AN INNOVATIVE PROJECT REPORT ON

THE IMPACT OF COMPENSATION AND REWARD SYSTEM IN AN

ORGANISATION

Masters of Business Administration

(Batch 2020-22)

Under the guidance of- Submitted by-

Ms. Meha Joshi Piyush Kumar(2K20/DMBA/87)

Assistant professor Sarthak Arora(2K20/DMBA/113)

MBA section B

DELHI SCHOOL OF MANAGEMENT

DELHI TECHNOLOGICAL UNIVERSITY
INTRODUCTION
About the Topic
Compensation is the
remuneration that is received by
an employee in return for their
contribution to the organization's
goal. It is a practice involving
balancing the work-employee
relationship by providing
monetary and non-monetary
benefits to employees.
Compensation includes bonuses,
overtime pay, profit sharing, sales
commission, and recognition
rewards. Compensation is an
integral part of HR management
which helps in motivating the employees and improving organizational
effectiveness. Direct Compensation is generally made up of health benefits and salary payments. The
creation of salary and pay scales ranges for different positions within the company is the primary
responsibility of compensation management staff.
Direct Compensation that provides employees with the assurance that they are getting paid fairly.
Indirect Compensation focuses on the personal motivations of each person to work. Although
salary is essential, people are most productive when they share the company's values and priorities.
These benefits can include free staff development courses, subsidized daycare, the opportunity for
promotion or transfer within the company, public recognition, the ability to effect change in the
workplace, and service to others. Employees should be adequately managed and motivated by
providing the good remuneration and Compensation as per the industry standards. The lucrative
Compensation also serve the need for attracting and retaining the best employees. Compensation and
benefits on employee performance and organizational effectiveness depend on the existing
Compensation and performance management programs in the organization. Typically, most
employees respond to increases in pay and benefits with a positive and more productive attitude.
Sometimes, employees only notice rewards of a salary increase the day the increase is communicated
to them, and the day they receive the first paycheck, including the salary increase. In this paper, I
would like to discuss the components and importance of Compensation. I want to emphasize the
impact of Compensation on employee performance inthe organization.

The work is anchored on an interpretative understanding of Herzberg's theory on two-factor

perspectives. It can better understand employees’ attitudes, performance, and perception towards
achieving organizational set goals and objectives. This paper also focuses on different modes of
reward, factors influencing tips system and performances, and motivation on performances.
Physiological or Basic needs
According to Anyim (2012), physiological or basic wants are the area unit's essential would like of
someone. It includes propulsion. This is often conjointly referred to as felt would like. This would
likely cause physiological tension, which is shown by any body’s behavior. This will be reduced
by intake of one thing. Physiological wants or basic wants are referred to as physical wants. Maslow
is the same; once someone fulfills the first physiological or physical wants, he moves up to a
subsequent level. For example, Food, shelter, clothes, sleeping, etc.
Theoretical Framework (Herzberg Perspective)
According to Herzberg (1987), what do people want from their jobs? Do they want just a higher
salary? Or do they want security, good relationships with co-workers, opportunities for growth
and advancement, or something else altogether? These are essential questions. To understand
employee attitudes and motivation, Frederick Herzberg carried out studies to determine that
which factors in an employee's work environment cause satisfaction or dissatisfaction. He
published his findings in the year 1959 in his book titled The Motivation to Work. Herzberg found
that the factors driving job satisfaction (and presumably motivation) differed from those causing
job dissatisfactions. He developed motivation-hygiene theory to explain results.
The following table tells the top six factors that cause dissatisfaction and the top six factors that
cause satisfaction, listed in the order of higher to lower importance.

Factors Affecting Job Attitudes

Leading to Dissatisfaction Leading to Satisfaction

 Company policy  Achievement
 Supervision  Recognition
 Relationship with/Boss  Work itself
 Work conditions  Responsibility
 Salary  Advancement
 Relationship with/Peers  Growth

Herzberg stated that because the factors causing satisfaction are different from those that cause
dissatisfaction, the two feelings cannot be treated as opposites. The opposite of satisfaction is no
satisfaction. While this distinction between the two may sound like a play on words, at first sight,
He argued that there are two different human needs portrayed. Firstly there are physiological
needs that can be fulfilled by money, for example, food and shelter. Secondly, there are
psychological needs to achieve and grow, and this need is fulfilled by activities that cause one to
grow. To apply Herzberg's perspective on motivation in a workplace, one needs to adopt a two-
stage process to motivate people. Firstly, one needs to eliminate the dissatisfaction they're
experiencing and the need to help an employee find satisfaction. When these are successfully
done, performance is guaranteed.
Definition of terms:

 Compensation- Compensation is the act of compensating with something such as

money, given or received or reparation for a service or loss.
 Pay Structure- It consists of the various salary grades and their different levels of single
jobs or groups of jobs.
 Performance- It is a process of collecting, analyzing, and reporting information
regarding an organization or individual or group. It shows the extent to which an
employee achieves work targets assigned to him.
 Employee- An individual who works part-time or full time under a contract of
employment, whether oral, written, express, or implied.
 Employer- A Legal entity who controls and directs a servant or a worker under a
contract of employment and pays wages or salary as compensation.
 Manpower- Power in terms of people available or required for work.
 Employee Wellbeing- This refers to the physical, moral, psychological, social,
economic, and mental health of a worker at work
 Incentive-This is a form of payment made more than the regular payments to employees to
stimulate, motivate or encourage performance.
 Wages- these are the payment made to manual workers SALARY- is a fixed periodical
payment to a non-manual employee
 Key Performance Indicator (KPI‟s)- are performance measures that indicate
progress towards a desirable outcome.
 Staff cost-are costs associated with recruitment, maintenance, and retention of staff
within an organization.
 Outsourcing-Outsourcing is the practice of sending certain job functions outside a company
instead of handling them in-house to gain a cost advantage.
 Score Card- a statement showing a comparison of actual employee performance against
set assigned targets to determine the degree to which an employee has met his target.
 Basic wage- is the remuneration, by way of basic salary and allowances, which is paid
to an employee in terms of his employment contract for the work done by him.
 Allowances- These are usually paid in addition to the basic wage to maintain the value
of basic wages over a while.
1.1 Review of Literature
Compensation processes are based on Compensation Philosophies and strategies. They contain
arrangements in the shape of policies and plans, guiding principles, structures, and procedures
managed to provide and maintain appropriate types and levels of pay and other forms of
compensation (Bob, 2011).
Compensation implies having a structure in which the employees who perform better are paid more
than the average-performing employees (Pearce, 2010). Compensation management is one of the
central pillars of HRM. It is concerned with the implementation and formulation of strategies and
policies that aim to compensate people fairly, equitably, and consistently following their value to
the organization (Armstrong, 2005). As the name suggests, compensation management implies
having a compensation structure in which the employees who perform better are paid more than the
average-performing employees (Hewitt, 2009). In their study, Harrison and Liska (2008) posit that
reward is the centerpiece of the employment contract-after all, it is the main reason people work.
This includes all types of rewards that are received as a result of employment by the organization.
In another study, Brown (2003) sees compensation as a return in an exchange between their
employees and themselves as an entitlement for being an employee of the organization or as a
reward for a job well done.
Now let us discuss about wage level.

What is a Wage Level?

It is defined as the money an average worker makes in a geographic area or organization.

How Wage Levels are Set?

The Wage levels are calculated using position importance and the skill required as criteria.
There is a minimum wage set by federal law for most jobs, but the actual compensation
entirely between the employer and the employee.

What are "Stagnated" Wage Levels?

It's a regressive wage system, which does not attach any value to employee number of the service
year, employee performance, additional qualification, or at large may be said to lack respect for
workers dignity and right to a good life. Workers spend their energetic and productive moments
of life receiving a meager salary as the total monthly payment. The practice has been observed to
be repugnant to natural justice, equity, a good conscience, and fairness.

What is a Wage Rate?

A wage is an amount of money that is paid to a worker for some specified quantity of labor. When
expressed for time, it is typically referred as the wage rate. The wage rate is the pre-tax amount of
payment It is usually monetary and paid per unit of labor. It is the primary financial item that the
worker and the employer focus on.
1.2 Components Of Compensation System
Human Resource is the most essential resource for any organization. It is responsible for every decision
taken, every work done, and every result. Employees should be adequately managed and motivated by
providing the best remuneration and compensation as per the industry standards. Compensation is the
remuneration that is received by an employee in return for his/her contribution to the organization goals.
It is an organized practice that includes balancing the work-employee relation by providing monetary and
non-monetary benefits to employees. Compensation is an vital part of human resource management which
helps in motivating the employees and improving organizational effectiveness.

Compensation System
Compensation systems are designed keeping in view the strategic goals and business objectives.
A compensation system is created based on certain factors. Components of a compensation
system are as follows:

Compensation provided to employees can direct monetary benefits or indirect non-monetary

benefits known as perks, time off, etc. Compensation does not include only salary, but the total
of all the rewards and the allowances provided to the employees in return of the services. If the
compensation offered is managed effectively, it contributes to the high organizational
productivity.
Direct Compensation:

Direct compensation refers to monetary benefits offered and provided to employees in return for
the services they provide to the organization. The economic benefits include basic salary, house
rent allowance, conveyance, medical reimbursements, special allowances, leave, travel allowance,
bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

Indirect Compensation:

Indirect compensation means the non-monetary benefits that are offered and provided to
employees in return of the services provided to the organization. This include Leave Policy,
Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits,
Retirement Benefits, Holiday Homes.
Managing Employee’s Compensation
Compensation continues to be influenced by several factors that are producing some critical trends
in compensating workers. One of such trends is aligning wages to the organization’s goals. Others
include tailoring compensation to the needs of employees, better salary, and pay equity (Fisk2001).
Various existing theories to support this argument have been identified, and one of such is the
reinforcement theory, which B.F propounds. Skinner. This theory holds that individuals can be
motivated by their work environment when it is adequately developed. It emphasizes the
importance of a person's experience of a reward. This compensation management implies that high
employee performance followed by monetary compensation will make future high performance
more likely.
Another theory is the Expectancy theory propounded by Victor Vroom. However, this theory
focuses on the link between rewards and behavior, emphasizing expected bonuses rather than
experienced rewards. In other words, it is mainly related with the effects of incentives. It stresses
that behaviors (job performance) can be described as a function of ability and motivation.
Expectancy perceptions often have more with job design and training than pay systems.
Extrinsic motivation depends on rewards such as pay and benefits controlled by an external source,
whereas intrinsic motivation depends on rewards that flow naturally from work itself. Therefore,
while it is essential to keep in mind that money is not the only effective way to motivate behavior
and that money rewards will not always answer motivation problems, it does not appear that
monetary rewards run much risk of compromising intrinsic motivation in most work settings.
Another theory relevant is the Equity Theory and Fairness, propounded by John Stacey Adams as
Equity Theory but was later on advanced by Elaine Hatfield and her colleagues, now known as
Equity Theory and Fairness. This theory came from continuous agitation for fair and equitable
wages for all workers. The theory, is divided into two, suggests that people evaluate the fairness
of their situations by comparing them with those of other people. According to this theory, a person
(P) corresponds his/her ratio of perceived outcomes (O=pay benefits, working conditions) to
perceived inputs (I = effort, ability, experience) to the percentage of comparison other (O) –
external inequity pays. The main implication of this theory for managing employee compensation
is that to a large extent, employees evaluate their pay bycomparing it with what others are paid,
thereby influencing their attitude to work by such comparisons.

Impact of Compensation on Employee Performance

Compensation is the remuneration that is received by an employee in return for their contribution
to the organization. It is an organized practice which involves balancing the work-employee
relation by providing monetary and non-monetary benefits to employees. Compensation includes
payments such as bonuses, profit sharing, overtime pay, recognition rewards and sales
commission. Compensation Weighs significantly in job performance. An organization's
performance management system begins long before the employee reports for her first day on the
job. Performance management starts with discussing the job duties, responsibilities and
expectations with candidates during the recruitment and selection process. Ideally, a job posting
should contain a gist of the job, the qualifications the company is looking for and what the company
expects from employees in that particular role. Consequently, when a recruiter hand over a job
applicant the full job description, essentially saying, "This is what we expect from the person we
hire to fill this position and if you accept this, we can move forward with the selection process."
Methods of employee compensation
Some of the most common methods of employee compensation which as impact employee
performance are as follows,

 Individual incentives:
Pay incentives are associated with increased performance and productivity—for example,
employees receive pay raise for reaching a certain level of performance. Bottom line, increases
in quantifiable productivity are related to individual incentives, with studies showing increases
on average of30percent when incentive programs are introduced.
 Merit pay:
This involves giving employees bonuses or other compensation when they perform well. It is
the most widely used method for organizations. Research studies show that there is some
support that merit pay is associated with increased performance, though many studies failed to
demonstrate a definitive impact of this system on performance.
 Profit-sharing:
This involves rewarding employees when profitability targets are met. Studies suggest that they
do have an impact on performance. However, employees may be less motivated by this type of
reward than other reward systems because they may not see the connection between their efforts
and increased profits. Profit-sharing tips are also often disseminated in the future (e.g., at
retirement) and can be less motivating than immediate rewards.
 Stock plans:
This involves offering employees the opportunity to buy stock in the company at a fixed rate.
Studies are investigating the impact of this approach for middle and upper management show
positive results. However, this option has its issues— for example, when stock prices fall, this
could impact employee motivation. It also opens the door for ethical and even criminal
violations to occur.
 Gainsharing:
This involves rewarding employees based on group performance, accounting for the
interdependent nature of jobs. Studies show that this approach is practical and can result in high
performance, teamwork, increased profits and decreased losses. Offering a variety of
performance incentives is best.
Compensation aids in:
Recruitment and retention of qualified employees- A Good pay attracts a pool of prospective applicants.
Organizations will through its recruitment process select the right staff with needed qualification and skill.
Once this rare genius is identified, good pay, fringe benefits and conducive working conditions aid the
workers retention.
Increasing or maintaining morale/satisfaction-is assumed by theorist as a motivational factor. Wikipedia
enumerated the Abraham Maslow’s (a psychologist) hierarchy of 24 needs theory as follow premises:
He observed that, these needs overlap and one of them predominates. The predominant need is
referred to as pre-potent need. Thus, an individual will tend to satisfy the pre-potent of most
powerful/pressing need at a given point of time. A pre-potent need must be partially or totally
satisfied before the next higher need is felt and its satisfaction desired.
Maslow’s Hierarchy of Needs

The hierarchy of needs is: -

Physiological needs-Physiological needs are those needs that are required for basic human
survival. If these requirements are not completed, the human body cannot work properly and will
ultimately fail. These needs are the most vital; they should be completed first. Air, water, and food
are basic metabolic requirements for survival. Shelter and clothing provide necessary protection
from the elements.

Safety needs-Employee safety at work should be guaranteed. Safety and Security needs
include:
 Personal security.
 Health and well-being.
 Financial security.
 Safety net against accidents/illness or their adverse impacts.

Love and belonging- The third level of human needs is interpersonal and involves feelings of
belongingness, friendship, Intimacy, and family. According to Maslow, humans require to feel a
sense of belonging and acceptance among their social groups. Humans need love and be loved
– sexually/non-sexually – by others. Many people become susceptible to - social anxiety,
loneliness, and clinical depression in the absence of love or belonging element. The need for
belongingness may overcome the physiological and security requirements, depending on the
strength of the peer pressure.

Esteem- All humans need to feel to be respected. Esteem represents the typical human desire to
be accepted & valued by others. People often indulge in a profession or hobby to gain recognition.
People with low self-esteem often require respect from others. However, fame or credit will not
help the person build their self-esteem until they accept who they are internal.
Psychological imbalances such as depression can stop the person from reaching a higher level of
self-esteem or self-respect.

Self-actualization-This level of need is to what a person's full potential is and the realization of
that potential. Maslow calls this level as the desire to accomplish everything, to become the most
that one can be. People may focus on this need very specifically. For example, one person may have
a strong desire to become an ideal parent. In some, the desire may be expressed athletically. For
some, it may be expressed in paintings, pictures, or inventions.
 Maslow’s Hierarchy of Needs

Performance Management
Performance management is a systematic approach that involves developing an organization’s
mission and objectives, enhancing Communication within the organization, clarifying individual
responsibilities and accountabilities, defining and measuring the individual performance and
rewarding their performance, and finally improving the staff performance and developing their
career progression in the future. There is a difference of definition between Schneier and
Fletcher; it is Communication. Fletcher pointed that by enhancing the Communication within the
organization so that employees know the objectives and the business plan of the organization,
and employees can continue Communication in the production process for exchanging
information, discussing problems, and seeking feedback. Thus, combining the definition of
performance management system from Armstrong, Fletcher, & Schneier. Clear & detailed
employee performance objectives play a essential role in helping companies perform their
business plan and achieve the strategic goals. Managing performance activities like seeking
feedback and coaching, evaluation, and rewarding are included in the theories of both authors.
In addition to Fletcher's (1996) view, there would be a need for a continuous communication
activity in the managing performance phase. The Communication between managers &
employees and Communication within employees could make employees understand the
objectives and make managers supervise daily work progress.
Objectives of Performance Management
 Motivating, empowering, and rewarding employees to do their best.
 Focusing employee’s tasks on the right things and doing them right.
 Proactively managing and resourcing performance against agreed accountabilities and objectives
 maximizing potentials of individuals and teams to focus on the achievement of organizational
objectives. There is a dichotomy between general performance management and HR-related
performance management.
However, general performance management and HR-related performance management are the
goal setting, planning, evaluation, feedback, and rewarding activities. However, HR-related
performance management focuses on the management of employees or managers, then
motivating them. Moreover, general performance management is defined more widely than
HR-related performance management. It takes into account the definition of goals and the
measurement of goal attainment not just financially but also in meeting all stakeholder
aspirations.

The motivation of employees at work is one of the fundamental aims of the performance
management. Since the employee performances are captured, reported accurately, and
subsequently rewarded. Worker’s motivation is very important for an organization because of the
following benefits it provides:

Puts human resources into action

Every concern needs financial, physical, and human resources to accomplish the goals. It is due to
motivation that the human resources can be utilized by making full use them. This can be
accomplished by building willingness in employees to work. This will help the enterprise in
securing the best possible utilization of resources.

Improves the level of efficiency of employees

The level of subordinate or an employee does not depend upon his qualifications and abilities. To
get the best of his work performance, the gap between knowledge and willingness has to be filled,
which helps improve the level of performance of subordinates. This will result into:
a. Increase in productivity,
b. Reducing the cost of operations, and
c. Improving overall efficiency.

Leads to the achievement of organizational goals

The objectives and goals of an enterprise can be achieved when: -
a. There is the best possible utilization of resources,
b. When there is a co-operative work environment,
c. When the employees are goal-directed, and they act in a purposive manner,
d. When goals can be achieved if coordination and co-operation coincide, which can be
effectively done through motivation.
Builds friendly relationship
Motivation is an essential factor that satisfies employees. This can be done by keeping in mind and
framing an incentive plan for the benefit of the employees. This could initiate the following things:
e. Monetary and non-monetary incentives,
f. Promotion opportunities for employees,
g. Disincentives for inefficient employees.
To build a cordial, friendly atmosphere in a concern, the above steps should be taken by a
manager

Leads to the stability of the workforce

The stability of the workforce is essential from the view of reputation and goodwill. The employees
can only remain loyal to the enterprise when they feel participation in the management. The skills
and the efficiency of the employees will always be of advantage to employer as well as employees.
This will lead to an excellent public image in the market, attracting competent and qualified people
into a concern. As it is said, “Old is gold,” which suffices with the role of motivation here, the older
the people, the more the experience and their adjustment into a concern that can benefit the
enterprise.

Motivation is vital to an individual as:

 Motivation will help him achieve his personal goals.
 If an individual is motivated, he will have job satisfaction.
 Motivation will help in the self-development of the individual.
 An individual would always gain by working with a dynamic team.

Motivation is important to a business as:

 The more motivated the employees are, the more empowered the team is.
 The more is the team work and individual employee contribution, more profitable and
successful is the business.
 During the period of amendments, there will be more adaptability and creativity.
Motivation leads to an optimistic and challenging attitude at work place
The (BSC Model) balanced scorecard model is one of the outstanding and popular method of
tracking and measurement of performance. This is due to its flexibility. Each of its 4 categories
could be defined by unlimited numbers of performance indicator which may differ from one
department/organization to another, hence making it a perfect performance measurement tool for
every organization.
Analysis and Interpretation

Q Do incentives motivate you to perform effectively towards achieving the companies goal and
objectives?

100% of respondents believed that incentives motivate them to perform effectively towards
achieving the company’s goals and objectives. Offering employees, a little encouragement can go
a long way in boosting productivity; irrespective of their position at their companies, they believe
that motivation is a primary aspect that can energize them to be productive and committed.

 Happy Employees work more.

 Employee Incentive Programs Can Improve Employee Morale.
 Both company wide and individual incentives encourage employees.

Most employees would like a touch quite a virtual pat on the boss’s back to remain intended. That
is why several employers implement worker incentive programs to keep their workers engaged and
dealing arduously. These worker incentives will help you net a lot out of your team while keeping
them intended and glad.

The study shows that out of the 50 workers sampled, 100 percent of the respondents said
yes, confirming that our hypothesis is upheld by the worker’s responses showing the
effectiveness of motivational incentives from the worker’s point of view.
Conclusion and Recommendation
Human beings are regarded as one of the most vital company’s assets, hence they need to be managed
efficiently and effectively. One of the tools that the companies use to attract, retain and motivate their
people is Compensation Management. With this behavioral science theory andevolution of labor and
trade unions, employees started asking for their rights. Employee’s performance was being measured
and apprised based on the organizational and individual performance. The compensation system was
designed based on job work and related proficiency of the employee.
Compensation helps in running an organization effectively & accomplishing its goals. Salary is just a
small part of the compensation system; the employees have other psychological and
self-actualization needs. The most competitive compensation will help the organization to attract and
sustain their best talent. The compensation should be as per industry standards. A good compensation
package is essential to motivate the employees to increase their performance and increase
organizational productivity.
A sound reward system provides a positive assurance for fulfilling the needs and wants of employees
in the workplace. It generally has an optimistic attitude behind it, and it is usually given to have
excellent leverage to satisfy the psychological requirements of employees. As earlier mentioned in the
body of the work, the elements of reward system include pay raises, bonuses, company automobiles,
vacation benefits, well-furnished offices, jobs with higher responsibilities, sense of worth, recognition,
health insurance plans, club privileges, child care support, job autonomy, wall plaques, non-verbal
signals such as smiles, golden handshakes, profit sharing, incentive plans, developmental feedbacks
and so on.
Rewards are an act or promise for a more significant action. It is like a stimulus to more concrete
action. It refers additional remuneration or benefit to an employee in recognition of achievement or
better work. It’s spur or zeal in the employees for better performance. Therefore, a hope for a reward
is powerful incentive to motivate the employees because these rewards are used in an organization to
induce the performance of employees to be effective and efficient in the workplace to achieve the
desired aims and objectives of the organization. Each company or organization must decide if
increased performance or satisfactory performance levels are to be remunerated by employees' salaries
alone or if additional financial rewards are to be considered. The ultimate goal is to increase
performance by reinforcing specific behavior through the available reward system. The strategic
objective for all organizations lies in the practical approach. Most organizations are continually
challenged with achieving the aims and objectives of organizational desirable goals and objectives.
Organizational heads or managers need to attract, motivate, retain and satisfy their employees. This is
the most significant guarantee for organizational success and performance.
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