AMBO UNIVERSITY WOLISO CAMPUS

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF BUSINESS ADMINISTRATION AND INFORMATION

SYSTEM
A RESEARCH PAPER ON ASSESSING THE IMPACT OF COMPENSATION ON EMPLOYEES
JOB PERFORMANCE (in case of Dashen Bank woliso branch)

A research submitted in partial fulfillment of the requirement for bachelor art (BA)
Degree in business administration and information system

Name Tena Bezie

ID 24959/11

Submitted to; instructor FANTA .T (MBA)

February 3/2021

Woliso, Ethiopia
ABTRACT
The study is designed to assess the impact of compensation on employee job performance in
case of Dashen Bank in woliso branch. The main objective of this study will be to investigate
the impact of compensation on employee performance in Dashen bank woliso branch. The
study is limited only in Dashen bank woliso branch and it is difficult to generalize the finding
of this study to employees of other banks because of [covid 19]. The target populations of the
study are employees of Dashen Bank in woliso branch. There are 30 employees in the bank.
We used census type of data collection technique and we will use descriptive research design.
To successfully accomplish the study and meet the objective, we will use both primary and
secondary source of data. A Questionnaire will be designed to collect the data on the factor
related to compensation like salary, rewards, indirect compensation and employee
performance. The collected data is analyzed using descriptive statistics such as tables,
frequency and percentage. The major findings of this research will be that compensation will
has positive impact on employee performance.

i|Page
ii | P a g e
 CHAPTER ONE

1 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The reason behind developing business organizations in the world is making profit. To
achieve this objectives organization use various available human and non-human resources.
Among these resources, human is commonly seen as the most valuable asset of the
organization to earn competitive advantage and achieve its objectives. Because other
requirement cannot perform activities by themselves rather it is by workers. As organizations
strive to achieve one or more objectives through exhaustive utilization of human capital the
employee aim toward achieving individual purposes while working for the organization
[ CITATION iva01 \l 1033 ]. When employees carry out their activities, organizations
evaluate them for several different reasons that include determining giving feedback,
assessing for training programs and making compensation. Compensation is a human
resource management function that deal with every type of rewards individual receives in
exchange for performing organizational tasks. Organization compensates employees through
wages and salaries, bonus and benefit such as health insurances, vacation times, and pension
programs. These activities are important to increases the performance of employees
[ CITATION des051 \l 1033 ]

The general purposes of compensation policy covers respecting employee’s performance,

maintaining competitive labor market conditions, maintain justice employee salaries,
motivating employee performance and reduce employee turnover (Milkovich, 2008)

Employee performance is the contribution of the employees to attain goal of the organization.
Employee performance can be manifested in improvement in production, easiness in using
the new technology, highly motivated worker.

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1.2 Statement of the problem
The new economic policy introduced in November, 1991 caused the culmination of the
command economy heralding the establishment of a market oriented one. This policy change
created an opportunity and a conducive environment for the emergency of private financial
institutions aimed at the bringing a meaningful economic role in the development efforts of
the country. Dashen bank was established as per the intent of the new policy and the
Ethiopian investment code. It came into existence on September 20, 1995 according
to the commercial code of Ethiopia. Dashen bank coined its name from the highest
peak in the country, mount Dashen. The bank is the biggest private bank in Ethiopia.
It operates through a network of above 223 branches; nine dedicated forex bureaus
above 300 ATM machines, and 958 plus point of sale (pop) terminals spread across
the length and breadth of the nation. It has established correspondents banking
relationship with 464 banks covering 71 countries and 175 cities across the world.

To survive in this growing and competitive business, Dashen bank must compensate
and motivate employees in efficient manner. The reason is employees are the main
asset of Dashen bank. Compensation systems are very crucial for any organization. If
employees are compensating appropriately, they perform better and become more
productive.

“Employees are encouraged when they are financial and nonfinancial rewarded
(Caruth and Handlongthen, 2001). However, in Dashen bank some problems are
occurred that are related with compensation and employee performance. The first one is
that Dashen bank employees basic salary are less than Zemen bank, Awash bank, Abyssinia
bank and its salary is 8200, 5600 and 7000 ETB respectively because of this reason most
valuable employees of Dashen bank in woliso branch shift their eyes in to other private banks
which have paid high salary like Zemen and Abyssinia bank. For example, Ademasu wodaje
is one of the 40 employees of Dashen bank in woliso branch. During his short stay at the bank
his basic salary is increased from 4200 to 5300. In spite of how grateful he is, he always
looking for bigger and better things which means and looking into other private banks that
pay more. Indirectly these migrations of employee have a negative impact on employee
performance. Secondly, employees of Dashen bank do not serve their customers loyally.

2
When employees give service for their customers they bugging, irritate, and insult them. This
reflects employees of Dashen bank have fewer attitudes towards their work because of low
salary. Thirdly, in recent years 12 employees of dashen bank leave the bank and get into
Zemen and Abyssinia bank, this implies that compensation is very crucial for organization. If
employees are leave their jobs performance is directly affected. Qualified accountant and
managers do not select banks which have low basic salary and allowance like Dashen bank.
Therefore, this affects employee performance, productivity, satisfaction and motivation
towards their job. In the context of our country Ethiopia we can take financial and non-
financial compensation as a main factor for Dashen bank performance because our country is
very poor, so employees are eager to get compensation.

Because of the above reasons we are motivated to conduct this study to identify factors which
affect the performance of employees and consequences of compensation system on the
employee’s performance. Moreover, we are interested to conduct this topic in order to
suggest some mechanism to show and find solutions for those problems in the case study
area.

1.2.1 Research questions

1. What are the major compensation package practices in Dashen Bank in woliso
branch?
2. What factors affect the compensation systems of the organization?
3. How does the compensation systems and performance related?
4. What are the different methods of compensation to increase employee’s job
performance?
5. What are the major objectives of compensation?
6. What is the importance of compensation on employee performance?

1.3 Objectives of the study

1.3.1 General objective of the study

The general objective of the study is to investigate the effects of compensation on employee’s
job performance in case of Dashen bank in woliso branch.

1.3.2 Specific objectives of the study

 To identify the various compensation system issues that affect employee performance.

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  To know how employee performance is determined by compensation
 To examine the relationship between compensation systems and employees’
performance.
 To determine the importance of compensation on employee performance at Dashen bank
woliso branch.
 To ascertain the effect of compensation on employee performance

1.4 Significance of the study

This study is important to managers. Firstly, the study helps the managers to indicate
good methods of compensation system in the organization. Secondly, the study is an
important input for the managers when designing a compensation packages for
employees. Thirdly, this study provides valuable information for managers on the
impact of good compensation packages to enhancing employee’s performance.
Finally, the study is also serving as a reference for future researches on this topic.

1.5 Scope of the study

1.5.1 Geographical scope

The scope of the study is limited itself on Dashen Bank in woliso branch ,Keble 01, on the
impact of compensation on employee job performance because of some constraints like time
and budget.

1.5.2 Conceptual scope

The conceptual scope of the study includes both financial and non-financial compensation
packages. Financial compensation includes salary, Bonus, reward and others. Non-financial
compensation include like recognition.

1.5.3 Organization of the paper

The study classified in to five chapters: the first chapter provide general introduction
about the topics understudy, background of the study, statement of the problem,
objective of the study , significance of the study , scope of the study , and
organization of the paper. The second chapter outlining the related literature review of
different of authors about the subject matter understudy .The third chapter of the

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research design and methodology that the researcher used such as, research design,
sampling technique, and sample size. And the fourth chapter interpretation analysis.
Finally the fifth chapter summed up all points that rose in the paper, drawn conclusion
and sound recommendation.

CHAPTER TWO

2 REVIEW OF RELATED LITERATURE

2.1 Definition of compensation
Employees are real wealth of an organization. The attainment of organizational
objectives largely depends on employees’ motivation to work. Compensation is total
of all rewards provided to employees in turn for their service. [ CITATION iva01 \l
1033 ], defines compensation as all form of financial and non-financial benefits as
well as clear and apparent services which are accepted by employees as the part of
work relations. Here, one should know the fact that employees work in organization
for the sole purpose of earning enough money to live comfortably and satisfy all their
needs. Compensation not only allows organizations to get right people in to the right
job at the right time but it also facilitates the effective utilization of its work force.
Compensation is the process of directly and indirectly rewarding employees for their
performance of assigned tasks. [ CITATION Dre05 \l 1033 ], defines compensation
as all form of payments or reward given to employees which arises from their
employment.

There are two components in compensation administration, which are fixed

component and variable component. A fixed component is in the form of basic salary
whereas a variable component is payment based on performance such as bonus or

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profit sharing and benefits such as health insurance and annual leaves [ CITATION
mon993 \l 1033 ].

2.2 Types of compensation

According to [ CITATION mon993 \l 1033 ], compensation is divided in to two
types. These are: Financial Vs. non-financial compensation

1. Financial compensation

Financial compensation consists of both direct financial and indirect financial

compensation. Direct financial compensation which is paid to employees in the form
of wages, salaries, bonuses and commissions in exchange of their performance and
indirect financial compensation is a reward employees receive such as health benefits,
paid time off from work such as annual leave, maternity leave, sick leave and other
related benefits[ CITATION Iva891 \l 1033 ].

2. Non-financial compensation

Non-financial compensation includes any satisfaction, which employees receive

from the job, such as the fulfillment of needs for recognition, personal growth,
advancement and affiliation or the job environment like pleasant work
companions, work setting and the like results non-financial compensation. For
example, being a member of successful department results satisfactions for the
member /for each individual/. Non-financial compensation consists of prizes, self-
steam and recognition. It also affects employees’ motivation, productivity and turn
over which intern affects organizations performance [ CITATION Dre05 \l 1033 ].

The job
The job
-Interesting environment
Compensation
duties
-Sound policies
-Challenging -Appropriate
Non financial
responsibility status

-Opportunity
6 -Comfortable
for working
recognition environment
-Team sprit
 Financial

Direct Indirect
(benefits)
-Wages
-Allowance -Insurance plans
-Salaries -Life, health care
-Commissions -Social assistance
-Bonus benefits
-Retirement
-Education
assistance
Figure2.1: Types of compensation (Mondy and Noe, 1999)

All these compensation s affect the performances of the employees in different

manners. A high rate of compensation in an organization results in high productivity,
profitability, competitive to other organizations.

2.2.1 Basic financial compensation

1. Wages

The remuneration paid for the service labor in production periodically to all
employees or workers. Wage means any economic compensation paid by employers
under some contracts to his workers the service rendered by them, usually referred to
hourly rate paid to such groups as production and maintenance employees. Wage
include family allowance, pay financial support etc. Payments directly calculated on
the amount of time worked [ CITATION mon993 \l 1033 ].

In general, wages are payments based on the number of units produced or piece rate
pay system. It is a payment to manual or blue collar workers for a short time period.

2. Salary

Salaries are money paid monthly or annual basis to employees whose output cannot
be easily quantified. And also the monthly paid rate is determined by the mutual

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agreement between the individual employees and the employer [ CITATION
Iva891 \l 1033 ].

3. Bonus

Bonuses are lump-sum payments offered to employees in recognition of successful

performance. A bonus is a payment that supplements salary and can be paid in the
present on in the future. Majority of large and some small organization pay bonus in
the belief that doing so leads to better profitability, and competency of organization
[ CITATION Iva891 \l 1033 ].

4. Incentives

An incentive scheme is a plan or a program to motivate industries or group

performance. An incentive program is most frequently built on monetary, but may
also include a variety of non-monetary rewards or prize [ CITATION Iva891 \l
1033 ].

2.2.2 Basic non-financial compensation

1. The job

The major human resource management objective is to satisfactorily match job

requirements and employee abilities and aspirations. Although, the task of job design
is typically performed by other organizational units, human resource management has
a distinct responsibility for recruiting, selecting and placing individuals in those jobs.
A good job’’ has the potential for becoming an important part of non-financial
compensation [ CITATION mon993 \l 1033 ].

2.3 Theories of compensation

Compensation is the remuneration given to the employees for the work they do for
the organization. In other words, an employee is entitled to both the financial and
non-financial benefits in return for his contribution to the organization. To understand
which components of compensation is efficient, we need to go through the theories of

8
compensation. There are three theories of compensation viz. reinforcement theory,
expectancy theory, equity theory and agency theory which are explained below
(mondy, 1999).

Theories of
compensation

Agency theory Equity theory

Reinforcement and
Expectancy theory

Fig
ure 2.2; theories of compensation

2.3.1 Equity theories of compensation

According to this theory, there should be equity or the uniformity in the pay structure
of an employee’s remuneration. If the employee feels he is not being paid fairly for
the amount of work he does in a day will result in lower productivity, increased
turnover and high absenteeism. The remuneration system should comply with three
types of equity. Organizations must attract, motivated, and retain competent
employees. In doing so, organizations strive for equity in their compensation systems.
Equity is workers perceptions that are being treated fairly. Compensation must be fair
to all parties concerned and be perceived as fair, [ CITATION mon992 \l 1033 ].
Adams equity theory says that an employee who perceives inequity in his or her
rewards seeks to restore equity. The theory emphasizes equity in pay structure of
employees’ remuneration.

9
Employee’s perceptions of how they are being treated by their firms are of prime
importance to them. The dictum a fair day work for fair day pay a sense of equity felt
by employees. When employees perceive inequity, in can result in lower productivity,
higher absenteeism or increase in turnover.

1. Internal equity theory

Internal equity exists when employees are paid according to the relative value of
their jobs within an organization. Job evaluation is a primary means for determining
internal equity. Employee equity exists when individuals performing similar jobs for
the same organization are paid according to the factor unique to the employee. The
employee perceives the fairness in different pay for different pay for different jobs
based on the nature of work involved, i.e. he must feel that pay differentials among
the jobs are fair. The most common factor is employee performance, as determined by
the performance appraisal. Internal equity is the perceived fairness of the pay
structure within the organization.

2. External equity

External equity exists when the organization employees are paid comparably to those
who perform similar jobs in other organizations. Compensation survey enables
organizations to determine the extent or amount to which external equity is present.
External equity is the perceived fairness in pay relative to what other employers are
paying for the same type of labor. The employee should feel the fairness in what they
are being paid is in line with what players in the same industry are paying to their
employees for the same kinds of job, [ CITATION mon992 \l 1033 ].

3. Individual equity theory

The employee perceives the pay differentials among the individuals who are
performing the same kind of a job and within the same organization. Usually an
individual with more experience gets high remuneration as compared to the fresher
irrespective of the nature of a job.
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2.3.2 Agency theory of compensation
This theory states that both the employer and the employee are the stakeholders of the
company and the remuneration paid to the employee is the agency cost. The employee
will try to get an increased agency cost whereas the employer will try to minimize it.
Hence, the remuneration should be decided in such a way that the interest of both the
parties can be aligned. Thus, these theories posit that the compensation in the form of
salary or wages can be decided on the basis of the outcome or the behavior of an
employee. The agency theory focuses on the divergent interests and goals of the
organizations stakeholders and the way that employee remuneration can be used to
align these interest and goals. Employee and employers are the two stakeholders of a
business unit, the former assuming the role of principals and the latter the role of
agents. The remuneration payable to employee is the agency cost. It is neutral that the
employees expect high agency costs while the employers seek to minimize it. The
agency theory says that the principle must choose a contracting scheme that helps
align the interest of the agents with the principals own interests (Mondy, 1999).

2.3.3. Reinforcement and expectancy theory of compensation

This theory is based on the assumption that, the reward-earning behavior is likely to
be repeated, i.e. an employee would do the same thing again for which he was
acknowledged once. Similarly, in the case of expectancy theory, given by vroom, the
employee is motivated to do a particular thing for which he is sure or is expected that
performance will be followed by a definite reward or n outcome. In general,
reinforcement theory states that a response followed by compensation is more likely
to recur in the future. The implication for compensation management is that high
employee performance followed by a monetary reward will make future high
performance more likely.

Like reinforcement theory, expectancy theory [ CITATION vro64 \l 1033 ] focuses

on the link between compensation and employee job performance, although it
emphasizes expected compensation or incentives.

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 2.3.4 Motivational theories of compensation
Motivation is the act of stimulating someone or oneself to take a desired course of
action; it is the act or processing of furnishing with an incentive or inducement to
action managing requires the creation and maintenance of an employment in which
individuals work together in groups towards the accomplishment of common
objectives. Then the manager’s job is not to manipulate people, rather to motivate
them.

To motivate employees’ needs to recognized what motivate them. The primary tasks
of managers are to get people to contribute activities that help to achieve the mission
and goals of an organization. To guide people’s activities in desired directions
required knowing what leads people to things; that means, what motivated them. The
basic elements of all human behavior is some kind of activity whether physical or
mental activities are goal oriented; that means, the people do things that leads them to
accomplish their goals (Bantie Workie,2004).

2.4 Importance of compensation

Compensation is important to personnel managers for many reasons of all personnel
problems, paying employees is perhaps the most perplexing or complex one , states
that it involves many emotional factors to employees and employers.

1. The importance of compensation to employees

Compensation has benefit to employee. First, it is the primary and often the only
source of income for employees and their family. Second, it is fair reward for the
work employees perform and the benefits they provide for the employees. Third, it
determined the employees’ social status. Finally, income level is often as a measure
of persons worthy.

2. The importance’s of compensation to the employers

The amount a firm pays its employees in the form of wages, salary, and fringes
benefits is quite important, as this cost factor interacts with total revenue to determine

12
the firm’s financial success. Therefore, the primary way for employees to increase
their earnings is to increase the company’s sales and profits.

A firm’s compensation policy should be to pay wages high enough to attract,

motivates, and retain qualified employees and, at the same time, low enough to ensure
adequate profits to attract new capital, expand productive facilities, and permit
consumer satisfaction at a reasonable price [ CITATION MeG89 \l 1033 ].

3. The importance of compensation to the nations’ economy

The nation also has an interest in the compensation problem most overt complaints of
workers focus their absolute and relative wage rate. If wage rates increase faster than
increases in employee productivity, unit labor costs group and the inevitable result is
a wage price spiral [ CITATION MeG81 \l 1033 ].

2.5 Employee performance

Employee performance is about employees achieving the results, goals or standards
as per the expectation set by the organization. Employees are rated on how well they
do their jobs compared to the performance standard set. In short It is the
accomplishment of a given task measured against pre-set of standards of accuracy,
completeness, cost, and speed, the initiative they take, their creativity in solving
problems and the resourcefulness in the way they utilize their resources, time and
energy [ CITATION Rot03 \l 1033 ].

2.6 Relating Compensation and employee performance

It has been found that there is a significant relationship between compensation and
employee job performance in organization. For example, Milkovich (2008) found that
a firm’s ability to attract, motivate and retain employees by offering competitive
salaries and appropriate rewards is linked to firm performance and growth.

Higher performance requires much more than employee motivation. Employee

ability, adequate equipment, good physical working conditions, effective leadership
and management, employee health and other conditions all help raise employee
performance levels [ CITATION Iva89 \l 1033 ].
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Most compensation experts believe that pay affects the performance of employees. A
number of studies indicate that if pays tied to performance, the employee produces a
higher quality and quantity work [ CITATION Iva89 \l 1033 ]. Compensation in the
form of pay for performance has intuitive appeal, it is extremely difficult to perfectly
and it a pay for performance system together. Developing a system that employees
consider as showing that pay is tied to performance requires a number of managerial
skills. The first skill is managers must be able to allocate pay on the basis of merit.
Any merit pay increase must be meaningful, not token, if it is to be motivational. The
second skill is managers must be willing to specially discriminate among
subordinates, in terms of rating and rewarding performance. The third skill is the pay
system must be communicate at the time of employment in terms of initial pay,
expected long term progression, and adjustments. This information should be
communicated the manager, who informs the employee as well what performance
levels are required to obtain the pay increases. The last skill is managers must have
the ability to discuss the pay for performance linkage with subordinates.

Due to this reason compensation are linked to measurable performance on employees

to perform the objectives of the organization. So compensation and performance have
directly related. A compensation system does not necessarily mean rewarding in the
monetary form. It is also includes flexible benefits, medical care, work life balance as
well as employee perks.

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 CHAPTER THREE

3 Research Design and Methodology

3.1 Research approach
We use quantitative research approach because it emphasizes objective measurements and
statistical, mathematical, or numerical analysis of data collected through questionnaires and
quantitative research focuses on gathering numerical data and generalizing it across groups of
people or to explain a particular phenomenon.

Conducting quantitative research study is to determine the relationship between compensation

(independent variable) and employee performance (dependent variable). Under this research
approach personal bias can be avoided by keeping a distance from participating subjects and
using accepted computational technique.

3.2 Research design

We were conducting the research by using descriptive type of research on the title of the
impact of compensation on employee job performance. Because it shows the effect of
compensation on job performance and it describes the state of affair as it exist at present.
Typically, descriptive research design concern with determining the relationship between
compensation and employee job performance. Descriptive research design basically
describes “what is”. Descriptive research is one which describes, records, analyzes and
interprets the condition that exist, so the most appropriate research design for this type of
research will be descriptive.

3.3. Target population

Target populations of the study are employees of Dashen Bank in woliso branch. We use
census data collection technique. Census data collection means a complete enumeration of the
whole population. We will use census data collection because of different reasons. Firstly, the
population is not vast. Secondly, to get high degree of accuracy and data collection through
census gives an opportunity to have an intensive study about the problem. Thirdly, in order to
make sound decision and eliminate bias.

We used all employees of Dashen Bank. The numbers of employee are 50, among this 18 of
the employees are female and the remaining 32 employees are male.

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3.4. Data type and Sources
We used both primary and secondary data to successful accomplishment of research. The
primary source of data for the study is the response of employees that is obtained through
questionnaire and interview. Secondary data on the other hand, collected from books,
journals, organizational documents, internet and different written materials which support this
research.

The data for the research was collected through questionnaire and interview from the
employees of Dashen bank in woliso branch. The questionnaire contained a total of 19
questions on one independent (compensation) and one dependent (employee performance)
variable.

According to the total population of the study the researcher will develop the sample
size with 90% confidence level and 10% sample error.

N
n= Where, n = sample size
1+ N (e)2

N =Total population

e= sample error

3.5 Methods of Data presentation and Analysis

After the collection of the data which collected from respondents, the error and omissions
will be detected by using editing and coding then we turn to the task of analyzing them. The
analysis of data requires a number of closely related operations such as establishment of
categories to raw data through coding, editing and tabulation. The data will be grouped based
on similarity or on the basis of common characteristics. To do so, the data can be
summarized, categorized and rearranged and tabulated to indicate the events, percentages,
cumulative percentage and frequency distribution data interpretation can be use to interpret
and analyze. For the simplicity we use percentage to interpret and analyze the findings.
Generally, we can present the data by using tabular methods of presentation and the data is
interpreted by using percentage.

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 4. WORK PLAN
Table: 1 work plan

S.NO ACTIVITIES JANUA FEBRUR MARC APRI MA JUNE

RY Y H L Y
1 Title selection 

2 Gather source for 

titles
3 Prepare material 

4 Proposal 
presentation
5 Sample collection 
And analysis
6 Data analysis 

7 Research writing 

8 Research submission 

9 Research 
presentation

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 5. BUDGET PLAN
Table 2: Budget Break Down
No Items Units Quantity Unit price Total Remark
amount price
1 Stationers cost

1.1 Pen Packet 3 6 18 .

1.2 Typing paper Packet 1 120 120 .

1.3 Computer laptop NO

writing 1 300 300 .

1.4 staplers Packet 1 10 10 .

2 Communication cost

2.1 Telephone Minute 2 25 50 .

2.2 Note book NO 2 20 40 .

2.3 Personal cost 5 30 150 .

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3 Researcher P/d 5 60 300 .

3.1 Assistance p/d

50 20 1000 .
Transportation cost
Sum of subtotal 1988 .
4

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 REFERENCE

 Caruth and Handlogthen, 2001, Retaining and motivating employees compensation

preference personal Review, pp., 402, Hong Kong and China
 Chabra (2001), Human Resource management concepts and issue,2 nd revised edition
 Dessler (2005), human resource management, 9th edition
 Dessler (2011), human resource management, 12th edition
 John M. Ivancevich (1989), foundation of personnel/human management,
University of Houston.
 John M. Ivancevich (2001), Human resource management 4 th edition
 Leone. Magginson (1981), personnel management and human resource approach, 4 th
edition, university of south Alabama.
 Milkovich (2008), compensation, 9th international edition, USA
 Mondy (1999), human resource management, 7th edition
 Noe et al (1996),Human Resource Management-Gaining a competitive advantage

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