Analyzing Compensation's Impact on Employee Motivation and Performance

This report delves into the critical relationship between compensation and employee motivation and performance. It begins by establishing the importance of motivation in achieving organizational goals, and then explores the Expectancy Theory. The report then analyzes various compensation strategies, including performance-based (incentives, merit pay) and non-performance-based (market, retention, experience, intangibles) approaches. A mixed strategy is recommended, emphasizing the importance of both performance-linked rewards and market-competitive packages. The report concludes with practical recommendations, including job analysis, pay structure development, and the construction of job grades and pay ranges to ensure fair and effective compensation practices. The report also suggests using benchmarking, job descriptions, and industry data to set the pay and compensation rate.

Table of Contents
Impact of Compensation on Employee motivation and performance:........................................................2
Expectancy theory:..................................................................................................................................3
Compensation strategies:............................................................................................................................3
Performance based:................................................................................................................................3
Non-performance based:........................................................................................................................5
Market:................................................................................................................................................5
Retention:............................................................................................................................................5
Experience:..........................................................................................................................................5
Intangibles:..........................................................................................................................................5
Recommended Strategy:.............................................................................................................................6
Recommendations:.....................................................................................................................................6
Job analysis, pay structure and compensation:.......................................................................................6
Constructing job grades:..........................................................................................................................7
Calculating pay ranges:............................................................................................................................7
Compensable Factors:.............................................................................................................................7
Reference....................................................................................................................................................8

Impact of Compensation on Employee motivation and performance:
Motivation is one of the main challenges of organizations, and it has been established as
essential to achieve corporate desired outcome. This involves paying great care to the right way
for people to accomplish their goals (Amstrong, 2008). Amstrong (2008) continues to suggest
that bonuses, promotions and roles will provide inspiration to ensure that people achieve
outcomes in line with management expectations.
Motivation decides how a person will respond to an opportunity. It is the effort that will
be made (DeNisi and Griffins, 2008). Due to the motivational function of the working
environment in understanding and arrangement, to promote effective behaviors. In team-based
situations and individual working situations, motivation is critical. Motivation requires
harmonizing employee objectives and principles with the mission and vision of the company in
order to achieve and uphold high standards of success (Campbell, 2007). Campbell (2007) adds
that with the highly competitive market place, it is obvious that companies have to appreciate in
particular the importance of workers in creating a competitive advantage, motivating people to
provide good-quality outcomes, sustain high efficiency and resolve difficulties and obstacles.
Satisfaction, acknowledgement, gratitude, encouragement and compensation are key
factors that decide employee motivation (Bowen, 2000). Organizations which understand the
value of employee motivation also adopt strategies that consistently encourage employees to
achieve the goals of the organization. These incentive improvement methods include incentives,
staff involvement, reviews and job climate to ensure the interests and needs of workers are
addressed (Bowen, 2000). Clegg and Birch (2002) conclude that the idea of encouraging is
motivational in itself; therefore, the greatest inspiration arises from expectation than the reward
itself.
Compensation is one of the main motivational factors, since people can automatically
expect appropriate payment and dividends from their actions to do better. Whilst people strive
for various factors, reward is the most important motivating force in today's dynamic economic
climate and consumer culture to enhance their performance. Most people are at least inspired by
money for their daily needs and desires. In any context, compensation is the most evident
external reward; it gives the carrot most people seek. (Amstrong 2008). The incentives that
organizations award individuals for their ability to work in different organizational positions and

different situations and tasks are set by their motivation that is synchronized with the firm’s
goals.
Expectancy theory:
According to the expectation theory, people are driven because they have self-confidence
in their abilities, trust in management's promises of receiving a reward, and a personal value for a
particular reward (Vroom, 1964).
So Expectancy theory also describes that people have some expectancies from the
management especially in this critical situation they must be seeking some kind of help as a
reward to their services. This will not only boost their moral to work in this situation but also
motivate them to work harder and get the desired results for the firm. There is more disruption
and confusion in today's workplace, as well as a greater demand for motivated workers, a fall in
conventional benefits, a growth in unconventional benefits, and a greater use of discretionary
pay. Employee motivation is also affected by incentive schemes and management processes,
according to studies (Bowen, 2000). In various organizations, several scholars have concentrated
on employee motivators such as happiness, acceptance, gratitude, and work climate. So as per
expectancy theory employee satisfaction is possible to meet their expectations in certain was so
they generate a sense of relationship that will enhance the overall performance and motivation
level of the workforce in this pandemic environment.
Compensation strategies:
 Performance based compensation
 Non-performance based compensation
Performance based:
According to Dransfield (2000), gradual raises within fixed pay categories have
generally vanished, with performance-related pay being the chosen process. Financial incentives,
according to Dessler (2008), are monetary benefits given to workers whose performance reaches
a prescribed level.
Performance-related compensation, according to Bowen (2000), are bonuses that are
offered based on an employee's potential to do well on the workplace. The award is determined
by an individual's success on the job site. Commissions, piecework compensation schemes,
benefit programs, group benefits, and other merit pay plans are examples of these incentives.

Many people believe that contingent compensation is the most effective way to reward
employees, however it is delusional to assume that it is the only extrinsic motivator in the type of
pay that results in long-term motivation especially in today’s environment when everybody is
threatened by this pandemic.
According to Gomez (2012), most employees believe that they should be rewarded for
their efforts. They described a pay-for-performance or incentive system as a system that rewards
employees based on the assumptions that individual employees and work teams contribute
different amounts to the company and that the company's overall performance is largely
dependent on the individuals and groups. They also said that in order for a company to retain and
inspire workers, it must compensate workers based on their comparative success.
According to Amstrong (2008), various rewards and appreciation schemes are
appropriate for different individuals in a company, including incentives for individual workers,
salespeople-related incentives, team or group-based incentives, organization-wide incentives,
and executive incentives. Individual employee reward and appreciation schemes, he adds, are
incentive systems specifically suited for use for individual workers, with examples including a
piecework scheme, merit compensation as an incentive, merit pay opportunities, and rewards for
professional development. Bowen (2000), argues that reward plans may be created based on
member, team, or goal achievement. Specific rewards are offered to individuals for their
increased contributions to corporate goals, while collective incentives are used where individual
employees' performance is not observable due to interconnectivity with other workers' duties.
When the workers of a company are given bonuses, it is referred to as an agency reward.
When accounting for the basic work and future competencies, pay-for-performance is not
usually a full wage system. Instead, performance-based compensation is incorporated into or
applied to wage arrangements based on performance requirements. For merit compensation, the
employee's success becomes the criterion for advancement within the job's pay grade.
Performance is a consideration in most variable wage schemes that leads to an increase in base
pay or a reduction in base pay to make room in the salary budget for a cash benefit bonus
payment. Employees and managers believe that linking wages to results is a good idea.
According to research, managers believe that their quality of success can be the most significant
factor in determining the size of a pay raise. 2 Although not all classes of workers place a high

value on efficiency, most employees believe it is an important factor in determining how much
they should be paid.
Non-performance based:
Many factors are involved in the nonperformance based compensation.
 Market
 Retention
 Experience
 Intangibles
Market:
The starting point should be what other companies pay for equivalent positions and duties.
Since market pricing is such an important factor in deciding salaries, compensation accrediting
agencies devote an entire qualification course to it. Job descriptions, positions and duties,
company sector, company size, and location are all factors that go into determining fair pay in
these courses.
Retention:
In many markets, a lack of key talent is clearly a cost of doing business. As a result, a
business seeking to succeed in one of these markets would also compensate for employee
retention. In highly competitive markets, providing adequate handcuffs on key workers by
retention grants to restricted stock may and should be considered.
Experience:
A main leader from a much bigger organization with a strong track record would often be
attracted to a transformation or even a start-up company. This usually comes at a price. A
premium is added to an experienced executive's current overall incentive plan in order for them
to take the risk.
Intangibles:
Person output should be aligned with the intangibles that a model cannot capture as
choice is used as a part of variable pay.
On the other hand, a skill-based strategy promotes workers who master new abilities and
gain new experience. This method is usually preferred by enthusiastic, self-motivated workers
because it provides them with an incentive to concentrate on their professional growth. It also

offers a framework for rewarding workers who strive to achieve greater levels of performance.
When businesses invest in expertise and capability growth, they help to raise the bar for success
around the board. On the negative side of the approach, internal competition within job ranks can
lead to friction among coworkers.
Recommended Strategy:
In fact a strategy that should be a mix of both performance and non-performance based
strategy should be adopted to address the both. Because highly performing people are always
expecting some reward from their management and at the same time people with a good track
record. Also their maybe people some people who need to be retained in the firm for long term
goals for that purpose a market competitive compensatory package must have to pay to them to
keep them and also reduce the turnover rate. So a mix of both these strategies would be good for
the firm to address all needs of compensation strategies.
Recommendations:
For providing clear recommendations regarding pay structure and compensation first we
have to complete the job analysis.
Job analysis, pay structure and compensation:
Compares to other organizations and sectors has a range of function and responsibility
similar to them. Usually a comparison of an internal work description with a survey job overview
or a matrix should be used as a benchmark. There are typically employments in identical
positions around the business. There are administrative assistants in several different offices, for
example. Although the job details can vary somewhat, this category of jobs is probably one
standard job. So for proper job analysis a benchmark could be established that would help to set
the pay and compensation rate.
 When we decide if a survey job is a suitable fit for an internal job, always compare job
details — never titles alone. In terms of size and duty, titles differ greatly from
organization to organization.
 Find it to be a decent standard if a benchmark job matches a description or matrix with at
least 80% of a survey job.
 Studying two to three time to finalize the list of benchmarks; benchmarking could be
more a science than an art.

 Present rates of compensation for industry data are reviewed. Review the average salary
rates of each index against the target market data. Please pay special attention to places
with a differential of 20% above or below the market. Make sure the match reflects
correctly the benchmark tasks and make adjustments as necessary.
 Select benchmarks that reflect a broad array of the roles, departments and levels of the
organization, such as career types or families and employment levels (e.g., manager
versus individual contributor, junior level versus senior level).
Constructing job grades:
A career grade is different for group of separate workers, but similar internally. Grades
provide the company with versatility and internal equality by creating a system where fair labor
is handled for compensation purposes equally. Grades also provide staff with a promotional
ladder.
For broad and diverse positions, a systematic work assessment is needed to determine the
tasks are equal internally. It can take some time to complete the process, so it does help to have a
sound and clear pay system. The work assessment is especially helpful to explain the position,
accountability and relationship reporting of new or newly restructured organizations.
Calculating pay ranges:
There is a salary range anytime a company has to pay workers in the same job range
different rates. Managers should consider aspects such as knowledge and success in areas that
provide versatility. Ranges often enable students to recognize learning curves and the variance in
success of their positions. Organizations often only measure standard wage ranges, as the base
pay is reflected in fixed cash payments and the fundamental job benefit. For any work grade, pay
levels are measured and are essentially a plus-minus distribution, also known as the intermediate
phase. The limit of a certain pay grade is set by the full range. Set the floor to approximation
range. Usually, the range is limited in the case of junior employment. On the other hand, ranges
for management positions are also broad, reflecting the change in the output and curve.
Compensable Factors:
The next step is to decide what the company is "is paying for" – which factor(s) put a job
in the work hierarchy at a higher level. The measures used to assess the relative location of the
workers are these compensable variables. In a way, it is the task assessment that focuses on
selecting compensable variables. These considerations not only put workers in the career

hierarchy of the enterprise, but also remind jobseekers of which achievements are compensated.
Many compensatory factors are used as we discussed above. Because are motivated by different
factors so a mix of compensatory factors could be used for their motivation and we could use the
theory of equity or theory of expectancy for compensation in this scenario.
Reference
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Clegg, B. and Birch, P., 2002. Crash course in managing people. Kogan Page Publishers.
Campbell III, J., 2007. Motivation, attitudes, goal setting, performance and interactive effects of pay for
performance. Capella University.
Bowen, R. B. (2000). Recognizing and Rewarding Employees. New York City: McGraw-Hill Professional.
Dransfield R. (2000). Human Resources Management. Heinemann Educational Publishers, Halle court,
Jordan hill, Oxford.
Dessler, G. (2008). Human Resource Management. Upper Saddle River, NJ: Pearson/Prentice Hall.
Gomez-Mejia, L.R., Balkin, D.B. and Cardy, R.L., 2012. Managing Human Resources. United State.
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