents, which accounted 64% of
the respondents have adopted both monetary and nonmonetary reward system in their companies. Linking
performance and reward is the best and direct way to
motivate and retain employees in Malaysian
manufacturing companies.

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Table 5: OSL Regression

Variables

Annual Sales

Shareholders Fund

-----------------------------------------------------

-----------------------------------------------------

---------------------------------------------------

Coefficient

Coefficient

Coefficient

t-value

Sig.

Total Assets

t-value

Sig.

t-value

Sig.

ER

-0.322

-0.786

0.050

-0.721

-2.781

0.017

-0.506

-2.345

0.026

IR

0.335

1.358

0.879

0.717

2.466

0.030

0.158

1.692

0.996

BSIZE

-0.105

-0.735

0.466

-0.058

-1.786

0.678

-0.067

-0.0458

0.604

FAGE

0.036

0.250

0.804

0.063

0.784

0.729

0.052

0.989

0.963

R = 0.110

R = 0.135

R =0.126

Adjusted R2= 0.035

Adjusted R2= 0.115

Adjusted R2= 0.162

F value=1.038

F value= 3.575

F value= 4.848

F significance=0.004

F significance=0.001

F significance=0.000

Multiple Regression Analysis: Table 5 presented the

result of regression analysis by performing the
Ordinary Least Square (OLS) regression in this study.
The R-squares for total annual sales, shareholders
fund and total assets are 11%, 13.5 and 12.6%
respectively. Out of these three models, neither
firm size nor firm age is having significant
relationship with all three financial measures (total
annual sales,shareholders fund and total assets)
respectively.
Extrinsic reward such as work for tangible rewards i.e.
salary, bonus and incentive) is statistically negatively
correlated with all three financial performance measures.
Adverse relationship exists between employees
perception on extrinsic rewards and companys financial
performance. This is mainly due to the fact that employees
are not motivated by extrinsic rewards.In general,
Malaysian companies are less likely to be motivated by
extrinsic rewards in the long run. Study by [63] stated
that, when employees feel that they have to work in order
to get tangible rewards, such extrinsic reward is just a
temporary incentive from company. It would not provide
sustainable motivation and happiness to employees.
Maslows need hierarchy theory explained that people will
be motivated only when their needs are satisfied. If
employees are just temporary motivated by extrinsic
rewards, it will not significantly influence their attitudes
and behavior. As supported by the study of [56],
employees satisfaction is correlated with customer
satisfaction. Unsatisfied employees are not willing to
improve their behavior and provide better services when
serving customers. This cause dissatisfaction of customer
on services provided. As a result, average sales value per
employee decreases. As a conclusion, when extrinsic
rewards have been provided and it fails to motivate
employees, poor individual performance will reduce
revenue and profits of company. It ultimately affects the
total assets acquired by the company.

On the other hand, the results between intrinsic

rewards such as recognition, self-esteem and enjoyment
and companys financial performance are rather mixed.
Intrinsic reward is significantly correlated to only one of
the three financial performance measureswhich is
shareholders fund. The result is also supported by the
previous researches [33, 40] where intrinsic rewards is a
sustainable source of motivation for employees to
improve financial performance of company.
CONCLUSION
Implementation of extrinsic rewards is proved to have
an adverse relationship with financial performances of
organization. The research finding is contradicted with
previous researches. This may be due to these researches
were conducted in different countries. Different context
and cultural of countries mightcause employees react
differently on extrinsic rewards.
On the other hand, results showed a positive
relationship between implementation of intrinsic rewards
and financial performance of organization. It is consistent
and supported by the previous researches such as study
done by [33, 40]. An intrinsic reward is believed to be able
to satisfy and motivate employees to perform better. Value
creation and continuous improvement of employees
enhance the overall business performance. Thus,
performance of company improves through intrinsic
rewards offered to employees.
It is hoped that results and findings of this research
enhance the understanding of management teams on
associations between reward system and organization
performance. Besides providing monetary rewards,
companies should give more emphasis on intrinsic
rewards in order to motivate and improve employees job
performance. A careful design of reward system which
links with the performance measurement is essential for
the long-term success of organization.

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