RELATIONSHIP BETWEEN REWARD AND EMPLOYEE PERFORMANCE

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KATHMANDU UNIVERSITY
SCHOOL OF MANAGEMET
RELATIONSHIP BETWEEN REWARD AND EMPLOYEE
PERFORMANCE
TERM PAPER
SUBMITTED TO:
MS. SEEMA SINGH
COURSE INSTRUCTOR
KUSOM
SUBMITTED BY:
NITESH KUMAR SHAH (13329)
MBA SPRING 2013
JANUARY 28, 2014

1. Introduction
World is getting competitive day by day and this rise in level of competition has posed threat to
the existence of firms itself. The dynamic and ever changing environment with fierce
competition is making firms learn ways of quick responses to changing consumer demands. All
this requires highly motivated and satisfied employees, who can give their 100% for the
organization. It is obvious that performance of organization is dependent on the performance of
the employees. Competitiveness in many of today’s industries is based on the effectiveness of
human assets-on the ability of employees to create, to apply their skills and accumulated
knowledge, to work effectively together, and to treat customers well (Harvard Business
Essentials, 2006). To get such effective and efficient employees for the organization and to retain
them many factors play important role and rewards provided by the organization is crucial
among them. Reward management is one of the ways used by successful firms to attract and
retain suitable employees. “Rewards is one of the important elements to motivate employees for
contributing their best effort to generate innovation ideas that lead to better business functionality
and further improvise company performance both financial and non-financially”. (Aktar, Sachu,
& Ali, 2012). Current trend in organizations is to achieve higher employee productivity by
linking reward with performance.
This term paper is an attempt to identify the relationship between reward in any organization and
performance of its employees.
Both compensation and reward is used as reward only in this paper while exploring the
relationship as compensation is incorporated in the reward.
2. Literature Review
2.1 Reward
According to Michael Armstrong “Reward management is essentially about designing,
implementing, and motivating pay systems which help to improve organizational performance.”
Before employees do anything, they look for reward (Agrawal, 2011). Reward management is
now very important aspect of human resource management. Reward consists of a package of:

a. Pay: This includes the payment like wages and salary for doing work for the organization.
It is the financial pay-off for the effort made in the organization (Agrawal, 2011).
b. Benefits: This includes the payment in addition to the pay. It includes payment for paid
leave, gratuity, pension etc.
c. Services: This includes such items which enhance the living standard and well being but
the cost of living of employees does not increase as the amenities are provided by firms.
For e.g. housing, transport, loans at subsidized rate etc (Agrawal, 2011).
d. Job-related Rewards: These are the benefits coming from job itself. This includes
promotion, status, opportunity for growth, leadership opportunities.
Intrinsic rewards are satisfaction derived from the job itself, such as pride in one’s own work, a
feeling of accomplishment, or being part of a team. Extrinsic rewards include benefits provided
by the employer, usually money, promotion, or benefits (Decenzo & Robbins, 2007).
Financial rewards comprise all rewards that have a monetary value and add up to total
remuneration-base pay, pay contingent on performance, contribution, competency or skill, pay
related to service, financial recognition schemes, and benefits such as pensions, sick pay and
health insurance (Armstrong, 2010).
Non-financial rewards are those that focus on the needs people have to varying degrees for
recognition, achievement, responsibility, autonomy, influence and personal growth. Non-
financial rewards can be extrinsic such as praise or recognition, or intrinsic, associated with job
challenge and interest, and feelings that work is worthwhile (Armstrong, 2010).
Armstrong, (2010) proposed a reward management system which emphasizes the need to
consider all aspects of the work experience of value to employees, not just a few such as pay and
benefits. He argues for the total reward approach in which he aims to blend the financial and
non-financial elements of reward into a cohesive whole.

Transactional (tangible)
Individua
l
Pay
Base pay
Contingent pay
Cash bonuses
Long –term
incentives
Shares
Profit sharing
Benefits
Pensions
Holidays
Health care
Other perks
Flexibility
Communal
Learning and
development
Workplace learning
and development
Training
Performance
management
Career development
Work environment
Core values of the
organization
Leadership
Employee voice
Recognition
Achievement
Job design and role
development
Quality of working
life
Work/ life balance
Talent management
Relational (intangible)
Figure: Model of total rewards: Towers Perrin

The figure depicted above is most frequently used as the basis for planning a total reward
approach. The figure consists of four quadrants. The upper two quadrants -pay and benefits-
represent transactional or tangible rewards. These tangible rewards are financial in characteristics
and are essential to recruit and retain staff, but they are vulnerable as they can be replicated by
the rival firms. In contrast to the tangible relational or intangible non-financial rewards are
represented in the lower two quadrants. These intangible rewards are difficult to imitate easily so
they can create both human capital and both human resource advantage (Armstrong, 2010).
2.2 Compensation
Compensation is all forms of financial rewards provided to employees in return for their
services. Compensation, in turn, is a necessity of life for employees: pay is the means by which
they provide for their own and their and their family’s needs. As such this is the only reason
employees go to work but this does not mean non-financial or intrinsic rewards are unimportant
and can be ignored. It simply means that money is a powerful source of motivation (Stone,
1998). According to Michael Armstrong “Compensation management is essentially about
designing, implementing, and maintaining pay system which helps to improve organizational
performance.” There are two components of compensation:
a. Direct Compensation: This includes Pay like wages and salaries and Incentives provided
for higher performance.
b. Indirect Compensation: This includes Benefits i.e. payments in addition to pay provided.
This also consists of Services that are not paid in cash. This enhances employee well
being (Agrawal, 2011).
Armstrong, (2010) mentions that aims of reward management should be to “add value to
people”. More specifically, the aims are to:
•Support the achievement of business goals through high performance
•Develop and support the organizational culture
•Define what is important in terms of behaviors and outcomes
2.3 Strategic Reward

According to Armstrong, (2010)” Strategic reward management is the process of planning the
future development of reward practices through formulation and implementation of reward
strategies.” This answers to the crucial questions like “where do we want our reward practices to
be in a few year’s time?” and “how do we intend to get there?” This term incorporates both
means and ends.
2.4 Performance
The Oxford English Dictionary defines performance as “The accomplishment, execution,
carrying out, working out of anything ordered or undertaken”. The definition presented above
explains about the outcome/output but it also articulates that performance is about doing the
work as well as being about the results achieved (Armstrong, 2010). Performance is regarded
generally as the outcomes achieved. It is taken as the something done by person irrespective of
the purpose. While some of them argue that it should be defined as work outcome because they
provide the strongest links to the strategic goals of the organization, customer satisfaction, and
economic contributions. Traditionally performance was evaluated on the basis of outcomes only
but now the parameters has emerged which not only look after the ends rather it also considers
means. Compliance of stated method, compliance of ethics is also being evaluated now.
2.4 Productivity
Productivity is a measure of the output of goods and services relative to the input of labor,
capital, and equipment. The more productive employees of the organization more competitive
the firm will be in industry (Cascio & Nambudiri, 2010). A recent study found that innovative
HR practices in manufacturing i.e. production ideas drawn from non-managerial employees, job
rotation, tying pay to performance may account for as much as 89% of the growth what
economists call “multi-factor” productivity. The theory in personnel economics is that workers
respond to incentives. “Specifically, it is a given that paying on the basis of output will induce
workers to supply more output” (Lazear, 2000).
3. Relationship between Rewards and Performance
According to Armstrong, (2010) the reward management strategy and practice of an organization
contributes in the improvement of organizational performance by developing and operating

reward systems which help to attract, retain and engage the people upon which the business
relies. Employee will put their maximum effort when they have a feeling or trust that their efforts
will be rewarded by the management. (Aktar, Sachu, & Ali, 2012)
Reward and Motivation: Motivation is an internal process that activates, guides, and maintains
a behavior (Baron, 2006). Reward should be linked to achievement so that employees will be
motivated to accomplish the standards, surpass the standards to achieve the reward.
If the need for achievement can be aroused it will be very helpful for the organization. If the
individual goals are well linked with the organizational goals then such alignment will help to
boost the organization’s performance rapidly. In order to acquire the results with the highest
efficiency and effectiveness from human resource, motivation of employee is very essential
(Gohari, Kamkar, Hosseinipour, & Zohoori, 2013). Employees may have interest in the work but
if he/she is not motivated he/she can lose commitment to accomplish the benchmark level of
performance.
There are many factors that have significant impact on employee performance like working
conditions, worker and employer relationship, training and development opportunities, job
security, and company’s overall policies and procedures for rewarding employees, etc.
Motivation that comes with rewards is of utmost importance among all the factors that affect
employee performance (Aktar, Sachu, & Ali, 2012).
Intrinsic rewards produce non-quantifiable personal satisfaction, such as a sense of
accomplishment, personal control over one’s work, and a feeling that one’s work is appreciated.
Extrinsic rewards are external, tangible forms of recognition such as pay hikes, promotion,
bonuses, and sales prizes (Harvard Business Essentials, 2006). Both types of rewards have an
important place in performance management.
People are motivated by both intrinsic and extrinsic rewards. These rewards motivate employees
to produce value-creating behavior and are effectively employed by managers.
Money is the crucial incentive no other incentive or motivational technique comes even close to
money with respect to its instrumental value (Rynes, Gerhart, & Minette, 2004). Motivating

employees by providing financial rewards is not new; Frederick Taylor used this in 1800s. He
rewarded those employees who exceeded their predetermined standard.
Extrinsic and Intrinsic reward and performance
A research conducted in Bangladesh ‘The Impact of Rewards on Employee Performance in
Commercial Banks of Bangladesh: An Empirical Study’ by Serena Aktar, Muhammad
Kamruzzaman Sachu, Md. Emran Ali with the sample of 180 employees shows that Extrinsic
and Intrinsic rewards have positive relation with performance.
Dimension Correlations rewards and employees’ performance
Employees’
performance
Extrinsic rewards Intrinsic rewards
Employees’
performance
1 .549 .496
Extrinsic rewards .549 1 .994
Intrinsic rewards .496 .994 1
Correlation is significant at the 0.01 level (2-tailed)
Table shows all the correlations between the variables examined in the study. The correlation
coefficient was shown a strong relationship, r = 0.549 between extrinsic rewards and employees’
performance. The correlation coefficient was shown a strong relationship, r = 0.496 between

intrinsic rewards and employees’ performance. Meanwhile intrinsic rewards also showed a
strong relationship r = 0.994 toward extrinsic rewards with the significant level less than 0.01.
4. Practices in Nepalese Organizations
Information collected on the basis of research and interaction with employees of different
Nepalese organization helped to evaluate the relationship of reward/compensation with
performance.
The pay scale of Tribhuvan University is at par with the pay scale of civil service in Nepal. But
the benefits and services provided to the employee of Tribhuvan University are lower than that of
civil servants. Remuneration in the private colleges is much higher. Most of the Tribhuvan
University full-time teachers are teaching in private colleges as part timers to earn more money.
The pay scale in other universities of Nepal is much higher than that of Tribhuvan University.
This is very disappointing for the talented and effective teachers and many have turnover
intentions.
Nepal Telecom is one of the leading organizations in Nepal and the reward system is superior to
civil servants and is even superior to some private organizations. They were also provided with
the stock options. But all these reward does not seem productive as the performance of the
employees has not improved. Although firm is doing well financially it can do much better if the
productivity of employee is improved.
Banks were centre of attraction for all few years back because the pay was good. But if the entry
level reward system is evaluated it is very low. But the performance that bank management is
getting from them is not compromised as they have to perform what they are assigned. There is
no way to escape. So, what the not satisfied employees do is they leave the job. Turnover
intention is high in bank due to reward system. Generally the intention of turnover is seen in low
level employees. So indirectly performance of the bank is affected from the reward system. As
turnover intention have negative impacts on the employee performance.
A study “Job Satisfaction and organizational Commitment (Nepal Investment Bank)” by
Manju Basnet, Sabita Joshi and Smriti Upadhya have mentioned about the rewards at different

managerial level in the bank. Top level management is provided with higher pay scale, other
allowances, many facilities that are based on the positions they hold. There is abroad travelling
opportunity, training opportunity abroad along with possibility of up gradation at control level.
They can reach the decision making centre. Mid level employees have some control over
decision making and they are opportunities for future growth to them. They are performing good
as they have power for interferences in the work of organization. The performance is just
meeting the standards and there is no extra input as they are not motivated for that. They have
job security but the opportunity for growth and getting benefits of high post is less (Basnet,
Joshi, & Upadhya, 2008).
5. Limitations and assumptions of this term paper
This term paper is not free from limitations like all research studies.
•In an attempt to find the relationship between reward and performance all the possible
resources and tools were not explored.
•The findings are general and are not conclusive, for concluding those findings further
research needs to be done.
•There were constraints like enough researches were not found in Nepalese context.
6. Conclusion
The overall assessment of the theories shows that there is relationship between the reward and
the performance of the employees. The correlation table presented above also showed that there
exists positive relation between reward and performance. Although the relationship that we got is
not very strong but it is enough to infer that there exists a relation as these variables are
subjective. However, the practices in the Nepalese organization partially prove this thing as the
performance of employees of Nepal Telecom is not satisfactory enough. The performance of
employees there is not commensurate to the reward they receive. There we need to do further
research to exactly identify the reason behind the dismal performance of employee.
7. Managerial Implication

Managers need to use the tool reward effectively to sustain in this competitive market. They also
need to understand that the reward system they provide should be attractive enough to retain
quality employees. The turnover, recruitment and training cost will incur time and again so it is
better to have motivated employees through effective reward. Besides that turnover can tarnish
firm’s image in market and turnover intention also has severe impact on performance of
employee ultimately affecting firm’s performance. Where reward system is not showing results
disciplining might be required.
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