The modern market place is competitive full of uncertainty and organizations must be competitive to survive. Equally, there is need for effective production methods and an efficient workforce. The efficiency of production methods are not only dependent on the production techniques and the machines, but are highly correlated to the type of workforce. However, the workforce can be highly productive if they are motivated and one of the techniques of motivating employing is the use of competitive compensation. Therefore, compensation is correlated to employee performance and has a huge influence on company performance.
According to (Hansen, Smith, & Hansen, 2002)employee compensation package includes the monetary and non-monetary packages. According to the author, the compensation package often consists of the base salary and benefits such as performance bonuses, insurance cover and retirement plans. These compensation packages have huge influence on the company cash flows, its ability to recruit and retain employees and its performance. The nature of compensation that companies offer to its employees affects its ability to attract top talent and the experienced employees with high performance in the market. Currently, most companies are listed in business magazines, highlighting the best and worst companies to work for. Among the ratings that are used to rank such companies are compensation packages.
The ability of a company to attract top employees improves their ability to compete in the market and thus influencing their performance. Having a well-compensated and competent workforce influences the company performance. A company, which can attract top talent owing to its competent compensation packages, is more likely to be more productive than the one with poorly compensated workforce, with average talents.
Compensation has a profound impact on employee motivation and job satisfaction. Although compensation is not the only factor that affects employee motivation, compensation packages such as bonuses and profit sharing schemes makes the employee feel motivated to help the organization to succeed. Since such compensation packages are tied on the productivity of the employees, they have huge impact on the company performance. The employees will work to increase performance and thus increase their compensation. Moreover, a substantial percentage of the company cash flows are used in the compensation of the employees, which influences the company cash flows. Higher compensation packages affects company cash flows, which ultimately influences company ability to meet its goals and thus affecting its performance.
The recruitment process is one of the most expensive processes for an organization to undertake. Although capital investments take huge investments, recruitment process can be an expensive undertaking for an organization, especially if there are high rates of employee turnover. When a company recruits employees, they have to train on how to perform the job tasks. The company expects the employee to repay them through job performance. However, if the company offers the employee lower compensation, such employee may seek employment opportunities in organizations that offer more competent compensation packages in the same industry. Such employee turnovers, if they occur frequently, are likely to cost the company substantial amount of money in training.
Moreover, high employee turnover spells a loss of experienced workforce, which may take time to replace. Therefore, high employee turnover due to poor compensation strategies have an impact on the company performance due to loss of experienced workforce, for which the company spent its resources in training. When a company loses an employee, they lose unique capabilities and possibly the customer contacts, which are hard to harness. Therefore, compensation affects company performance in many ways. Poor compensation strategies increases employee turnover, lowers employee motivation, resulting in poor job attitude and lower job motivation, which results in poor performance. In contrast, providing competitive compensation strategies increases job motivation, create job satisfaction and good attitudes, which increases the company performance.