High Compensation Pay Will Influence Employee Motivation Commerce Essay


This article shows the relationship between high compensation pay and employees motivation in organization. Besides training, job satisfaction, and work environment, compensation pay is one of the factors that can influence employee motivation. Motivation has many theories that support employee will perform better in their job. Compensation pay aspects such as pay or reward package and promotion will lead or boost up employee motivation in order to perform in their work that contributes to organization. There are many theories that explain compensation effect on employee motivation. Many researchers had mentioned about the relationship between compensation pay aspects, pay or reward package and promotion and employee motivation in organization. Higher the compensation pay, employee motivation in organization will increase.


Compensation is the total amount of the monetary and non-monetary pay provided by employer to an employee in return for work performed as required. Wayne. F. Cascio had stated that compensation which includes indirect cash payment and direct payments in the form of employee benefits and incentives that provide by employer in order to motivate employees to perform well for higher levels of productivity is an important component of the employment relationship between employer and employee. According to Milkovich, Newman & Gerhart (2011), compensation refers to all forms of financial returns and tangible services and benefits that give by employer to employee as part of an employment relationship. For monetary pay, it as the return for employee that work or contribute in organization, while for non-monetary pay is provided by employer to an employee in order to motivate employee to perform in their work.

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Every stakeholder such as employer, manager, shareholder and others have their own perceptive regarding compensation and how compensation affects how they behave. Employee may define compensation as an exchange of service employee contribution or as a reward for a job well done. Employee see compensation as to some reflects the value for their personal skills and abilities, or the return for the education training they have learned or acquired. The pay individual receives for the work they perform in their work is usually the major source of personal income and financial security in their life and so it is very important determinants of an individual economic and social well being. For manager, compensation pay directly influences their success in two ways. Firstly, it is a major expense competitive pressure both internationally and domestically, forces employer to consider whether their compensation decisions is affordable or not. Other studies show that many organization labor costs account for more than 50% of total costs. And for industries such as public employment or service, this figure is even higher.

Compensation is one of the factors that influence employee motivation in organization. The good compensation pay is a good motivator for employee. Employee motivation and behavior influence by compensation by two ways (Milkovich, Newman & Gerhart 2011). High compensation pay will lead employee to motivate in doing their job or perform well in their work and performance. If employee did not get compensation pay much as they should get, employee tend to not perform well and motivate to do their job. Compensation pay desired behavior which is motivated employee for better performance. This study would like to investigate the relationship between compensation pay aspects which are pay or reward package and promotion towards employee motivation in organization.

The problem

"After bonuses are distributed, management teams may often be frustrated by the lack of employee motivation. If the employee does not see a direct correlation between performance and bonus, this may lead to a lack of motivation because employees see no reason to perform better".

Shun Linda Wang, 2003

Nowadays organization whether small or large, people pay much more attention to their life style and the money they earn from the work than their senior. However, it still remains unclear whether many of employees would continue working if it were not for the money that they earn. Employee will expects their employer give a compensation plan are that it is fair and equitable, that it provides them with tangible rewards matched with their skills and, further, that it provides recognition and employee feel their employer appreciate them.

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Employer will face big challenge in order to motivate employees in organization. Motivation of employee is an important key to an organization that can lead to overall effectiveness of organization. Basically, employee will do or perform well in their work if their employer provides compensation pay to them. In other word, employee is not motivated in order give full commitment in their work because of compensation pay that they receive from employer is not enough or dissatisfied. Employee will perform better if they see the relationship between compensation pay and performance. Employee tends to motivate and perform better in their job if employer provides high compensation pay.

Are wages attached to jobs and do promotions play an important role as a wage determinant? Do expected promotions affect motivation and, once the promotion has been realized, will this make the motivation disappear completely? These questions is the famous question that employer will ask in order perform well towards increase productivity or efficiency of organization. As Herzberg (1968) has argued, just because too little money can affect and demotivate employee, does not mean that more and more money will lead about increased satisfaction, much less increased motivation. But it is reasonable to assume that if employee's take-home pay or salary was cut in half, employee morale would suffer enough to not perform well and undermine performance. It doesn't necessarily follow that doubling that employee's pay would result in better work or employee will motivate to perform well. According to Schuler and MacMillan (1984), they stressed that Human resource management practices (including compensation) may give a competitive advantages to one corporation over its rivals in order to retain and motivate their employee in organization.

Literature review

"Motivation is the desire to achieve beyond expectations, being driven by internal rather than external factors, and to be involved in a continuous striving for improvement".

(Torrington, Hall, Taylor & Atkinson, 2009, p. 276)

Motivation, in the context of work, is a psychological process that results from the interaction or relationship between an employee and the work environment and it is characterized by a certain level of willingness to do something. Motivation also defined as the employees are willing to increase their work effort in order to desire that they hold or obtain a specific need (Beardwell & Claydon, 2007). According to Arnold (1991), motivation consists of three components:

ï‚· Direction - what a person is trying to do?

ï‚· Effort - how hard a person is trying to do?

ï‚· Persistence - how long a person keeps on trying to do?

Motivation of employee was set as the dependent variable in this study. Although the construct of motivation can be operationally defined with the help of similar to variables such as motives, dispositions, needs, and values (Hogan and Hogan, 1990), the field of psychology has not observed a single, crucial measure of employee motivation. Therefore, there is the study that measures motivation by a single straightforward item: How has the level of your work motivation level changed in the last three years? The responses of the study had range from "decreased (1)" to "increased (5)." (Takahashi, 2005)

Moreover, in a way of accomplishment expected work productivity and job satisfaction motivation is the outmost element to be taken into account (Schultz & Schultz, 1998). Mainly, the impacts of motivation on the work performance and productivity will attract attention towards employee motivation in the work environment (Huddleston & Good, 1999). Employee with high level of motivation tends to work hard and perform better in their work as compared to the employees with low level of motivation. The understanding of the employee's expectations and needs of employees at work signifies the base for their motivation. In order to increase employee satisfaction and motivation with their work, it is important to arrange employee's work and the level of satisfaction with work.

Motivational models are usually divided in to two between and those, which are process theories that focus on the individual's interactions with their environment and those content theories that which focus on an individual's internal attributes. Expectancy theory is one of the process motivation theory describes motivation as a function of individual or employee's perception that they have about their surroundings and they will form the expectation based on these perceptions.

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The organizational psychology literature includes a number or many motivational theories, but based on Ghazanfar, Chuanim, Khan & Bashir (2011) they have selected expectancy theory as their "implementation mechanism" for some reasons. Firstly, the theory has been subjected to rigorous academic testing that each of its components has been experiment and the result is there is a positive influence or relationship on employee motivation. Other researcher such as Klein (1991), Pritchard and Sanders (1973), and Arvy (1972) give support for the link or relationship between effort and E-P expectancy. Hope and Pate (1988) established that the link between instrumentality and effort is one of be the best supported of the components and measured by Lawler and Porter (1967), Snead and Harrell (1994), Klein (1991), Harrell and Stahl (1984). Pritchard and Sanders (1973) have confirmed the motivational link between effort and valence. Secondly, the theory is easily to understand and very straightforward. Developed by Vroom (1964), expectancy theory determines three factors that play an interactive role in motivation. Effort-performance expectancy refers to E-P expectancy that concerns the employee's perception which effort is positively linked with level of performance in organization.

Maslow's theory shows that human needs as a role of the capacity in which the human needs have already been fulfilled. It means that human needs that are fulfilled have a low motivation value. Other than that, Herzberg explains that work satisfaction is based on the presence of intrinsic motivation, while the presence of extrinsic factors will lead to dissatisfaction of work. If there is hygienic factors, workers will be happy with their current work situation. In order to have motivated workforce in organization, the hygienic factors must be satisfied and when motivations are in place. This model is in the same type as the theories of Lewin and Vroom that it is concern with the influence of perception and expectancy on motivation. However, this model is a more comprehensive theory than the other theories. The model is based on the following propositions:

The motivational force of an individual is based on how individual see the value of the goal, the power required achieving the goal and the probability that the goal will be achieved.

Because of individual's past experience is similar of situation, it will enable to a better self-assessment of the required effort, ability perform well and achieve the goal

Performance achievement can be achieved by individual efforts which mean individual understand the task requirement and know their self-assessment of ability.

Individual sees performance as lead to both rewards which is extrinsic and intrinsic can give satisfaction if individual feel the rewards are fair. This model is most complete and has enough description of the process of motivation.

Performance of employee is usually described as a joint function between both ability and motivation, and one of the primary tasks that employer have to face is motivating employee to perform to the best of their own skill or ability (Moorhead & Griffin, 1998). Basically, when economists talk about incentives and motivation, it refers to type of motivation which is extrinsic motivation (Frey, 1997, Benabou and Tirole, 2003). Extrinsic motivation is a type of behavior influence by external interventions, examples your boss give reward in term of money, praise your work, or status (Frey, 1997). This type of incentives works same as quid pro quo: employee has the implicit contract that after perform well in a performance they will receive an external reward. This means that the view of monetary rewards, either in the form of incentive compensation or promotions automatically will increase employee motivation.

According to Minner, Ebrahimi, and Watchel (1995), they explain that motivation consists of these three interdependent and interacting elements which are drives, needs, and incentives. As long as organizations have been operated, compensation had recognized as one of major motivator of employees in order to perform better as well as an important tool for organizations. To construct compensation systems, organization must have mutual understanding so that it can be to the organization's structure, strategies, and employees that has been an important area. To use compensation as a motivator to employee motivation, personnel employer must look at four major components of a pay structures in an organization (Popoola & Ayeni 2007). These four major components are job rate, which is the importance the organization attaches to each job, payment, which employer give reward to encourage employee based on to their performance, personal or special allowances, like transport allowance and fringe benefits such as holidays with pay and pensions.

According to Akintoye (2000), he highlight that money is still be the most important motivational strategy. Early year 1911, Frederick Taylor and his scientific management associate defined money as the most important factor to motivate employee in order to achieve and improve better productivity. Taylor also defined compensation and performance based pay as one of the major tools management had to motivate employees and to improve their productivity hence reduce turnover. Money sees as an important motivating power in as much as it symbolizes intangible goals like security, prestige, power, and a feeling of accomplishment and success. Sinclair (2005) explained that the motivational power of money with the process of job choice. Sinclair explains that money has the power to attract, retain, and motivate employee in order to increase and improve performance. As example, if an employee gets another job offer, which offers best financial rewards and has same job characteristics with his current job, that employee would be motivated to leave current job and accept the new job offer.

Banjoko (1996) states that employers which want to reward or punish their employees, they usually use money. This is can be done through the process of rewarding employees for increase productivity by give recognition to employee so that employee will feel fear of loss of job or other related issues such as no promotion because of not perform well in performance. The eagerness to be promoted and earn improved pay also will motivate employees. Compensation research is more focus on stressing the internal orientation to an individual's reaction to pay. This research orientation is always led by industrial organizational psychologists and has contributed to human resource management practice. The main force for this research has been the suggestion that pay will affects level of job satisfaction of employee and work behaviors or employee motivation (Oshagbemi, 2000).

Generally, organizations offer their employees three types of opportunities which are (Ospina, 1996):



Challenges at work.

According to Kwon (2004) there are two ways promotion provided incentives. First, wage increase upon promotion or promotion premium can be fixing by principal, and let the promotion probability depend on performance. Second, a principal also can fix the promotion probability and let the promotion premium depend on performance. Hence, both promotion probability and promotion premium will base on performance. However, the literature has only focused on the former, and mostly will ignore the final. Remind that when use for performance-based wages, in most previous models of promotion-based incentives, the principal do not have any reason to provide huge incentives, and sometimes promote employees without any reason. Our model highlights the final. Because employees in the model is same and usually makes an investment along the equilibrium path, the principal promotes them based on term unless they realized performance or wages. This is consistent based on seniority-rule in promote employees. But, a wage increase with promotion based on performance in order to provide incentives for investments on job-specific human capital that does not for a new job level. In the extreme case, controlling for term, the promotion probability based whether on performance or on wages.

According on a survey amongst all individual employees, Herpen, Cools & Praag (2004) found a positive link that effect of promotions on intrinsic and extrinsic motivation, which leads to the effectiveness of promotion. They show that promotion will affect positively on extrinsic motivation that constant with one of the basic assumptions in the tournament model. Motivation is high in this type when employees think that they will get promotion in the future. Intrinsic motivation is not so much affected by an expected promotion but rather by a recently realized promotion. Without a realized or expected promotion in long period will lead to a decrease of intrinsic motivation (Herpen, Cools & Praag, 2004). Promotions should elaborate motivation in many ways. Moreover, there often does not seem to be strong pay for performance within jobs, which only increases the clear importance of promotions for organizational incentives (Hedstrom, 1987).

But for internal labor markets, the status of higher positions is more important rather than higher pay because employees tend to perform well to win the competition. Promotion defines an incentive mechanism that gives value to employees that in higher position (Takahashi, 2005). For organizations that want to motivate their employees, they must fully the incentive effects of promotion. Lazear & Rosen (1981) stated that promotions have contributed a great deal in theoretical interest, especially in the tournament models. A promotion can be an indication of trust and lead to empowerment, which is correlated positively with intrinsic motivation (Deci and Ryan, 1985). In order to find out the full incentive that effect promotion, organization will analyze the relationship between perceived promotion opportunities and intrinsic motivation.

"Reward is the benefits that workers can get from perform well in a task, representation a service or discharging a responsibility." (Colin Pitts, 1995, p. 11.) Pay can be as the most important factor that will motivate employees and also can be motivating reward that is received when employees can perform better in a task and service. Individuals will motivate to go out and find a work in order to get pay. Pay is also can be seen as a way in order to value employee's work that contributed to organization. Organization will face a problem such as hard to retain good employees in organization if employees feel reward package that they get is unfair and not satisfied. It is because pay can be a powerful demotivator towards employees (Colin Pitts, 1995). It shows that rewards absolutely can influence employee motivation. Inequity in the management of compensation such as performance that measure unfair may give negative impact to the objectives of the company, as employees will not work hard but want to get reward so it will lead to expense of contribution. But if the compensation pay is perceived as fair, satisfied and competitive, hence good employees are likely to stay in the organization (Schuler, 1998).

Many employees think that reward package is only wages and salaries that employer give as a return of their contribution to organization. Actually the reward package is include bonuses, health insurance, pension schemes, car allowance, beneficial loans, meal allowance, profit sharing, share options and others. (Pitts, 1995, p.13). Efficient reward system can be a good motivator but an inefficient reward system can lead to demotivation of the employees. Reio and Callahon (2004) concludes that both intrinsic and extrinsic rewards motivates the employee resulted in higher productivity.

Carraher et al (2006) stresses that there should be an effective reward system in organization in order to retain the quality employees' and reward should provide based on their productivity. There many works has been done in order to evaluate the link between rewards and employee motivation and there are many researchers investigated and agreed that reward can give impact on employee motivation. Organization must make sure that policies and procedures to form reward system will increase employee motivation and satisfaction in order to maximize the performance of the employees.

Performance-based pay (PBP) is one of the compensation schemes that have link between employee performances with pay. It can be defined as a system of remuneration in which an individual's increase in salary is solely or mainly dependent on his/her appraisal or merit rating (Swabe, 1989). Armstrong (2005) defines it more comprehensively as the process of providing a financial reward to an individual which is linked directly to individual, group or organizational performance. But Schuler (1998) maintains that PBP is not limited to financial rewards, and that non-financial rewards, such as recognition, can also constitute pay for performance. The basic reasons for PBP are performance enhancement for competitive advantage and equity (MIlkovich and Newman, 1996). In this regard, Beardwell and Holden (1995) identify several specific reasons for which managers may introduce PBP. These include:

Help in recruitment and selection;

Facilitate change in organizational culture;

Weaken trade union power; increased role of the line manager;

Greater financial control and value for money;

Ability to reward and recognize performance; and

Encouragement to flexibility.

Proposition/ Recommendation

Each researcher has their own recommendation regarding this study that investigated the relationship between compensation pay and employee motivation. Organization or employer should understand what influences individual's motivation which determines how they behave and why they behave in a certain way. Organization can use theories of motivation in order to determine level of motivation or factors that can influence employee motivation in organization. One of the theories that organization can be use is the basic one, Maslow's theory. Maslow's theory shows that human needs are a function of the capacity in which the needs have already been fulfilled. This means that a fulfilled need has a low motivation value.

Bishop (1987) suggested that pay is directly related with productivity and reward system depends upon the size of an organization. Compensation pay such as pay or reward package and promotion will influence employee motivation in organization. For efficiency of compensation pay, organization can give compensation pay based on their size of organization. If the organization is big, employer should provided compensation pay that suitable to their employee such as high compensation pay in term of give employee high pay so that employee will motivate and tend to perform well. Consequently, it will increase employee motivation in organization and employee.

Herzberg's theory explained that if employer give an opportunities for promotions and actual promotions are highly to motivate higher performance than regular pay structures. This is supported by Maslow's earlier needs theory, which ranks self-esteem and self-actualization as higher-order needs compared with physiological needs, which would include pay, as lower-order needs. Promotions do usually increase pay, but the motivational influence stems from recognition, increased responsibility, more challenging work and a personal sense of accomplishment -- all of which are motivating factors, according to Herzberg. Herzberg even notes "opportunities for advancement" specifically as a motivator. If employer gives opportunity or promotion to employee, motivation of employee will increase towards to perform better in work because employee feels that employer appreciate their contribution to organization and get recognition from organization.

Conclusion and Implication

Human resources Compensation pay is one of the most important factors that influence employee motivation in organization. The findings of the present study adds a new perspective on the basis of a new environmental settings to the existing evidence signifying that the work motivation in the organizations is influenced by the satisfaction of the employees with their compensation, which is offered by the organization. The further analysis of the data pertaining to the satisfaction with compensation and work motivation suggest that benefits had a positive but weak relationship with the work motivation. Benefits include allowances and reimbursements for miscellaneous expenses, company housing and company conveyance. The previous researches in this regard refer benefits as not an ingredient, which motivates employees, Jacques and Roussel, (1999). Our findings relate with these findings because of the weaker relationship of benefits with work motivation. We might also find an explanation for the inefficiency of benefits, in research by Hills, Bergmann and Scarpello (1994). Referring to surveys concerning employees, they formulate the proposition that benefits are generally perceived as a right in United States society, so they have no incentive character.