Analyzing The Effect Of Reward Practices Commerce Essay

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For the past few decades, Government of Pakistan has made efforts and succeeded in its efforts to make the environment conducive for the corporate sector to increase investment and overall uplift of economy. These organizations from Telecommunication, Banking, Oil & Gas and other industries are playing significant roles in the economic development of Pakistan. For this continuous process towards development, Human Resource Management Practices in a business must be taken in to consideration for un-exhaustive operations and enhanced organizational performance.

An Overview of Telecom Industry in Pakistan

The mobile telephone industry, adding to the speed of globalization is also changing the lifestyle of the people in Pakistan. It is a pivot in making the life patterns of masses easier day by day. The mobile Industry of Pakistan is quite vibrant and is still growing in a highly dynamic, sophisticated and competitive market environment.

The history of mobile telecommunication services can be traced back to early nineties, which have a substantial standing in Pakistan's telecom sector and is providing its subscribers with the cheapest calling rates in South Asian region. In addition, the mobile service providers are adding new services to their clients, like DSL (Digital Subscriber Line), Local Loop, LDI (Long distance and International), WLL (Wireless Local Loop) and ISP (Internet Service Provider). Compared to the developed countries there is still room for improvement in the service like the inclusion of WiMax and 3G cellular systems, etc..

Having said this, the deteriorating law and order situation in the Pakistan and financial slump has also slowed down the development in the cellular industry in Pakistan. However, this industry still has a good profit margin that is being reduced for the service providers due to competition. As per the report of Pakistan Telecom Authority (PTA) (2008), Mobilink is the market leader with 35.3% market share and followed by Ufone (20.8%), Telenor (20.5%), Warid (17.8%), Zong (5.4%) and Instaphone (0.4%) and overall cellular subscriber base in Pakistan has reached up to 9.2 million in Sep 2008. Currently, Instaphone is totally out of service and not in competition anymore.

A study by Rafiq and Gao (2008) revealed certain important aspects about the market dynamics of mobile telecommunications industry in Pakistan as a complex system of humans and technology is operational in the mobile telecom industry in Pakistan. The study also elaborated the robust growth of mobile telecom industry in Pakistan as a result of favorable conditions for growth. They further contended that a current competitive environment for mobile telecommunications is backed by fair regulations and policies devised by PTA. The study also illustrated that the healthy competition among mobile operators is affecting the working patterns of mobile phone companies and they are providing improved value-added services at highly compatible rates to their consumers. Due to tough competition, some companies died out.

Rewards and Organizational Performance: A Basic Motivation Tool

Miller & Hamblin (1963) and Rosenbaum et al. (1980) analyzed the impact of various different combinations of rewards on team productivity and processes. They deduced that improper mix of rewards leads to lowered efficiency and productivity.

If not motivated, a skilled employee can become a poor performer. One of the effective ways to enhance employee motivation and performance is to provide ay for performance compensation (Delaney and Huselid, 1996). The rewards system positively augments performance as the interests of employee and the organization is on the same wavelength, thus resulting in improved efficiency and performance (Kalleberg and Moody, 1994; Huselid, 1995; Kling, 1995). The reward system rotates around the expectancy theory, which proposes that the good performance of employees is directly linked to the rewards system (Fey and Bjorkman, 2001; Guest, 2002; Mendonca, 2002).

Lawler (2005) reported that organizational performance and effectiveness, organizational design and change management are the outcomes of an outstanding Human Resource (HR) system. Hewitt (2004) and Saratoga Institute (2006) concluded that for the betterment of the various HR functions, HR indicators are required to be to empirically measured and reported by HR Systems. Consequently, this approach will shift the HR systems and functions from traditional personnel administration towards Strategic Human Resource Management (HRM) having wide growth opportunities for an organization. Therefore, reward and performance are closely linked with one another in a way that improvement in rewards system results in an increase in organizational productivity.

To improve organizational performance, motivation plays key role in enhancing employee effectiveness and its focuses on the effects of intrinsic and extrinsic "rewards" in shaping employee behavior. Therefore, we can say that rewards could be and often are being used as a motivator to enhance organizational performance. The decision of an employee to join an organization and perform well depends, among others, the rewards and incentives system implemented (March and Simon 1966; Rosenstiel 1975; Weinert 1998).

Extrinsic versus Intrinsic Rewards

Based on the work of various researchers, rewards are divided into two main categories known as intrinsic and extrinsic rewards. The intrinsic rewards exist in the job content and include variety, challenge, and autonomy etc. Extrinsic rewards refer to the context of job such as pay and fringe benefits, promotion or advancement opportunities within the organization, the social climate, and physical working conditions. Brief and Aldag (1977) suggested that it is useful to have a distinction between extrinsic and intrinsic rewards. However, Crino (1978) highlighted that extrinsic and intrinsic rewards are not only different types of outcomes but these two are separate ends of a same band. Contrary to this, Guzzo (1979) suggested that differentiating extrinsic and intrinsic rewards is inadequate for understanding of different types of rewards and incentive systems in organizations.

Porter and Lawler (1968) reported that there is an equivocal relationship between extrinsic and intrinsic rewards with performance. However, there is a weak relationship between extrinsic rewards and work performance because it is very difficult to maintain consistency and fairness in rewarding work performance. One more reason is an inherited difficulty in performance management system and evaluation to measure qualitative tasks. On the other hand, intrinsic rewards can easily be linked to performance, as these rewards are associated with soul and spirit of a person. Intrinsic rewards focus on achievement of something good that is urgent, immediate and directly aligned with performance; such rewards are not bothered by situations and are not externally controlled. Porter and Lawler (1968) further contended about extrinsic and intrinsic rewards that when we combine them with one another, they impact the satisfaction and performance positively.

On the other hand, Deci (1972a) advocated that both extrinsic and intrinsic rewards do not improve motivation level rather extrinsic rewards when surpasses certain level, it overpowers the impact of intrinsic rewards. Resultantly, there is a negative impact of extrinsic rewards on intrinsic motivation at times when the work performance is linked with extrinsic rewards only.

Extrinsic Reward Structure and Policy

Although not much work has been done on linking the awareness of extrinsic rewards structure and policy with the performance of the employees and/or the organization, some researchers have found significance association among rewards and incentives tied to organizational performance. A study by Bau and Dowling (2007) found that there is an association among the reward and incentive systems in organizations. They further suggested that organizations having large number of skilled and qualified employees have better financial and non-financial reward practices while the smaller organizations with fewer staff cannot manage to have a structured extrinsic rewards practices.

In order to achieve the goal and objectives of an organization, extrinsic monetary pay is considered to be an integral factor among rewards given (Heneman and Judge 2000; Milkovitch and Newman 2004). According to Gardner et al. (2004) for work performance, an extrinsic reward in the shape of monetary pay is often administered. Monetary Pay is also used for retention of willing workers (Trevor et al. 1997). Contrary to this, Tekleab et al. (2005) suggested that employees perceive monetary pay administration in negative terms, which shows that pay is not considered to be a positive motivator for effective performance and retention of employee (Currall et al. 2005; Tekleab et al. 2005; Trevor et al. 1997).

In addition, it is argued that salary raise and benefits have strong impact upon creating a sense of commitment and gratitude as an employee will feel that he/she is being fairly treated in the organization. Therefore, there is an indirect link between different facets of job attitudes with pay and benefits. As Williams et al. (2002) stated that overall job satisfaction has positive relationship with benefit level and system. Dulebohn and Martocchio (1998) commented that knowledge and usefulness of pay plan is significantly related with organizational commitment. Various authors of the same field maintained that satisfaction of the employee is greatly tied with the extrinsic rewards that are given to the employees based on his performance. So, based on the findings as discussed above, an empirical investigation about the extrinsic reward structure and policy needs to be conducted. In addition, reward structure and policy becomes more important when a new firm is initiated and its reward structures are to be formulated. A company needs to develop the major components of the reward and incentive system with the passage of time, as a young firm will have an unstructured reward and incentive system. This reward and incentive system contains various types of rewards such as financial rewards and social incentives, which evolve as the company grows.

The approach to adopt the extrinsic rewards structure and policies in organizations depends upon the perception of employers, market dynamics and strategic approach of the firm in question. The compensation schemes of the organizations greatly assist in increasing their profit margins in the related the industry. After the SWOT (success, weakness, opportunities and threats) analysis conducted by the organization for its effectiveness, the reward practices for the whole organisation is then formulated (Stoughton and Pong Wong, 2007)

Theoretical Model and conceptual Framework

The framework of the study includes a model based on three independent variables that are assumed to have a significant impact on organizational performance. The job satisfaction (JS) model as presented in Figure1 includes three independent variables including Extrinsic Rewards, Intrinsic Rewards and Extrinsic Rewards Structure and Policy (ERSP). Organizational Performance is the dependent variable in this hypothesized model.

Figure 1

Hypotheses of the Study

Based on JS model shown in Figure 1 and literature search foundations, certain hypotheses of this study have been developed. The survey instrument was designed based on the proposed model of Job Satisfaction and the following hypotheses. The hypotheses are as follows:-

H1 Extrinsic rewards lead to better organizational performance.

H2 Intrinsic rewards lead to better organizational performance.

H3 Awareness of the extrinsic reward structure and policy positively affects organizational performance.


Data, Sample and Procedure

This empirical study is designed as an exploratory survey research to test the hypotheses developed based on JS model under consideration. A survey instrument was developed to test the hypotheses of this study and primary data for which was collected from employees of mobile telecommunication organizations working in Pakistan. This instrument was designed with the help of various stakeholders and was pre-tested for content validity. Its language and content both were fine-tuned on the basis of comments received.

The twin cities of Islamabad and Rawalpindi were used as the sample space in this study. The sample size was 150, out of which 98 questionnaires were received back and 95 were found completed in all respect. The demographic information as well as responses on research variables were collected followed by a SEM and interpretation of results to identify the importance and predictive power of the model.


The questions in the survey instrument were grouped together into four categories out of that three categories measured the three independent variables - extrinsic rewards (ER), intrinsic rewards (IR) and extrinsic rewards structure and policy (ERSP) and the fourth group measured the dependent variable - organizational performance (OP) in this study.

The survey tool was a two-part questionnaire consisting of demographic as well as research variables questions. Respondents were asked to answer the questions on a seven-point Likert scale ranging from absolutely dissatisfied/disagree (1) to absolutely satisfied/agree (7).

The independent variable ER was measured on 11 items scale having reliability statistic of 0.83 whereas IR was measured on 05 items scale having reliability statistic of 0.77 and third variable named as ERSP was measured on 39 items scale. The reliability statistic for third measure was 0.92.

Analysis of Data and Results

According to Bollen, 1989, structural equation modeling (SEM) was used to measure relationships between the latent variables since early 20th century for the first time. Moreover, Gefen et al. (2000) commented that the SEM model is concerned about a grounded reality or null hypothesis and its pattern of linear relationships between a set of observed and unobserved variables. The rationale behind using SEM is to determine whether the model based on null hypothesis is valid, rather than to identify and explore a proper workable one. SEM models consist of observed variables also called measured variable or MV in short form and unobserved variables also called latent or LV in short forms. LVs are based on hypothetical constructs that cannot be directly measurable, and in SEM, they are shown as an indicator of various multiple or measured variables (MVs). The SEM model is an a priori hypothesis about a pattern of linear relationships among a set of observed and unobserved variables. The objective in using SEM is to determine whether the a priori model is valid, rather than to 'find' a suitable model.

SEM has been explained as a combination of exploratory factor analysis and multiple regressions (Ullman, 2001). Moreover, path analysis and confirmatory factor analysis are two special cases used in SEM and are broadly utilized in social science research. Path analysis (PA) models spell out the patterns of directional and non-directional relationships among observed and unobserved variables. The only LVs in such models are error terms (Hair et al., 1998).

In order to identify the impact of independent variables upon dependent variable, LISREL 8.8 Software was used for statistical analysis of the data by using path analysis and SEM of ordinal data series to identify the strength of proposed independent variables upon dependent one.

Goodness of fit indices was computed and the potential impact in terms of statistical values of independent variables upon dependent one was interpreted in next few tables and paragraphs.

Descriptive Statistics

Table 1 to 6 represents descriptive statistics of sample under consideration which include demographic characteristics such as Age, Gender, employees having shares in Organization, educational level, Job Tenure and Size of Organizations.

Table 1: Employee's Age

Employee's age



20 to 30 yrs



30 to 40 yrs



40 to 50 yrs



Above 50 yrs






Table 2: Gender













Table 3: Employees having Shares in Org.

Employees having Shares in Org












Table 4: Education Level

Education Level












Table 5: Job Tenure

Job Tenure



Less Than 2 yrs



Less Than 3 yrs



Less Than 5 yrs



Less Than 10 yrs



10 yrs or above






Table 6: Size of Organizations

Size of Organizations



Less Than 500 employees



Less Than 1000 employees



Less Than 3000 employees



Less Than 5000 employees



5000 employees or above






Proposed Model Analysis & Hypotheses Testing

Path analysis was conducted using SEM for ordinal Data Series. A JS model as shown in Fig.1 was proposed/constructed relating extrinsic rewards (ER), intrinsic rewards (IR) and extrinsic rewards structure and policy (ERSP), which is represented by a latent variable, 'rewards' to organizational performance (OP). This model has been validated and showed model fit indices clearly are illustrating a statistically significant positive relationship (p<0.01) for IR and ER on OP, and a successive insignificant relationship of ERSP on OP. No negative relationship was reported in this model fit statistics. The goodness of fit indicators was found strong enough for hypotheses testing in this case.

The job satisfaction (JS) model was verified by having clear and tangible results on the respective hypothesis tests. The first hypothesis (H1), that is extrinsic rewards leads to better organizational performance, was confirmed by the data (path coefficient=0.60, t-values = 2.66, p<0.01).

In addition, second hypothesis (H2) intrinsic rewards leads to better organizational performance. This hypothesis was also found significant at p<0.01 with a path coefficient of 0.60 and t-values = 2.68. Moreover, insignificant result was found to support H3, which tested that extrinsic reward structure and policy awareness positively affects organizational performance. The path coefficient for H3 was reported as 0.42, t-value and p-value were insignificant.

Table 7 illustrates the model fit statistics for the hypothesis H1, H2 and H3.

Table 7

Fit Indices

Recommended Values

Predicted Values

Chi-square/degrees of freedom





















Where GFI = goodness-of-fit index; AGFI = adjusted goodness-of-fit index;

NNFI = non-normed fit index; CFI = comparative fit index;

RMSR = root mean square residual; RMSEA = root mean square error of approximation.

Furthermore, LISREL estimates and structural equation for the model clearly is portraying that the model having three independent variables, which are indicators of a latent variable i.e. REWARDS accounts for most of variation in dependent variable i.e. organizational performance (OP).

The Equation 1, 2, 3 and 4 shows LISREL Estimates based on Maximum Likelihood Estimation having three measurement equations and a structural equation of independent, latent and dependent variables used in the proposed model.

Measurement Equations

ERSP = 0.42*REWARDS, Errorvar. = 1.90 ………………… # 1

Standerr (0.28)

T-values 6.75

P-values 0.000

ER = 0.60*REWARDS, Errorvar. = 0.25 ………………… # 2

Standerr (0.23) (0.049)

T-value 2.66 5.20

P-values 0.008 0.000

IR = 0.60*REWARDS, Errorvar. = 0.15 ………………… # 3

Standerr (0.22) (0.039)

T-value 2.68 3.93

P-values 0.007 0.000

Structural Equation

REWARDS = 1.18*OP, Errorvar. = 0.52 ………………… # 4

Standerr (0.44) (0.23)

T-value 2.69 1.29

P-values 0.007 0.197

The measurement equation # 1 shows that Extrinsic Rewards Structure and its policy have insignificant relationship with latent variable, Rewards, having no standard error, t-value and p-value calculated.

However, the measurement equation # 2 shows significant relationship of Extrinsic Rewards with latent variable, Rewards, having standard error = 0.23, t-value = 2.66 and p-value = .0008.

Likewise, the measurement equation # 3 shows strong and significant relationship of Intrinsic Rewards with latent variable, Rewards, having standard error = 0.22, t-value = 2.68 and p-value = .0007.

Finally, the structural equation (Equation # 4) illustrates the strong and significant relationship of REWARDS being used as a latent variable for intrinsic, extrinsic rewards and ERSP upon Organizational Performance. The equation is having standard error = 0.44, t-value = 2.69 and p-value = .0007 shows a model fit for further use.

The Figure # 2 shows the tested the Model using path analysis technique and SEM for ordinal data series. The path coefficients and residuals are shown in the figure for the same model. The bold blue line shows significant relationships and a gray line shows insignificant relation among the variables.

Moreover, the whole model summary such as R Square and Adjusted R square values are significant which are presented as follows:

Model Summary



R Square

Adjusted R Square

Std. Error of the Estimate






a. Predictors: (Constant), IR, ERSP, ER

Dependent Variable: Org. Performance

Discussion and Conclusion

This paper focuses on the impact of rewards and its practices upon organizational performance. The rewards practices play a decisive role in motivating the workforce and augmenting organizational performance and HR specialists are required to be more focused to discover the key factors that are more imperative and of significant importance for motivating the workforce and gaining organizational effectiveness. Succinctly, the most important finding of the study is the high level of importance and value that has been given to intrinsic rewards than extrinsic rewards. Moreover, least concern was reported about extrinsic rewards structure and policy awareness upon organizational performance by the sample understudy.

The results obtained support the investigation made by Ryan & Deci (2000) who commented that employees who are intrinsically motivated/rewarded when compared to those who are extrinsically motivated/rewarded, were found to have more interest in work, shows excitement, feel fun at work, and are more confident which ultimately leads to enhanced organizational performance, determination, creativity and innovation, job security, and high level of self-esteem, among other benefits. Like wise, intrinsic motivation enhances participation and high level of satisfaction along with improved competency level contrary to extrinsic motivation, which increases anxiety, and decreases self-esteem (Frederick and Ryan, 1993).

The sample of employees in this study recognizes intrinsic rewards as a better motivating instrument than extrinsic rewards and they are found least concerned with their rewards structure and policy being administered in their organization.

Therefore, it is concluded that approaches to enhance intrinsic reward practices as a motivator are significant and prime value for better and enhanced organizational performance followed by secondary importance given to extrinsic rewards and finally, extrinsic rewards structure and policy.

Research Implications/Limitations

The HR experts may alter reward practices and its administration in order to make organizational performance better. Therefore, this study provides empirical evidence to the HR managers about the considerable relationships and links between rewards practices and organizational performance. This study has revealed certain significant facts regarding perceptions of employees of Mobile Telecom Industry of Pakistan about rewards practices and its impact on performance of any firm, which were not already explored yet.

Although, a sample chosen for this study was very limited in number/size, however, the response rate to our survey was fair enough and it is confidently said that the non-response bias is not significant in the results of this study.

Future Research Opportunities

The future research may focus on the impact of rewards practices in public sector telecom industry organizations of Pakistan so that to have a clear comparison of perceptions among corporate and public sector companies.