The Impact of Compensation and Internal Equity on Employee Performance ()
1. Introduction
Compensation is given to the employee on the basis of the amount of works done and the hours spent in doing them therefore it is very important to employees and it can have an impact in their performance. Internal equity is a criterion adopted by organizations to ensure fairness in pay structure. The compensation awarded to employees is determined through internal equity and is calculated depending on the relative value of the employee. Many researchers have identified that compensation is directed to employee performance. There have been many studies in determining the impact of compensation on employee performance and motivation but there has not been any study to determine the same impact of compensation and internal equity on employee performance. This study has discovered the knowledge in the gap to address the relationship between the compensation and internal equity and employee performance at ABC automotive corporative.
Employee performance is the most common challenge in any organization management and this is because an organization cannot achieve its goals unless its employee performs accordingly. Lack of good performance from the employee, will make the organization to go down and experience crisis (Onyebushi & Ero-Oruss, 2019) . Employee performance refers to how employee behaves in the workplace and how well they perform the job duties the organization obligated to them. Moreover, it is generally agreed that each employee is a serious investment for a company, so the return that each employee provides must be significant. In the opinion of Attahiru (2021) , employee performance is defined as how an employee fulfills their job duties and executes their required tasks. It refers to the effectiveness, quality, and efficiency of their output. Further, employee performance has been recognized as job performance of an employee at workplace. It is an essential component in the organizational success and organizational productivity depends on the employee performance (Shaikh, Tunio, & Shah, 2017) .
Globally, Employee performance has been used for decades. Typically, it is done annually and used to evaluate how an employee is improving in his/her job field, learning, or if he/she should receive a promotion. If done well, performance can boost an employee’s confidence, morale, teamwork, and focus. It focuses on quality, quantity, and effectiveness. However, each company has a different system or structure it uses to rank and analyze, and various ways in which to go about the employee performance (Pradhan & Jena, 2017) .
In addition, in the study done in Africa Nigeria, employee performance is a very important area in the workplace. It can help the organization increase and utilize the capacity of the human resources it has. It translates into good service delivery and interaction in which affects every area of the organization. To achieve this organization, need to make polices that will encourage employee performance (Orogbu, Onyeizugbe, & Chukwuemeke, 2015) .
According to a study done in Asia by (Manapragada, Bruk-Lee Thompson, & Heron, 2019) , employee performance also impacts company culture. If employees are engaged, punctual, managed fairly and willing to take responsibility that creates a culture of respect and trust and leads employees to stay in business longer, which lowers expensive employee turnover.
In this study, we will focus on determining the impact of compensation and internal equity on employee performance. Compensation and internal equity will be used as independent variables with three dimensions wages, salaries and incentives. Employee performance will be used as a dependent variable. This study will use gender, age, and length of working as moderators.
2. Review of Related Literature
There are many factors that have an impact on employee’s performance such as training and company’s policies yet employee performance still a challenge in most of the organizations. According to the study of Kappel (2018) , compensation is the total cash and non-cash payments that you give to an employee in exchange for the work they do for your business. It is typically one of the biggest expenses for businesses with employees. Compensation is more than an employee’s regular paid wages.
Moreover, compensation is a useful instrument for improving employee effectiveness that also has a good impact on employee behavior and the academic performance of the company. Furthermore, pay determines the ability to recruit and retain skilled employees in order to meet organizational objective (Adil, Rao, Ayaz, & Shinwari, 2020) . According to Olatunji, Amuni, Kehinde and Hassan (2015) , salary is paid weekly, biweekly or monthly, whereas wage is paid daily. The compensation provided serves as driver or motivational tool for the personnel, keeping them physically and mentally intact.
Kasrul and Ngandoh (2020) noted that incentives are anything that can attract an employee’s attention and motivate them to work can be called as incentive. An incentive aims at improving the overall performance of an organization. Incentives can be classified as direct and indirect compensation. They can be prepared as individual plans, group plans and organizational plans. In addition, In addition, Agrawal (2017) noted that when workers are compensated for the value of the work they do which describes the compensation relationships between several vocations, or consideration of skills and abilities within a single establishment.
According to Chinn (2017) , internal equity is the relative value of an employee’s job compared to others in the organization. Internal equity is based on a number of factors, including required education and experience, physical demands of the work, responsibility for materials, equipment or the safety of others, supervisory or management responsibilities, customer contact and working conditions. Work analysis and job design are used to determine the internal equity of jobs. Employees tend to compare their pay with that of their coworkers.
The relationship between compensation and performance is a little bit like the relationship between two people. They both rely on each other to function, but it’s hard to predict how an action by one might influence the other (Crowley, 2017) . Moreover, direct compensation is a direct gift given by the organization to employees such as wages, salaries, bonuses and incentives and indirect compensations is an indict gifts given by the organization to employees such as benefits, health insurance and other facilities (Lestari, Haryono, Kurnia, & Rda, 2020) .
According to the study done by Hameed, Ramzan, Zubair, Ghazanfar, Arslan (2014) , compensation is output and the benefit that employee receive in the form of pay, wages and also same rewards like monetary exchange for the employee’s to increases the performance. Compensation is the segment of transition between the employee and the owner that the outcomes employee contract. As the prospective of employee pay is the necessary of life. Compensation has a direct impact on the performance of the employees.
Many researchers have identified that compensation is directed to employee performance. There have been many studies in determining the impact of compensation on employee performance and motivation but there has been limited study to determine the same impact of compensation and internal equity on employee performance. This study has discovered the knowledge in the gap to address the relationship between the compensation and internal equity and employee performance at ABC automotive corporative. The study seeks to answer the following specific research questions:
Research Question 1: What is the level of compensation of the respondents?
Research Question 2: what is the level of internal equity of the respondent?
Research Question 3: Is there a significant relationship between compensation and employee performance?
Research Question 4: Is there a significant relationship between internal equity and employee performance?
Research Question 5: Is there a significant difference in employee performance of respondents when grouped according to gender, age, and length of working?
In this study, the impact of compensation and internal equity on employee equity has been analyzed. The variables taken for this study are compensation with the three dimensions (salary, wages, and incentives), internal equity and employee performance.
3. Methodology
Research Design
This study is a survey research that has been designed into a descriptive-correlation. It sought to examine the impact of compensation and internal equity on employee performance. In addition, demographic variables of the respondents were examining whether there is a significant difference in employee performance of respondents when grouped according to gender, age, and length of working. In order to achieve the research objectives, the study applied a quantitative methods approach, descriptive-evaluation to answer question 1 - 2, descriptive-correlational to answer question 3 - 4, and descriptive-comparative to answer question 5.
Population and Sampling Technique
This study used a purposive sampling technique in achieving the size of the survey respondents since they are respondents of the study are the employees of ABC Automotive Cooperative, who have been working in the company for at least one year. Those employees who have been working at ABC automotive cooperative for less than a year were not included in the list of respondents for this study. The study used convenient sampling to distribute survey questionnaires to the respondents. A total number of 30 questionnaires was distributed and the researchers was able to get back the 30 questionnaires
Instrumentation
The researchers used self-constructed survey questionnaires to collect data which is based on the literature review composed of four (4) parts. The first part was about the employees’ information about their gender, age, and length of working at the organization. Compensation questionnaires were the second part of the survey that contains 10 items about salary, wages and incentives and the Cronbach’s alpha was 0.788. Internal equity is the third part of the survey with also 10 items with the Cronbach’s alpha of 0.779. Finally, the fourth part of the survey is about employee performance with 10 items and the Cronbach’s alpha was 0.765. All the questionnaires were designed in a Linkert scale ranging from 1 to 5. (1 = Strongly Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree and 5 = strongly agree). To ensure that the respondents understood the survey questionnaires, the researcher explained the survey questionnaires to employees before they started answering and they were allowed to ask any questionnaires during the time they were answering. The questionnaires of this study were submitted to 12 experts for validation. The purpose of the validation is to ensure that the questionnaires will be understood by the respondents, no biased, with clear objective, and relevant to this study. After the process of the validation, the researcher conducted the pilot study.
Data Gathering Procedure
The researcher secured the permission to conduct the study from the college dean. The survey questionnaires were distributed after the permission was approved. One week was enough for the researcher to distribute the survey questionnaires and once returned, it was checked and review for the completeness of answers.
Statistical Analysis
To answer the first and second questions, the researchers used the descriptive design of research to get the overall mean of the respondents when it comes to compensation and internal equity. To address the third and fourth question which is the relationship between compensation and employee performance and the relationship between internal equity and employee performance, the researcher used Pearson product-moment correlation coefficient.
To address the fifth question of the research, Anova was used to determine the significant difference in the employee performance based on the respondents’ characteristics: gender, age, and length of working.
4. Results
Level of Compensation
In this study, compensation was measured in terms of salary, wages and incentives. Table 1 displays the overall mean the compensation of ABC employees, (M = 3.168, SD = 0.3684), this has a scaled response of agree meaning high. This implies that the employees perceive that there is a high compensation in the organization, this means that they are highly compensated.
Extent of Internal Equity
Extend of internal equity on respondents. ABC employees have a high extent of internal equity (M = 3.096) as shown in Table 2. This implies that the employees perceive that there is a high internal equity which means that there is fairness standard that sets salaries according to an employee’s worth within the company.
Relationship between Compensation and Employee Performance
Is there a significant relationship between Compensation and employee performance? Table 3 shows that there is a significant relationship between Compensation and employee performance, (F = 0.395, p = 0.031. p < 0.05). At this point, we reject the null hypothesis that states that there is no significant relationship between compensation and employee performance. This finding implies that the performance of the employees is impacted by the compensation given to them by the organization.
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Table 1. Overall mean for compensation of the respondents.
Legend: 3.2 - 4.0 = very high, 2.4 - 3.2 = high, 1.6 - 2.4 = Low, 1.0 - 1.6 = very low.
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Table 2. Overall mean for internal equity of the respondents.
Legend: 3.2 - 4.0 = very high, 2.4 - 3.2 = high, 1.6 - 2.4 = Low, 1.0 - 1.6 = very low.
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Table 3. Relationship between compensation and employee performance of the respondents.
*. Correlation is significant at the 0.05 level (2-tailed).
Relationship between Internal Equity and Employee Performance
Is there a significant relationship between internal equity and employee performance? Table 4 demonstrates that there is a significant relationship between internal equity and employee performance, (F = 0.518. p = 0.003, p < 0.05). Based on the result reject the null hypothesis that states that there is no significant relationship between internal equity and employee performance. This finding implies that the performance of the employees is affected by the way the employees are treated and compensated equally.
Difference in Employee performance in Terms of Gender, Age and Length of Working
This question seeks to know if there is a significance difference between male and female when employee performance is considered. In Summary an independence-sample t-test was conducted to compare the employee performance score for male and female. There was no significance difference in scores for male and female. (T = 0.725, p = 0.475, two-tailed) as shown in Table 5. Based on the results of the study, we fail to reject the null hypothesis that states that there is no significant difference between gender and employee performance. Decision: since p = 0.475 > 0.05 the study failed to reject the null hypothesis that states that there is no significant difference in employee performance when gender is considered.
This question seeks to know if there is a significant difference between the ages of the respondents when employee performance is considered. In Summary an ANOVA was conducted to compare the employee performance score for ages of the respondents. There was no significance (F = 0.386, p = 0.816, two-tailed) as displayed in Table 6. Based on the results of the study, the null hypothesis, that states that there is no significant difference between Ages and work performance was no rejected. Decision: since p = 0.816 > 0.05 the decision is failed to Reject the null hypothesis that there is no significant difference in employee performance when age is put in consideration.
This question seeks to know if there is a significant difference between length of working of the respondents when employee performance is considered. In Summary an ANOVA was conducted to compare the employee performance score when length of working of the respondents. There was no significance in score for length of working (F = 1.167, p = 0.355, two-tailed) as shown in Table 7. Based on the results of the study, the null hypothesis, that states that there is no significant difference between when length of teaching and work performance was no rejected. Decision: since p = 0.355 > 0.05 the decision is failed to Reject. The null hypothesis is that there is no significant difference in employee performance when length of working is put in consideration.
5. Discussion
In this study, the researcher examined the impact of compensation and internal equity on employee performance of ABC employees. The finding shows the high level of compensation of the ABC employees, this finding supports the study of Hameed, Ramzan, Zubair, Ghazanfar, Arslan (2014) , which states the high level of compensation of employees. This simply means that the employees are well
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Table 4. Relationship between internal equity and employee performance of the respondents.
**. Correlation is significant at the 0.01 level (2-tailed).
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Table 5. Difference in employee performance of the respondents in terms of gender.
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Table 6. Difference in employee performance of the respondents in terms of age.
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Table 7. Difference in employee performance of the respondents in terms of length of working.
compensated. In consideration of internal equity, the overall mean of ABC employees is high, this is the same result of the study done by Mohammed (2017) , which mentions a high level of internal equity of the employee of Bauchi state University Nigeria. According to Zayed, Rashid, Darwish, Faisal-E-Alam, Nitsenko, and Islam (2022) , a professor at the MIT indicated in his study that an employee who is satisfied with his compensation is more productive and motivated, although compensation is not the only factor.
The present study determined the relationship between compensation and employee performance, and the result indicates that there is significant relationship between compensation and employee performance (F = 0.395, p = 0.035, p < 0.05). However, in the study done by Juwita (2016) , there is a low relationship between compensation and employee performance indicates by the value of R = 0.145, the result also shows that the contribution of compensation towards employee performance is 2.1% meaning it is insignificant.
This study also determined the relationship between internal equity and employee performance and the findings shows that there is a significant relationship between internal equity and employee performance, (F = 0.518. p = 0.003, p < 0.05). This result is in support of the study of El Sheikh Taha (2021) internal equity has a positive impact on employee performance. Based on Adams’ theory of equity asserts that employees strive for equity among themselves and other workers. Equity is realised when the ratio of employee outcomes over inputs is equal to another employee outcomes over inputs (Adams, 1963) .
Male or female, they both have the roles to play in the organization in order to contributes to the organization is goals and objectives. With regards to the gender of the employee of ABC automotive corporative, the present study has proved that there is no relationship when gender and employee performance is considered.
K’obonyo (2017) , stated that the age of an employee is moderate by employee competence. In the current study, the finding found out that there is no relationship between age and employee performance. This signifies that the age of the employee can not affect his or her performance.
Limitations
The major limitation of this study is that it only covers the employees of ABC automative corporative, who have been working in the company for more than a year. Another limitation is that it includes three variables under compensation due to limited time.
The researcher was faced with some problems in the course of carrying out the study. The first problem encountered was the acceptance of the manager to conduct the study in the organization and distribute the survey questionnaires to its employees. Second was the time factor the research carried out with the academic works and other day-to-day tasks.
The researchers used a small sample size due to time and the current situation which is lockdown because of covid-19.
6. Conclusion and Recommendations
The purpose of this study is to establish the relationship between compensation and employee performance and also the relationship between internal equity and employee performance of employees of ABC automotive corporative automotive. The study also aims to assess the employee performance based on the selected characteristics of employees of (gender, age, length of working). The researcher found out that there is unequal distribution in terms of respondents. More females participated in this study than males. This means that the company has more female employees than male employees. When considering the age of employees, more of them are under the range age of 25 - 33. And few are under the age of 33 - 40 and 40 - 50. In regards to the length of working at the organization, more employees have been working for 5 years and above. In general, employees of ABC automotive reported high compensation with high internal equity. The finding also revealed that there is a significant relationship between compensation and employee performance. This means that the compensation which employees receive has an impact on their performance. The study also found out that there is a significant relationship between internal equity and employee performance when employees are paid fairly and equally. It does play a role in their performance. When gender is considered, either an employee is a male or female, there is no impact in their performance, if an employee is a male or female, this one can still perform well despite his/her age; same thing with age, and length of working. An employee if age and length of working in the organization, does not determine his/her performance.
The research recommends the following: The organization must keep on paying a high compensation to its employees, and also pay them equally because failure to do so may have an impact on the employee performance. For future studies, the use of different moderators and other variables may be considered to examine what can impact the employee performance. In addition, other factors such as specific department of employees, roles/tasks of the employees and variables such as motivation, job description, managers’ behavior toward employees can affect the performance of the employees.