The impact of compensation and reward system on employee performance: Study on Insurance Industry in Sri Lanka.

 1.    Introduction  

 

    1.1 Background of the study  

   

Compensation and reward system is essential to the organization as it has become in managing employee’s performance. It seeks to attract people to join the organization to keep them attract work and motivate them to high levels of performance.  One of the main management strategies of the organizations is to invest in employees. Organizations are seeking to develop, motivate and increase the performance of their employees in a variety of human resources applications because the survival and competitive advantage of any organization depends on the quality of its human resources (Armstrong 2005). Human motivation has long been known as complex and evolves from time to time or from situation to situation. As demonstrated in the hierarchy of needs theory by Maslow, upon satisfaction of a lower need, a higher need takes shape with a great propensity for motivation. However, most organizations focus on is the need for reward system to improve organization performance.

As such, different organizations measure performance differently. Some organizations focus

on timeliness of delivery, others focus on job satisfaction and many other areas of performance measurement strategies. Therefore, performance related pay system to be accepted for policy and practice, more empirical testing becomes necessary using different performance matrices (Murphy, 2015). Reward systems have a huge impact on organizations to retain and motivate the employees and as a result of achieving high levels of performance (Barber and Bretz, 2000).

Compensation and reward system used by the organization to increase employee productivity as it is concerned with employees and organization performance development by which best result can be achieved.

The purpose of this study examines reward system impact on employee performance of insurance industry and it could be used as key strategic tool to achieve profit maximization of an organization.  

 

 

 

1.2 Problem Statement

The compensation & reward system plays a major role in improving the employee performance and their productivity. But the Organizations are frequently seeing its employees as additional cost.  They make more efforts on improving the business & production process and there is little consideration for human resource contribution. Therefore, they do not correctly reward efforts and skills of employees. Organization success depends on how much they attention their employees and reward system. It is very much important in insurance sector study how compensation and reward system effect on employee performance. This study mainly focusses how compensation & reward system in organization affect the performance of employees as well as performance of the organization. Whenever the employees get appropriate recognition, its improvements the self-confidence of the employee thereby it will help to increasing their productivity. There is limited information with regard the impact of compensation and reward system on employee performance: Study on Insurance Industry in Sri Lanka.

 

 

 

 

 

 

 

 

 

 

 

 

 

1.3 Problem Justification

Findings of this study aimed insurance companies in introducing better reward structures to ensure employees performance of an organization. It will aim not only employee performance but also maximize whole organization performance & profitability. This study will gain new knowledge in the field of compensation reward system and employee performance. 

Nowadays there were high turnover in insurance industry due to poor reward system. Therefore, this study will help to justify the appropriate compensation & reward system in Insurance Industry. 

 

 

1.4. Objective of the study

1.      To determine the effectiveness of compensation and reward system on employee performance 

2.      To identified how the current reward system impacts employee productivity

3.      To find how to attract new employees to join the organization & retain employees with the right skills through the reward system

4.      To identify the top performers in the organization

5.      To match appropriate compensation system to individual and team performance. 

6.      To inspire a better compensation & reward system to increasing organization productivity

 

 

 

 

 

 

1.5 Significance of the study

This study will give what are the factors that affect reward systems on employee performance in insurance industry. This will provide a better understanding of what kind of reward system that could increase employee’s performance in the organization.

The importance of this study holds a benefit to human resource department of organization regarding the identify of effective compensation & reward system. And also, it will identify the effective compensation and reward system improves value to organizational performance.

 

 

1.6 Scope and limitation of the study            

This study will be limited to the impact of reward systems on employee performance in the insurance industry in Sri Lanka. Currently there are only 28 insurance companies available in Sri Lanka life and general. Therefore, this study will be limited to employees & agents who are working in insurance companies. The research design method, which will go through the questionnaire, collected the perception of employees on compensation & reward systems and organizational performance variables. Hence future researchers could also adopt the research design to produce a more reliable response and could also measure the impact by implementing different variables.

 

 

 

 

 

 

2.    Literature Review

 

This study emphasizes mainly on reviewing more relevant literature involving factors that impact of compensation and reward system on employee performance. Hence, it aims to build the foundation of this study through a literature survey by referring to text books, articles, journals and magazines while expanding the meaning and historical background of the study.

Considering the literature, there were number of articles published on the subject internationally. However, there were only few articles published on impact of compensation and reward system on employee performance in the local context. Based on the collected literature herewith summarized and presented in the literature review.

 

Employee Performance

Employee performance as proposed by scholars, it is based on the type of reward system in place within organizations (Bari, Arif & Shoaib, 2013). In an organizational context of performance, employee performance is defined as the degree to which an organizational member contributes to achieving the goals of the organization. Employee performance is vital to an organization as they play as an imperative mechanism that contributed to the success of an organization. Most organizations can measure employee performance through the quantity of output, quality of output, timeliness of output and labor productivity (George, 2015). What employee does or does not do will affect the reputation of the organization. The successful of supervising, create and empower the employees is an important basis of organization performance (Christensen, 2011).

 

 

Ways of measuring the performance of the employees:

1.      The Amount of the Effort: It refers to the amount of the physical or mental energy that the individual spends in a specific period of time in the work, in addition to the speed in performance.

 

2.      The Quality of the Effort: It refers to the level of the quality of the done work and the degree of matching between the done work and some specific standards. Some kinds of work are not measured by the amount or the speed of performance; but rather by the degree of error-free performance and matching between the production and the required standards.

 

3.      Manner of Performance: It is the way in which the work duties are done. For example, performance can be measured through the manner of performance, measuring problem-solving strategies or in problem detecting.

 

4.      Rates of Performance: It refers to the process in which the evaluator increases the employee's productivity in order to determine the efficiency, the quality and the amount of the employee's work in a specific period of time. Then, he compares the employee's done work with the specified rate. (Al-Rabayah 2003).

 

 

Reward system

 

Reward system have an effect towards the Work Engagement. Demographics factors also affect the work engagement. This shows that Reward system is needed to be upgraded more to increase work engagement. (Taufek F. H. B. M. 2015)The company’s reward system does not define the guiding principles and its implementation plan. Though total rewards should cover benefits, development and career opportunities. emphasizes that total rewards must also aim at satisfying the basic human needs of survival and security and advises that organizations have to choose relevant rewards over which they have what it takes to provide and manipulate (Schein 2005)

All the types of rewards available and the manner of their distribution can influence the satisfaction of employees, their personal commitment and the overall effectiveness of the organization (Zagoria 2005) Good remuneration has been found over the years to be one of the policies the organization can adopt to increase their workers performance and thereby increase the organizations productivity. (Ajila 1997)

Also investigated motivation among Nigerian workers using a sample of workers of high and low occupational levels. The hypothesis that low-income workers will be intrinsically motivated was not confirmed, and the expectation that higher income worker will place a greater value on intrinsic job-factors than low-income workers was also not confirmed. This shows clearly the extent of value placed on extrinsic job factors (Egwuridi 1981)

 

Observed that poor remuneration is related to profits made by organization. Wage differential between high- and low-income earners was related to the low morale, lack of commitment and low productivity (Akerele 1991)

 

Total reward systems are not limited to work-life flexibility, it also prompts career development. According to a study conducted in Ireland by Murphy (2015), it was revealed that career development practices such as training and mentoring increased job satisfaction by statistical significance.

 

 

Salary

 

Salary is defined as a fixed amount paid to the employees at regular intervals for their performance and productivity in a day (Surbhi, 2015). It is also the main mechanism for the organization to reward employees but very less exposure to how does it work in the reward system. In order to understand how salary can change the performance of an employee, the organization must understand their preferences in a reward system. Therefore, the salary issue is very challenging for the managers to handle and they should work hard at communicating with performance and financial reward connection (Lawler, 1988: 68 - 71)

 

 

Bonuses

Bonus, as defined by Heathfield (2016), is the compensation over and exceeding the amount of pay that the employees received as a base salary or hourly rate of pay. Bonus plans are one of important part in reward systems. This is because a bonus that will be given to the employees will be based on their current performance in the organization.

 

Appreciation

 

Appreciation is defined as meaningful and valuable to oneself (Sansone and Sansone, 2010). There are many definitions of gratitude that has been defined by scholars and views on the relationship between gratitude and appreciation. However, while agreeing to the relationship between gratitude and appreciation, McCraty and Childre (2004) argued that appreciation does not contain negative feelings. It is way from someone to thank others on their achievements. Moreover, McCraty and Childre (2004) indicated that appreciation has an energetic quality that expressed an extraordinary feeling of thankfulness from one person to another person. According to Fagley (2016), he argued that appreciation is another aspect of appreciation under gratitude such as ritual and it considered as a higher order construct. Most of the employees truly appreciate an appreciation post or by saying a simple "thank you" for their hard work in the organization.

 

Health Care benefits

 

Health care benefits are defined as policies and programs for maintaining and improving health (WHO, 1948) A study conducted in other countries by Noe et al. (2015) stated that the cost of benefits adds 44.5% to every dollar of payroll, accounting for 30,8% of the total employee non-financial compensation package. When the cost of health care programs keeps on increasing, it is very challenging to the organizations

 

 

 

Relationship Between Employee Performance and Salary

 

Salaries and wages are very significant and he also argued that wages must show a few elements of equity instead of focusing on adequate wages. This is because an adequate salary will provide satisfaction and enhance their performance in an organization (Agburu (2017) A research conducted by Edirisooriya (2014) showed that there is a strong positive relationship between employee performance and financial rewards such as salary and wages. Specifically, in examine human resource practices the use of incentive compensation is positively related to organizational performance (Huselid 1995: Delaney and Huselid 1996) The theory suggests that using incentive compensation better motivates individuals to perform than by simply relying on fixed rewards. Stevens and Hill (2001) focused on differences in executive compensation in large organizations. They found that low performing firms use higher fixed salaries and fewer incentives while high performing firms use lower fixed salaries and a greater percent of overall compensation is incentive pay. This would suggest that higher performing firms are using various forms of incentive compensation such as cash incentives, non-cash incentives and benefits and perks more than low performing firms.

 

 

 

Relationship Between Employee Performance and Bonuses

 

Bonus is a payment that was not expected from the employees and the old line to some of the organization (Bardot, 2014). Bonus is one payment made at the end of the year to reward extraordinary employees who achieve organization goals (Romanoff, 2008).

Most organizations utilize monetary pay intend to motivate their workers. A previous study conducted by showed that the result of reward such as bonus has positive and significant effect towards employee performance. (Hameed et. al 2014 and Sayuyigbe 2014)

 

 

 

Relationship Between Employee Performance and Appreciation

 

Appreciation is an expression of someone to thank for extra effort done by the employee in an organization (William 2010). An appreciation or gratitude should not be done or relying on a formal event organized by the organization as it can create a border and unhelpful to maintain employee's performance in the organization (Kouzes & Posner, 2017).

Sincere thank you from the employer will create a good environment that will increase productivity in the organization and also improve social network between the employer and employees. Feedback that into positive criticism is necessary for employee’s development. It is significant to create a positive workplace culture (Porath, Gerbasi and Schorach,2015) Positive feedback also motivates employees to function as a member team (William, 2010)

A study conducted by Turkish manufacturing firms showed a positive result of non-financial rewards such as appreciation and has a significant effect on employee performance. (Ozutku (2012)

 

 

 

Relationship Between Employee Performance and Health Care benefits

 

A study analyzed employee satisfaction as per specific industry of health care and alongside with the expenses and benefits of individuals with and without inabilities. They also stated that employers are more aware of people with disabilities and invest more money in healthier people Hernandez and McDonald (2010) Another study declared that employee benefits are among the "most relevant for remaining competitive in the labor market" (p. 86). The medical cost is expensive; thus, employees want organizations to understand their financial burden by designing effective health care benefits. (Dulebohn, Molloy, Pichler, and Murrary (2009).

It is showed a positive result and health care benefit has a significant effect on employee performance. (Tanya 2013)

 

In summary, the empirical literature reviewed above on the dimensions of total reward systems such as compensation based on salary, bonus, appreciation and health care benefits how effects on employee performance in an organization. As per the literature reviewed, we can identify in local & globally there were significantly and positively impact on above dimension for employee performance in insurance industry.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.    Research Methodology

 

3.1 Research Philosophy

 

3.2. Conceptual Framework

The connection among the independent and dependent variable is demonstrated by this model.

Independent Variable                                                                 Dependent Variable

Figure 1: Conceptual frame work showing the influence of reward system variables on employee performance variables

 

 

 

 

 

3.3. List of hypotheses formulated

       

	Hypothesis
1	Ho 1. There is a no relationship between the reward system for salary on employee performance
	Ha 1. There is a relationship between the reward system for salary on employee performance
2	Ho 2. There is a no relationship between the reward system for bonus on employee performance
	Ha 2. There is a relationship between the reward system for bonus on employee performance
3	Ho 3. There is a no relationship between the reward system for appreciation on employee performance
	Ha 3. There is a relationship between the reward system for appreciation on employee performance
4	Ho 4. There is a no relationship between the reward system for health care on employee performance
	Ha 4. There is a relationship between the reward system for health care on employee performance

 

 

 

 

 

 

3.4 Population

This study population will include insurance companies registered under the Insurance Regulatory Commission of Sri Lanka (IRCSL). This mainly includes life and general compound insurance companies. Due to the time constraints study will mainly select only insurance companies.

 

3.5 Sample

Sample will be contained of employees who employed in the 29 insurance companies in Sri Lanka. The respective respondents will choose from the above-mentioned sampling frame depending on the availability and reach.

 

3.6 Research Strategy

Primary data will collect through questionnaires filled out by respondents. A questioner will prepare & gather information from various salary employees and the will desire outcome. Secondary data will collect through books, magazines, articles & researches.

 

 

 

 

 

 

 

 

3.7 Operationalize of Variables

Type of the Variable	Name of the variable	Definition	Measurement of Data
Independent Variable	Salary	Fixed amount paid to the employees at regular intervals	Ratio Data
	Bonus	Over and exceeding the amount of pay that the employees received as a base salary or hourly rate of pay	Ratio Data
	Appreciation	Meaningful and valuable to oneself	Interval Data
	Health Care Benefits	Policies and programs for maintaining and improving health	Interval Data
Dependent Variable	Employee Performance	How an employee fulfills their job duties and executes their required tasks	Interval Data

 

           

 

 

 

 

 

 

Conclusion

This research will provide an insight into the factor that affect reward systems on employee performance at Insurance industry in Sri Lanka.

Organizations identify that they must establish a balance between the employee's contribution to the organization and the organization's contribution to the employee. Establishing this balance is one of the main reasons for rewarding employees. By referring past research, it is concluded that performance related pay is positively associated with employee performance in Insurance Industry. Employee Compensation and reward programs that allow employee contributions to the company’s goals and illustration appreciation for their efforts are necessary for a high-performing workplace, happier employees and reduced turnover. Organization profitability also increases with employee engagement.

Effect of reward system on employee performance could give a clear idea to examine and establish a good reward system model that could provide a better understanding of what kind of reward system that could increase employee's performance in the organization other than independent variables tested in this research study. This is because there are many types of a reward system in terms of financial and non-financial rewards that might have a huge impact on employee performance as the employees tend to show their good performance when they want salary increment, aim for the bonus at the end of the year, being recognized and appreciated by the organization and benefit them for a long time in the organization.

In comparing the relationship between reward strategies and employees ‘performance, it can

be concluded that where the effort of an employee is recognized, is encouraged to work harder and that when there is a successful implementation of a reward strategy at the company, it leads to enhanced performance.

 

Therefore, this study will help to identify how effective reward system influence with on employee performance in Insurance industry in Sri Lanka