effect of renumeration strategies on employee performance

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

It is believed that remuneration strategy accounts for one of the greatest investments an

organization makes. Although a fair wage is the cornerstone of the contractual and implied

agreements between employees and employers, the underlying assumption is that money can

directly influence behaviour. Many employees and managers believe that simply increasing what

people are paid will make them more motivated, productive and loyal. The influence of

remuneration strategy is an important ingredient in every organization and that employee

performance is a critical issue for many businesses, because of the need to attract, motivate and

retain the right talent pool for a business to succeed (Cohen et al, 1992).

The need to attract, motivate, develop and retain employees is critical to any organization's

prosperity today in terms of creating an environment in which employees feel truly engaged

connected to the organization's goals and objectives and satisfied with their jobs has never been

more crucial. The essential element in payment strategy is to ensure that employees retain a good

performance level in the work environment as workers have to believe that the pay they earn is

fair in relation to the work they do (Cohen et al, 1992).

Furthermore, one of the strongest determinants of employee attitudes, motivation and behaviors

is compensation (Wayne, 1992). However, the impact of pay on employee behaviors and

attitudes has focused on how pay is administered. Consistent with reinforcement and expectancy

theories, most of these research studies conclude that when high performance results in high pay

increases, performance is reinforced and more likely to be repeated in the future. A single

change in pay is often a function of many factors including overall health of the economy,

financial ability of the firm to raise wages, union negotiations, the need to retain an important

individual or class of employees, and relative performance of a particular employee.

Furthermore, pay level across time communicates more to employees about their value to the

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firm than the information conveyed by a single change in pay which may be influenced by the

above external factors (Wayne, 1992).

It is also a reality that remuneration issues are core aspects of any organization’s personnel

management function. It is an area of continual change and a minefield of complexities. The

remuneration strategy provides a welcome insight into reward systems. It presents the techniques

of job evaluation and remuneration thoroughly and describes the tools for evaluating jobs,

constructing a salary structure and comparing salaries giving guidance on developing a job salary

structure like for instance, setting up computerized systems; ranking jobs; integration

performance-related pay; creating a flexible salary structure as well as implementing a pay

policy. For example, (Hegewish, 1991) mentions that one employer laid great emphasis on the

fact that he did not require his workers to clock in as he, as the owner-manager, could see at a

glance if anyone was late, "Informal controls of this kind can be more effective than formal

controls under which the individual can escape attention when they are only one of a large

number" (Hegewish, 1991).

Henceforth, Filippo (1994) also states that the expansion of the business is mainly determined by

the willingness of the owner to delegate supervision and the organization of an increasing labour

force. As employees increase in number and the organization becomes more formalized, the

company will have increasingly sophisticated methods of motivating employees. For larger

companies, profit sharing schemes have become one of the more popular means of rewarding

employees. However, payment strategies for improved performance are widely used in

companies as (Mills, 1994) states that the only way to increase productivity is through

technological innovation but that in the absence of such progress firms `keep coming back to

incentives' to improve productivity. This is especially likely in firms where labour makes up a

large proportion of the total costs. The good thing about performance related to pay is that they

provide employees with a means of additional income. Williams (1998) found that workers on

incentive schemes earned more than eleven percent more than other employees, that profit

sharing was not a substitute for other forms of pay, and that the use of profit sharing was

associated with both higher productivity and improved performance and that goals must be

accepted by the individual and participation and consultation in setting the target to be more

effective in carrying out the strategy.

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1.2 Statement of the problem

The issue of remuneration is of particular importance considering that in all service industries,

there is the inherent characteristic of simultaneity, where the customers and clients participate in

service production. This ‘permeable boundary” between service organization employees and

customers, in the form of observation and interaction, creates a situation where the employee’s

experience at work is communicated to their clients and in turn reflects the overall service

quality impression of the organization (Williams, 1998). Thus improvement gained from having

a good remuneration policy can lead to increased profitability, coming from an improvement in

service standards through happy and committed staff.

Further, the supply of remuneration and benefits to staff could be viewed as a control mechanism

in which remuneration strategies used can contribute to the commitment, flexibility and quality

of staff within an organization. In this respect, compensation programs can be of strategic benefit

to a business. However a number of factors such as ability to pay and the philosophy of

management can impact on the strategic use of compensation. Owing to the reluctance of many

organizations to investigate alternative compensation strategies, a source of added commitment

by employees to the organization has been potentially misplaced (Merricks & Jones, 1987).

The overall objective of establishing Kenya Revenue Authourity (KRA) was to provide

operational autonomy in revenue administration and enable its evolution into a modern, flexible

and integrated revenue collection agency. This actuated the Revenue Administration Reform and

Modernisation Program (RARMP) which commenced in 2004/05 with the objective of

transforming KRA into a modern, fully integrated and client-focused organization (KRA, 2008).

Key Performance Indicators to evaluate the performance of the reform programme are; improved

tax compliance; enhanced revenue collection; stabilizing the cost of collection; improved quality

of service to stakeholders; improved public perception of KRA; competitive terms and

conditions of service for employees; reduction in corruption/bribery index; number of KRA

functions fully integrated; number of IT business solutions successfully implemented; and

increased motivation, commitment and cooperation of KRA staff (KRA, 2008). Clearly, it is

rather obvious that the human resource factor (particularly remuneration) lies at the very heart of

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the reform program. Subsequently, the need arises to undertake an empirical study to determine

the relationship between remuneration policies and employees performance at Kenya Revenue

Authority.

1.3 Objectives of the study

The overall objective of the current study is to determine the effect of remuneration practices on

employee performance at KRA. To this end, the study seeks to accomplish the following;

i. Determine the effect of KRA’s base pay practices on employee performance.

ii. Determine whether KRA’s bonus structure affects employee performance.

iii. Determine the impact of KRA’s monthly allowances on enhancing employee performance.

iv. Determine the extent to which KRA’s staff welfare scheme facilitates employee

performance.

1.4 Research questions

The current study is guided by the following questions;

i. What is the effect of KRA’s base pay practices on employee performance?

ii. How does KRA’s bonus structure affect its employee’s performance?

iii. What is the impact of KRA’s monthly allowances in enhancing employee performance?

iv. To what extent does KRA’s staff welfare scheme facilitate employee performance?

1.5 Justification of the study

The study will add to the body of knowledge that already exists on the relationship between

remuneration and employee performance. It can also be used as a basis for further academic

research on the topic.

The study will provide insights to the management and staff at KRA on what needs to be done to

enhance employee performance via remuneration strategies and also provide a basis on which

future planning can be guided.

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1.6 Scope of study

The current study will entail an evaluation of the effect of remuneration factors on employee

performance at KRA, Mombasa and will involve both staff and management teams. Specifically,

the variables used to denote remuneration practices are; base pay; bonuses; monthly allowances;

and staff welfare schemes.

1.7 Definition of key terms

Human resource management (HRM) is the planning, organizing, directing and controlling of the

procurement, development compensation, integration, maintenance and separation of human

resources to the end that individual, organizational and societal objectives are accomplished.

Salary: Salary is influenced by the size of a company by the specific industry, and in part by the

contribution of the incumbent to the process of decision-making. Salary refers to the weekly or

monthly rates paid to clerical, administrative and professional employees. Salary is determined

by mutual agreement between the individual and the employer.

Incentive: An incentive scheme is a plan or programs 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 prizes.

Compensation is recompense, reward, wage or salary given by an organization to persons or a

group of persons in return to a work done, services rendered, or a contribution made towards the

accomplishment of organizational goals.

Wage: means any economic compensation paid by the employer under some contract to his

workers for the services rendered by them. Usually refer to the hourly rate paid to such groups as

production and maintenance employees

Salary: refers to the weekly or monthly rates paid to clerical, administrative and professional

employees.

.

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Benefits & services: Chandra (2007) lucidly describes fringe benefits provided by the employers

to their employees under the statutory provision or on a voluntary basis. They include; provident

funds, employees’ state insurance (ESI) schemes, retrenchment compensation, employment

injury compensation, maternity benefits, gratuity, pension, dependent allowance and contribution

toward pension and gratuity claims. In addition, other facilities enjoyed by the workers include

medical and health care, restaurants, cooperative credit societies and consumer stores, company

housing, house rent allowance. Recreational and cultural services, clubs, cash assistance. Some

employers also provide education, transport facilities and conveyance allowances.

1.8 Conceptual frameworkFigure 1.1 showing conceptual framework

Input (independent variables) Process Output (dependent variable)

Source; Research study, (2010)

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Remuneration strategies- Base pay- Bonuses- Monthly allowances- Staff welfare schemes

Human resource management

Effective employee performance

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter reviews literature on remuneration strategies and organisational performance to act

as the frame of reference for the study. Specifically, the chapter contains meaning and definitions

of key terms, basic components of remuneration, and literature on internal and external factors

influencing employee performance through good remuneration practices. Empirical research

findings from previous related studies are also presented to give a picture of remuneration

practices in different industries, economies and research settings.

2.2 Theoretical Literature

2.2.1 Remuneration Strategies

Filippo (2005) states that "human resource management (HRM) is the planning, organizing,

directing and controlling of the procurement, development compensation, integration,

maintenance and separation of human resources to the end that individual, organizational and

societal objectives are accomplished." HRM strives to achieve organizational goals and the goals

of employees through effective personnel programs policies and procedures. Successful

performances of the personnel function can greatly enhance the bottom line of any organization.

The personnel practitioners however are challenged more today than at any time in the history by

a changing and more demanding labor force that has high expectation about the work place. At

the same time, rapidly advancing technologies and outside influences are changing the nature of

modern jobs. It is thus more critical and more difficult to maintain a work environment that

motivates and satisfies human resources (Luthern, 1998).

According to Cascio (2003) "compensation which includes direct cash payment, and indirect

payments in the form of employee benefits and incentives to motivate employees to strive for

higher levels of productivity is a critical component of the employment relationship”. He added

that compensation is affected by forces as diverse as labor market factors, collective bargaining,

government legislation and top management philosophy regarding pay and benefits".

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Other definitions offer that compensation is recompense, reward, wage or salary given by an

organization to persons or a group of persons in return to a work done, services rendered, or a

contribution made towards the accomplishment of organizational goals. Wage, bonus and other

allowance are examples of monetary compensation, while good accommodation, children

education, transport facilities, subsidized ration of essential commodities, etc. come under non-

monetary compensation. In short, wage paid to collar workers or salaries paid to white collar

employee can be classified as compensation.

A good compensation package is a good motivator. Hence, the primary responsibility of the HR

manager is to ensure that the company's employees are well paid. Other objectives of

compensation include; to attract capable applicants; retain current employee so that they don't

quit; motivate employees for better performance; reward desired behavior; ensure equity; control

cost; and facilitate easy understanding by all i.e. employees operating manager and HR personnel

(Strauss & Leonard, 1980).

According to Mills (1994) the following factors influence compensation: the organization's

capacity to pay; prevailing pay and benefits in the industry; compensation in the industry and

availability of special competent personnel; flexibility, i.e. kind of competencies and abilities in

managers; performance/productivity/responsibilities of individual; organization philosophy such

as to be leader or pay prevailing rates; qualifications and relevant experience; and stability of

employment and advancement opportunities.

Compensation literally means to counterbalance, offset, and to make up for. It implies an

exchange. Mills (1994) argues that compensation translates into different meaning among

countries and even overtime. He offers the following alternative perspectives on compensation;

Society view: perception of compensation differs within countries as well. Some in society may

see pay difference as a measure of justice. Stockholder view: To stockholder, executive's pay is

of special interest. In listed companies stock options are commonly believed to tie pay of

executives to the financing performance of the company.

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Employees: Employee may see compensation as an exchange of service rendered or as a reward

for a job well done. Compensation to some reflects the value for their personal skills and

abilities, or the return for the education training they have acquired. The pay individual receive

for the work they perform is usually the major source of personal income and financial security

and hence a vital determinants of an individual economic and social well being.

Managers: Managers also have a stake in compensation: it directly influences their success in

two ways. First it is a major expense competitive pressure both internationally and domestically,

forces managers to consider the affordability of their compensation decisions. Studies show that

many enterprises labor costs account for more than 50% of total costs. Among some industries,

such as service or public employment, this figure is even higher.

In addition to treating pay as an expense, a manager also treats compensation as a possible

influence on employee work attitude and behavior and their organization performance. The way

the people are paid affects the quality of their work, their focus on customer needs, and their

willingness to be flexible and learn new skills, to suggest innovation and improvement, and even

their interest in union or legal action against their employer.

Total compensation includes pay received directly as cash (e.g., base wage, merit increases,

incentives, and cost of living adjustment) or indirectly through benefits and services (e.g.,

pensions, health insurance, paid time off). Programs that distribute compensation to employees

can be designed in an unlimited number of ways, and a single employer typically uses more than

one program. The major categories of compensation include base wage, merit pay, short and

long term incentives, and employee benefits and services.

Base wage is the basic cash compensation that an employer pays for the work performed. Base

wage tends to reflect the value of the work or skills and generally ignores difference attributable

to individual employees. Some pay systems set base wage as a function of the skill or education

an employee possesses; this is common for engineers and scientists. Periodic adjustments to base

wages may be made on the basis of change in the overall cost of living or inflation, changes in

what other employers are paying for the same work, or changes in experience/ performance/

skills of employees.

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Incentives also tie pay directly to performance. Sometimes referred to as variable compensation,

incentives may be long or short term, and can be tied to the performance of an individual

employee, a team of employees, combination of individuals, team of employees, a total business

unit, or some combination of individuals, teamed unit. Performance objectives may be defined as

cost savings, volume produced, quality standards met, revenues, return on investments or

increased profits; the possibilities are endless.

Long-term incentives are intended to focus employee efforts on multi-year result. Top managers

or professionals are often offered stock ownership or bonuses to focus on long-term

organizational objectives such return on investments, market share, return on net assets and the

like. Coca-Cola grants shares of stock to selected "key contributors" who make outstanding

contribution to the firm's success. Microsoft, Pepsi, Wal-Mart and Proctor & Gamble offer stock

options to all their employees. These companies believe that having a stake in the company

supports a culture of ownership. Employees will behave like owners.

Incentives and merit pay differs. Although both may influence performance, incentives do so by

offering pay to influence future behavior. Merit on the other hand, recognizes outstanding past

performance. The distinction is a matter of timing. Incentives systems are offered prior to the

actual performance; merit pay on the other hand, typically is not communicated beforehand.

According to Robbins (1982), there are several prerequisites to the effective installation and

operation of payment system: a.) It should be developed and introduced with the involvement of

the workers concerned in a harmonious climate of industrial relations. b) Work-study precedes

the installation of incentive programs. c) The wage structure should be rationalized on the basis

of job evaluation before devising an incentive plan. d) The objective to be accomplished through

incentives should be defined and accordingly, an attempt should be made to select a scheme,

which is most suitable to accomplish them.

Benefits & services: The fringe benefit systems purported to develop a climate for healthy

employer-employee relationship, minimize excessive labor turnover costs and provide a feeling

of individual security against hazards and problems of life with a view to eventually enhancing

employee loyalty to the company and improving productivity. Mills (1994) lucidly describes

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fringe benefits provided by the employers to their employees under the statutory provision or on

a voluntary basis. The social services provided under the Britain’s Factories Act, 1948, in the

manufacturing industries include canteen, rest shelters, storage or lockers, sitting arrangement,

bathing and washing facilities and appointment of welfare officers, etc. Other benefits include

festival, year-end profit sharing, attendance and production bonuses, protective equipment's, free

supply of food items on concessional rates.

Social security system provides benefits such as provident fund, employees’ state insurance

(ESI) scheme, retrenchment compensation, employment injury compensation, maternity benefits,

gratuity, pension, dependent allowance and contribution toward pension and gratuity claims. In

addition, other facilities enjoyed by the workers include medical and health care, restaurants,

cooperative credit societies and consumer stores, company housing, house rent allowance.

Recreational and cultural services, clubs, cash assistance. Some employers also provide

education, transport facilities and conveyance allowance (Williams, 1998).

The remuneration strategy success is very much linked with corporate responsibility. Employers

and designated managers should apply and realize useful objectives and targets that are linked to

the workers pay and performance that implies effective performance management system

connecting the achievement of workers group, department and individual objectives and targets

in order to remuneration and bonus schemes. (Lockwood, 1994) The implantation of

remuneration strategies for business organizations adheres to their corporate governance

structure and provides a framework for implementing the strategies, policies and procedures that

have their roots in the statement of business principles such as the way organizations do their

business that will positively motivate employees to do better in work and perform beyond

standards and expectations that are expected of them in the diverse workforce as of the present.

(Lockwood, 1994).

Thus, devising and implementing successful payment strategies, effective employers will enable

to determine the overarching objectives and overall strategic direction of the workers payment

value and its systems as they reviews operating, financial and risk performance and carries out

annual strategic reviews on specific areas such as human resources, community investment and

the environment (Hegewish, 1991). He argued that the employer (senior management) is

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responsible for managing its pay schemes in accordance with the policies and standards set out in

its business plan as agreed by the organization’s business policy. In addition, there may be

subsidiary staff responsible for devising payment strategy designed for every business division

supporting the overall business workers strategy integrating a range of corporate committees that

will examine the implementation of the different strands of payment as well as business

responsibility strategy (Lockwood, 1994).

Moreover, there is a breakdown of different remuneration strategies in form of salaries/wages,

benefits and perks and reliable remuneration administration will include the necessary payroll

processes and plans in helping business organizations using different payment scenarios. The

workers are basically motivated by external factors as they will work better or be more

committed if they receive significant material gains, such as a large paycheque or more holiday

time and that employees are often motivated as a result of internal factors (Goldstein, 1978).

The employees’ pride in workmanship or their ability to help customers is often much more of a

motivating factor than money or self-interest. In spite of its fact, employers and organizations

must remember that such rewards complement each other, and that one is not sufficient without

the other. Each becomes an issue when it is insufficient or unfair. For example, pay will become

more important when employees are short of money or when unfairness is perceived. Thus,

organizations must also remember that everyone is different when it comes to motivation. While

some people are motivated by the potential to earn rewards, others are motivated primarily by

their desire to avoid unpleasant consequences. It takes time and good listening skills to determine

how to best motivate each employee.

Hegewish (1991) pointed out that an employer already has some sort of pay plan in place –

whether he realize it or not. However, paying employees in accordance with a formal system will

help business increase the ease of payroll and avoid mistakes. They argued that this plan need

not be complex, time consuming or costly. Rather, it should be straightforward and easily

explainable so that it is understood by respected managers/supervisors. In order to start up a

formal pay plan, the following steps could be used by the organizations (Hegewish (1991):

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Step 1- Define the jobs and prepare a job description for each position so that you may compare

them for pay purposes

Step 2- Evaluate the jobs by comparing job descriptions against one another. Rank job difficulty

and responsibility and cluster those that are similar in scope into the same pay range. Arrange

groups into pay levels like from highest to lowest

Step 3- Price the jobs according to the going rates for similar working area as it is ranked and

grouped jobs into pay levels, there needs a calculation of average rate for each job such as

deciding to use such averages as the midpoints in pay level ranges

Step 4- Install the plan, keeping in mind how it will be administered to provide for individual pay

increases. The organization may want to use performance-based increases, promotions, increases

for time spent with the company, or general increases to compensate for changing economic

factors/cost of living and to remain competitive

Step 5- Communicate the plan to employees, the in-charge may decide to write personal letters to

each employee and follow-up with meetings to explain the plan and answer questions. Clearly,

honestly and openly describe how the plan works so that expectations are defined as it will help

build goodwill and good relations with every employees

Step 6- Appraise employee performance under the payment plan through explaining how

employees’ efforts relate to pay and provide feedback to help them better understand job

responsibilities and expectations

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The above integrated system (model) is represented graphically below;

Figure 2.1 – Design & implementation of an effective remuneration strategy plan

Source: Beardwell & Holden (1994).

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In implementing the model, there are some key questions: Does the documentation give a full,

comprehensive description of each position? Is the evaluation system used soundly based and

rigorously applied? Is consideration given to market competitiveness in setting the remuneration

range? Is the performance appraisal system well designed and accepted by all employees? Is the

review process conducted fairly and within agreed time limits? As well as checking goal

achievement, does the review reconsider the job and changes that may have occurred? Are non-

financial rewards considered along with financial rewards? (Beardwell & Holden, 1994).

The system should not be bureaucratic, but it has to be perceived as fair. It also has to be actually

administered fairly.

2.2.2. Assessing Performance in Organizations

Schneider and Schmitt (1986) define performance criteria as ‘those behaviors and outcomes at

work that competent observers can agree constitute necessary standards of excellence to be

achieved in order for the individual and the organization to both accomplish their goals.’ A

similar definition of performance is provided by Campbell et al. (1990) as indicative of the value

attributed to particular behaviours by an organization that leads to the attainment of important

organizational goals. Campbell et al. stress that performance is thus more than simply behaviour,

it is behaviour imbued with significance and value by an organization because of what it leads to.

Performance occurs in the context of a job, position or role in an organization which they argue,

can be differentiated from the outcomes of performance. Performance is not the consequence or

result of job behaviour, it is the act itself (e.g. preparing a tender document). The consequences

of performance may not ultimately reflect the unique contributions of one particular employee

(e.g. the tender document). Many factors influence performance outcomes, some of which are

not under the control of the individual employee (e.g. lack of appropriate tools or resources,

financial considerations).

The distinction between performance and performance outcomes may, in many respects, appear

problematic since the act of performing may not necessarily be observable (e.g. information-

processing and decision-making) and thus may only be evident in its effects. Campbell (1990) is

adamant, however, that performance is a process of behaving that can be assessed independently

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of its outcomes, irrespective of whether it is directly observable. Thus, decision-making

processes can be operationalized independently of the final decision and also the outcome of that

decision. Campbell (1990) also differentiates performance from effectiveness and productivity.

Effectiveness, he says, refers to an ‘evaluation of the results of performance’, whilst productivity

is defined as ‘the ratio of effectiveness to the cost of achieving that level of effectiveness’. These

differences in definition illustrate the various difficulties inherent in assessing performance and

performance outcomes in organizations, i.e. the criterion used to evaluate performance.

2.2.2.1 Individual performance

Dipboye et al. (1994) report that objective measures of performance/effectiveness are commonly

regarded as the most useful, and the least contaminated by error. They cite examples such as a

typist's typing speed (number of words typed per minute), a forester's speed of felling trees

(number of trees felled per hour) and a salesperson's financial sales per unit time as examples of

‘objective’ outcome measures of performance.

In Information Technology led industries, there is now an increasing use of technology to collect

objective individual-level performance outcome data routinely. For example, in the call-centre

industry, information can be collected on the amount of time a telephone agent spends at

different stages of the calling process, e.g. time spent on the call itself, time spent writing up

notes on the call, and time spent out of the system for breaks, etc. These data may be collected

and collated by computer, are fed back to management and, via the appraisal process, to

telephone agents themselves. It could be argued that the collection of such rich and complex data

represents true assessment of the ‘process’ of performance, since an individual's behaviour at

each stage of the job task can be objectively assessed and built up into a picture of specific, as

well as overall, performance (Brewerton and Millward, 2001).

Certain objective performance/effectiveness criteria are fairly commonly used. These include

absenteeism and sales criteria. According to Hammer and Landau (1981), however, three

problems beset absenteeism measures:

Criterion contamination: e.g. absence can be voluntary or involuntary;

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Instability: i.e. organizational factors can influence absence rates differently for different

employees with the result that absence measures are highly unreliable;

Skewing of distributions: e.g. there are often many employees with no absences or only a few

absences across the year resulting in reduced the power for significance tests.

As noted earlier, then, absenteeism as a measure of performance effectiveness is problematic,

particularly in terms of its reliability and validity (does a measure of absence assess effectiveness

and effectiveness alone, or are other factors involved?). The problem of anonymity (i.e. cross-

referencing a project participant's confidential responses to a questionnaire with his/her

personnel files) can be overcome by asking participants to self-report their absence levels over a

given time period. Clearly, however, this introduces a number of additional sources of error,

including, amongst others, social desirability (most employees want to present themselves in the

most positive light possible and may therefore underestimate their true absence rate) and

memory (participants may not be able to recall their absence rates accurately over a 6- or 12-

month period), again throwing into question the reliability of this source of performance data.

Sales criteria are outcome measures with much appeal, but are again open to a number of

contaminants. Sales success is a function of both individual skill and environmental factors,

suggesting their unreliability as outcome measures. Because of this, it may be very difficult to

compare sales achieved across individuals if external factors (e.g. geographical location –

comparing sales representatives operating in London and the far south-west of England, for

example) have a marked effect on the criterion (Brewerton and Millward, 2001).

Because of the problems outlined above as regards objective measures, organizations often rely

heavily on appraisal ratings in order to assess the performance and effectiveness of their

employees (Dipboye et al., 1994). However, these are inherently subjective measures and, as will

be shown, are also open to a wide range of contaminants. Graphic rating scales represent the

most common usage of ratings for supervisory or managerial appraisals.

Indeed, Crites (1969) reported that 60% of organizations used rating systems to assess individual

employee effectiveness. For instance, there are a number of criteria that can be used to assess the

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effectiveness of a trainer. Each criterion (e.g. ‘organization’, ‘knowledge’, ‘enthusiasm’, etc.)

may be rated by the appraiser according to the 5-point scale (which ranges from ‘Poor’ to

‘Outstanding’). A number of significant drawbacks exist in the use of such graphic rating scales,

which can undermine their objectivity, reliability, validity and ability to discriminate.

There are methods available, however, which permit more reliable, valid, objective and fair

judgements of employees’ performance and effectiveness to be made using rating scales. A

number of ‘rating effects’ exist which limit the utility of rating scales unless used with great care.

Brewerton and Millward (2001) offer the following rating effects:

Halo – occurs when the rater tends to give the same level of rating across all criteria (the same

rating would be given across ‘enthusiasm’, ‘encouragement’, ‘responding to questions’, etc.). In

many cases, this effect represents an error on the part of the rater in generalizing from a certain

level of performance/effectiveness on one criterion to the remainder. It may be, as noted by

Cooper (1981), that similar ratings on all criteria may represent a true appraisal of

performance/effectiveness, and this requires a distinction to be made between ‘true halo’ and

‘halo error’.

Central tendency, severity and leniency – it is often the case that a rater will use only part of a

rating scale due to personal preference. For example, some raters may tend to use the central

portion of a scale (central tendency), while others restrict themselves to the more positive ratings

(leniency) or to the more negative ratings (severity). This leads to reduced objectivity, since

ratings cannot be argued to measure criteria in the same way regardless of who is doing the

measurement. This source of error also influences the capacity of the scale to discriminate

between employees if raters are restricting their judgements to only a narrow range of ratings.

Context – this source of error refers to differences in individual ratings of employees when alone,

or when in a group setting. Depending on the relative performance/effectiveness of the group,

contrast effects could influence the rating attributed to an individual employee. For example, if

two individuals receive moderate-good appraisals when appraised alone, placing one in a poorly-

performing group and the other in a high-performing group may result in the rater contrasting

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those individuals with the rest of the group and reporting inaccurately high or low group-level

appraisals respectively for these employees. This effect may undermine the reliability (and also

validity) of the rating process.

Similar-to-me – these effects, which impact on the reliability and objectivity of rating scales,

involve the rater making judgements as to the similarity or dissimilarity of the ratee to

him/herself and allowing these comparisons to affect judgement of performance or effectiveness,

e.g. reporting more positive judgements of those employees with similar backgrounds or political

beliefs, or who attended the same educational institutions, etc.

2.2.2.2 Linking organizational culture to performance

The various issues surrounding the conceptualization and measurement of performance and

effectiveness at the corporate or organizational level are well illustrated with reference to

management, sociological and applied psychological research on organizational culture.

Organizational culture has gained much management and research interest in the past 20 years.

To some degree, this interest reflects contemporary workplace focuses on people and

performance. Whilst managers are keen to address ‘soft’ people issues by introducing

intervention programmes such as personal and career development, participative management,

team-building, etc., these areas may only be regarded as worthy of attention if they can be shown

to make a significant and measurable difference to the performance of the organization itself. As

a result, many organizational and management specialists have conducted research to address the

question of the link between organizational culture and performance. It is widely agreed that

organizational performance may manifest itself in a number of ways, dependent on the

organization/industry of interest. These indicators have included: Staff turnover; Staff

absenteeism; Volume of sales/product; Profit; Market share; and Return on investment.

There is a distinction here between commercial and ‘people’ measures at the organizational level

of analysis. While it is true that commercial or fiscal measures are the most commonly used

indices of performance for financiers, accountants, bankers and investors, staff measures also

provide a useful indication of the state of the workforce and may flag up possible problems

looming on the horizon.

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Some researchers have attempted to frame organizational culture in terms of ‘cultural types’

when considering performance in the marketplace (Deal and Kennedy, 1982; Peters and

Waterman, 1982). Specific companies have been held up as prime examples of ‘successful’ and

‘high-achieving’ organizational cultures. This apparently straightforward relationship was

questioned by Ernest (1985), who stated that effective business planning requires an

understanding of not only the external competitive environment but also the internal corporate

culture, suggesting that there must be a ‘fit’ between planning and the beliefs, values and

practices within the organization.

Ernest argued that there is no single cultural ‘type’ which leads to success, but that

organizational plans are often ineffective because of the incompatibility of those plans with

organizational culture(s). Many studies undertaken in the 1970s and early 1980s were keen to

develop taxonomies of culture ‘types’ to describe the components present within companies in

the hope of linking those components with organizational outcomes such as performance.

Harrison (1972), Deal and Kennedy (1982) and Schein (1985) all produced interesting accounts

of culture types, with appealing descriptions of the types of behaviour associated with each:

Deal and Kennedy (1982): Tough-guy macho culture; Work hard/play hard culture; Bet-your-

company culture; Process culture. Harrison (1972); Schein (1985); Power culture; Role culture;

Achievement culture; and Support culture.

However, as noted by Furnham and Gunter (1993), these posited cultural systems have proved

little more than interpretative intuitions which have yet to be validated. More recent research has

questioned this typological approach and has focused increasingly on the multi-dimensional

nature of organizations’ cultures, and how separate ‘dimensions’ of culture may be related to

organizational performance.

Marcoulides and Heck (1993), for example, examined a number of elements of over 30 US

organizations’ cultures, including product and service organizations of various sizes, resource

types (capital or labour intensive), from both public and private sectors. They found that, when

taken together, the cultural dimensions listed below measured at organizational level could

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predict over 50% of the following performance indicators: Volume (gross revenue: product

value); Share (extent of penetration into potential customer base); Profit (revenue: costs); and

Return (profit: assets and equity invested).

The cultural dimensions together predicting these elements of performance included: Propriety

of criteria for, and distribution of, remuneration; Managers taking an interest in employee

welfare and performance; Attitudes of staff towards loyalty and commitment; Extent to which

staff believe management involve them in decisions; Degree of communication flow across the

organization; Pressure imposed on staff; and Means for evaluating employee performance.

Zamanou and Glaser (1994) measured six dimensions of organizational culture (teamwork,

supervision, morale, involvement, information flow and meetings), before and after a 2-year

intervention to improve teamwork, participation and communications training across the

company. They found that all six dimensional scores improved significantly pre- and post-

intervention, as did the following: sick leave reduced from 35,000 hours to 24,000 hours (32%

reduction); associated cost of absenteeism reduced from $349,000 to $254,000 (27% reduction),

despite a 4% increase in the number of employees (311 to 322).

2.2.2.3 Measuring performance at organizational level

The above example of organizational culture and performance illustrates some of the means used

to operationalize performance at the organizational level. Commonly selected criteria include

turnover, absence, sales, profit and market share. As with all measures of performance, if the

researcher is to draw on a particular criterion, s/he must be satisfied that the criterion is objective,

reliable, and valid. The principal problems of analysing organizational performance stem from

poor reliability (the influence of external factors on the criterion), limited sample sizes, and the

associated problem of limited comparability of organizations. Some commonly used measures of

performance (together with their advantages and disadvantages) are introduced below.

Turnover

Staff turnover, initially at least, appears to be an important and potentially useful criterion against

which to judge organizational effectiveness or performance, due to the high cost of replacing and

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training new personnel. Moreover, turnover, particularly of key people, can be disruptive at the

organizational level. However, the researcher needs to be aware of the various factors at work

when considering staff turnover as a possible criterion of organizational effectiveness:

External job market – this varies over time, becoming more or less buoyant in line with other

economic factors. The relative availability of other positions in particular industrial sectors will

impact on the extent to which staff leave a particular company over a given time period. Clearly,

this throws into question the reliability of staff turnover as a criterion unaffected by external

factors.

Contemporary workplace – it could be argued that in today's workplace, with the changes in

perceived expectations of employees and employers, turnover may become less salient and valid

as an indicator of organizational performance. Since many employees are becoming increasingly

focused on managing their own careers in the absence of a ‘job for life’, natural turnover is likely

to increase. This does not preclude employees who intend to leave the company from performing

highly effectively during their tenure, and so restricts the validity of turnover as a criterion

measuring much more than cost associated with recruitment and training.

Differences in reporting turnover – the researcher should also be aware of the variations in how

turnover is reported depending on the policy of the organization. This should be identified prior

to analysis of organizational performance data to ensure comparability of data.

Identity of leavers – the identity of those leaving an organization will have a varied impact on the

overall effectiveness of the firm. Clearly, the loss of less-effective employees will have a less-

damaging effect on overall organizational effectiveness than the loss of high-performing and also

more senior staff. The loss of senior staff can have a significant disruptive effect on the

organization's operation, with a knock-on effect felt from top to bottom of the organization, as

noted by Cannella and Hambrick (1993).

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Absence

Absence rates, when aggregated to organizational level, can tell the researcher something about

the effectiveness of the organization in retaining a certain level of staff resource over time.

Clearly, if staff are absent from work, they are unable to contribute to the performance of the

organization, making absence rates a fairly valid indicator of effectiveness. However, as with

staff turnover, differences in recording absence rates can reduce reliability of the measure

(whether or not an organization takes into account sickness, maternity and compassionate leave,

and training when assessing absence rates), as can differences in the historical attitudes and

‘culture’ of organizations in their relative levels of acceptance of a certain amount of

unauthorized absence from work (as discussed in depth by Nicholson and Johns, 1985).

However, absence data may well be able to provide the researcher with a valuable index of

organizational effectiveness as long as care is taken in ensuring that reporting systems (and

organizations themselves) are comparable.

Fiscal indicators

Profit, financial turnover of organizations, and other fiscal indicators (e.g. return on investment,

market share, etc.) are clearly open to an enormous range of external factors, making them

problematic as ‘pure’ indicators of organizational effectiveness. As Eccles (1991) states, ‘the

leading indicators of business performance cannot be found in financial data alone.’ (appearing

in Eccles, 1998). Differences in economic conditions, competition in different sectors, rates of

exchange, mergers and acquisitions, and accounting procedures, for example, can all impact

enormously on the ‘bottom-line’ financial performance of an organization. It may be possible,

however, to control for some of these external factors by ensuring that financial data are directly

comparable from organization to organization (e.g. by making statistical adjustments for

differences in end-of-year dates, omitting data on major acquisitions, ensuring that accounting

procedures are comparable, etc.). It is important that the researcher is confident of the

comparability of such data in order to include them as indicators of performance or effectiveness.

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Perceptions of corporate performance

Various writers (Dess and Robinson, 1984; Venkatraman and Ramanujam, 1987) have found that

perceptions of corporate performance by top management teams are highly correlated with actual

financial performance data. This suggests that it may be possible to obtain subjective perceptual

data on corporate effectiveness with some confidence, if this information can be obtained from a

trusted and reliable source (e.g. senior management).

The ‘balanced scorecard’

It is becoming increasingly widely accepted, at least within management research, that

performance at the organizational level should take in a variety of disparate indicators in order

that a comprehensive understanding of an organization's behaviour and success may be obtained.

Chakravarthy (1986), Dess and Robinson (1984) and Eccles (1991) all concur with this view,

which has been described as the ‘balanced scorecard’ approach (Kaplan and Norton, 1996) to

assessing performance at the organizational level of analysis.

Such approaches see a variety of measures, including ‘bottom-line’ indicators such as return on

investment or market share, as well as more subjective criteria such as perceptions of

customers/shareholders of service quality, employee views of the culture of the company and

ratings of the effectiveness of organizational processes, being used in combination to provide a

broad overview of organizational effectiveness. Of course, the breadth of such an approach

should in no way detract from the rigour required to assess the utility of available criteria. Once

again, the researcher must remain vigilant for evidence of objectivity, reliability, validity and

ability to discriminate fairly in criteria obtained within a balanced scorecard framework.

2.3 Empirical Literature

There are various studies that have been carried out in the fields of employee remuneration and

performance. Karlsson and Åhlström (1995) investigated the role of remuneration systems

towards attaining lean manufacturing at a manufacturing concern in Sweden. Previously the

organization compensated employees on the basis of piece-meal work. Management realized that

this system had to change for them to attain a lean manufacturing system. Consequently, the new

remuneration system contained both fixed and variable elements. Employees were compensated

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depending on the individual achievements (ability to perform five different tasks and the

individual’s team skills); while variable pay depended on the achievements of the team to which

the individual belongs. The bonus part was measured on the basis of productivity, quality, and

time accuracy.

There were several results of implementing these changes. First, the interest in quality issues

increased. Workers no longer tolerated defective parts and tried to take measures to correct the

parts which were defective. Furthermore, workers no longer tolerated missing parts, since this

made it impossible for them to deliver products on time. Secondly, the teams’ flexibility also

increased, since workers in the flow-lines are keener on learning new jobs than before.

Furthermore, the individual’s performance was focused on productivity before switching to flow-

lines and the accompanying change in the remuneration system. Now the focus is on team

performance. It has been observed that this new focus results in peer pressure on those who do

not adhere to the groups’ standards (Karlsson and Åhlström, 1995).

Hanley and Nguyen (2005) surveyed trade union perspectives on performance-related pay (PRP).

Document analysis of collective bargaining agreements in their study revealed that performance

appraisal and performance-related pay clauses range from mere stipulation of existence to

detailed processes and principles of design and implementation. Another important finding was

that accepted of performance-related pay was higher in white-collar unions’ agreements suggest

than in the blue-collar unions’ agreements which prefer to restrict pay increases to a job

classification structure. To minimise problems in shaping PRP schemes, the unions advocated

the integration of a social dimension; transparency and equality (Hanley and Nguyen, 2005).

They argued that using merit pay to link important outcomes to desired behaviours may not be

sufficient. There needs to be greater emphasis on intrinsic motivational factors such as

achievement, recognition, responsibility and personal growth. It is perhaps better to seek an

alternative such as comprehensive training and innovative development programs. Such an

approach could also alleviate the problems that arise from PRP initiatives by offering long-term

intrinsic rewards such as employee empowerment, job satisfaction and job fulfillment (Hanley

and Nguyen, 2005). Another recommendation of the study is that trade unions should be

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actively involved through a mutual decision-making process, as they would exert a beneficial

influence on management practice by enhancing the transparency and consistency of

Performance Appraisal and Performance Related Pay systems.

2.4 Research Gaps

From a review of both theoretical and empirical literature it is clear that a number of knowledge

gaps are abound. First, researchers and practitioners alike recognise that appraising an

employee’s performance is difficult. Indeed, problems of inaccuracy, manipulation and even

counter-productivity have been uncovered. Moreover, potential opportunities exist for PA to

focus on one or more negative aspects of an employee’s recent job performance and in effect,

inaccurately reflect the actual job performance (Nelson, 2000).

Secondly, is the difficulty of determining which factors have influenced the output of the system

i.e. employee performance. The exact role the remuneration system, per se, has had in affecting

output in the desired direction is, of course, impossible to ascertain.

Lastly, a key objective of the reforms program at KRA is to improve service delivery, staff

motivation and commitment through competitive remuneration strategies. However, the outcome

of this objective is still unclear. Consequently, the current study will serve to bridge these

knowledge gaps.

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CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

The current study will use a descriptive survey design to evaluate the effect of remuneration

practices on employee performance. The study will target both staff and the management team at

Kenya Revenue Authority – Southern Region. Sampling will be done randomly to achieve a total

sample size of thirty respondents from all five departments of the corporation. Close-ended

questionnaires will then be used to gather data and thereafter analyzed and presented using

Microsoft Excel and SPSS.

3.2 Research design

The research design to be used in the current study is the descriptive survey method. This

technique was selected as it was the most economical method for the researcher to collect data.

According to Cooper and Emory (1996), a descriptive survey is an attempt to collect data from

members of a population in order to determine the current status of that population to respect to

one or more variables. Survey research is therefore a self report study which requires the

collection of quantifiable information from the sample.

3.3 Study population

The entire population at the KRA- Southern Region totals 960 employees distributed across five

departments as follows;

3.4 Sample design & procedures

For an equal chance of interviewing respondents stratified sampling methods will be used. The

population will be divided by department and a random sample taken from each department.

This effort is expected to produce a sample size of 30 respondents, or 3.125 per cent of the total

population.

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Table 3.1 Sample Distribution Table

3.5 Data collection instruments and procedures

Primary data will be collected using structured questionnaires, by means of email, hand delivery;

and “face-to-face interview” methods. Specifically, a Likert-style rating scale was used to collect

opinion data as it is the most frequent used variation of the summated rating scale. Respondents

will be asked to agree or disagree with statements pertaining to the variables under study with

each response given a numerical score to reflect its degree of attitudinal favourableness.

Thereafter the scores were totalled to measure the respondents’ responses.

3.6 Data analysis

Descriptive statistical measures such as percentages and frequencies will be used to analyze

closed ended questions/statements. These techniques are usually able to employ factual

information about a situation to provide an understanding of performance levels. The data

collected will be edited for accuracy, consistency, uniformity and completeness and analyzed

with the results presented in tables, bar charts and pie charts. Thereafter tabulated and analyzed

using frequencies, percentages, mean scores and standard deviation measures by use of SPSS

computer software application (Statistical Package for Social Sciences). Cross-tabulation

analysis will also be applied to derive any relationships between the dependent and independent

variables.

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DepartmentPopulation

Size

Sample

proportion

Sample

size

Customs Services 433 0.03125 14

Domestic Taxes 236 0.03125 7

Large Taxpayers 45 0.03125 2

Road Transport 105 0.03125 3

Support Services 141 0.03125 4

Total 960 0.03125 30

REFERENCES

Adams, S. & Adelaide G. (1987), Modern Personnel Management, Delhi: Surjeet.

Beardwell, I. & Holden, L. (1994), Human Resource Management: A Contemporary

Perspective, (2nd ed.), London: Pitman.

Balu & Schoenher, (1971). Performance and Control Strategies, In Blackler, F. & Shimmin, S.

(Ed), Applying Psychology in Organizations. London: Methuen.

Cohen, A. R., Fink, S.L., Godon, H., Willits, R., D. & Josefowitz N. (1992), Effective

Behaviour in Organizations (5th Ed.), Boston: Irwin.

Crispin, G. (1990), The Employment Crisis in Africa: Issues in human resources

development policy. London: Cassel

Filippo, E., B. (1984), Personnel Management, (6th edition), New York: McGraw.

Goldstein, E., B. (1978), “Employee Share-Ownership and Motivation”, Industrial Relations

Journal, Vol.20 3, pp 311-330.

Guditus, W. (1984), Team Management – Leadership and Consensus, Ohio: Merrill.

Hegewish, A. (1991), “The decentralization of pay bargaining: Europe comparisons”,

Personnel Review, 6, 28-35.

Jonathan, C. (1994), Keeping Good Company, New Jersey: Oxford.

Jones, P. (1994). The Management of Food service Operations. An integrated and

innovative approach to catering management. London: Cassel.

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Lockwood, A. (1994). Providing service excellence. In Jones, P. & Merricks, P. (Eds.), The

Management of Food Service Operations: An integrated and innovative approach

to catering management. London: Cassel.

Luthern, F. (1998), Organizational Behaviour, (8th Ed.), U.S.A: McGraw.

Merricks, P., & Jones, P. (1987), The Management of Catering Operations, London: Cassel.

Mills, D. Q. (1994), Labour Management Relations, (5th ed.), New York: McGraw.

Robbins, P., S. (1982), The Management of Human Resources, (2nd ed.), New Jersey:

Prentice.

Strauss, G. & Leonard, S. R. (1980), The Human Problem of Management. London: Prentice.

Wayne, C., F. (1992), Costing Human Resources. New Yord: Van Nustrand.

Williams, R.S. (1998), Performance Management: Perspectives on employee performance.

London: Thomson.

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APPENDIX I: QUESTIONNAIRE

QUESTIONNAIRE: REMUNERATION AND EMPLOYEE PERFORMANCE: THE

CASE OF KENYA REVENUE AUTHORITY

Introduction - The current study seeks to establish the effect of remuneration on employee

performance. The survey results will be reported in general terms and will not identify

individuals. Your support in completing this questionnaire objectively is greatly appreciated.

Please tick your response where appropriate.

A. GENERAL INFORMATION

1. Job category

- Senior manager Supervisor

- Middle-level manager Staff

2. Department

- Customs Services

- Domestic Taxes

- Road Transport

- Large Taxpayers

- Support Services

3. Age of respondent:

< 30 years 30 > 40 years 40 > 50 years Over 50 years

4. Gender:

Male Female

5. Education level:

Primary level Secondary level Tertiary level

University

6. Years of service at KRA _______________________________

7. Employment type

Permanent Contract Casual

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B. EMPLOYEE REMUNERATION

What type of remuneration, basic salary and benefits, and annual pay adjustment are

provided to you by KRA? Please tick against the most appropriate choice

1. Base pay (salary)

- 80- 90% of monthly income

- Fixed monthly income

- Based on length of service

- Based on position, qualification & experience

- Based on market rate

2. Monthly allowance

- 10-20% of monthly income Overtime pay

- Family and adjustment allowance

3. Other allowances

- Housing - Education

- Transport - Entertainment

4. Bonus

- Biannually

- Annually

- Based on KRAs performance

5. Welfare

- Medical scheme Annual staff party

- Retirement plan Loan for emergencies

- Paid leave

- Subsidized meals

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EMPLOYEE REMUNERATION & PERFORMANCE

On a scale of 1 – 5, how would you rate the following remuneration aspects in terms of

their likely effect on your job performance? Please use the scale provided below;

1 = Not at all important, 2 = Somewhat unimportant, 3 = Neither important nor

unimportant, 4 = Somewhat important, 5 = Extremely important.

1 2 3 4 5

1. Base pay (salary)

- 80- 90% of monthly income

- Fixed monthly income

- Based on length of service

- Based on position, qualification & experience

- Based on market rate

2. Monthly allowance 1 2 3 4 5

- 10-20% of monthly income

- Family and adjustment allowance

- Overtime pay

3. Other allowances 1 2 3 4 5

- Housing

- Transport

- Education

- Entertainment

4. Bonus 1 2 3 4 5

- Biannually

- Annually

- Based on KRAs performance

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5. Welfare 1 2 3 4 5

- Medical scheme

- Retirement plan

- Subsidized meals

- Annual party

- Paid vacations

- Loan for emergencies

6. Are there any other aspects of remuneration that may have an effect on your

performance?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

___________________________________________

7. Do you have any other comments or suggestions that you think can be useful to this

survey?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

___________________________________________

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APPENDIX II – WORK PLAN

Activity Oct 1 –

Nov 30

Dec Jan Feb March

Proposal

writing and

questionnaire

design

Data Collection

Data analysis

Report

adjustment

Report Writing

& Compilation

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APPENDIX III: RESEARCH BUDGET

The budget for carrying out this research study is as follows:

ACTIVITY Kenya Shillings

Typing, photocopying and binding (3 hard cover copies)

of the research report.

4,000.00

Questionnaire distribution and collection 10,000.00

Data coding and analysis 6,000.00

Printing and photocopying of research report drafts 5,000.00

Travelling expenses. 10,000.00

Miscellaneous 10,000.00

TOTAL 45,000.00

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effect of renumeration strategies on employee performance

Documents