Reward Systems

Literature Review

This research paper seeks to investigate the relationship between incentives/rewards, in their different forms, and employee performance through the mediating role of job satisfaction. The focus of the research is on employees working in the Saudi Arabian industrial sector. Thus, it examines the literature of the three variables employed in this research: the independent variable (incentive systems), the mediating variable (employee job satisfaction), and the dependent variable (employee performance). Each main variable is defined, and relationships between the main variables are derived. Finally, based on these relationships, research hypotheses are developed and presented at the end of each subsection.

Incentives and Rewards and Employee Performance

Several studies have analyzed employee performance and the role incentives play in that dynamic relationship. Much of the previous research indicated that organizations rely heavily on reward systems to retain and encourage people and to achieve high levels of performance. However, diverse theories exist in the literature regarding these variables which have been constructively developed and empirically tested. For example, agency Theory is a crucial concept in this field. With regard to monetary incentives, one of the influential theories is performance-related pay (PRP) which is a tool designed to raise employee motivation and performance. Other additional main theories have contributed to the understanding of the relationship between incentives and motivation. One is Expectancy Theory, which is the most widely used analytical framework for determining whether a pay system influences motivation. It demonstrates how tying pay to individual performance might inspire employees to exert a high level of effort. This is however contingent upon meeting three conditions: the individual must feel that s/he can perform at the necessary level; that her/his performance will result in the intended outcomes; and that the reward has a positive worth. The other is the Reinforcement Theory which focuses on the relationship between the desired behavior (for example, performance) and the motivational tool (for example, pay for performance). According to this theory, a desired behavior can be promoted by using reinforcements such as rewards and incentives. Prior research utilizing reinforcement theory, conducted a reward–performance relationship and argued that the availability of rewards will affect a person's willingness to perform a task. The external environment must be designed positively to motivate employees and direct them to the desired behavior through positive enforcement.

However, the effect of financial incentives on the effort exerted by public managers and the ways in which different types of work motivation (i.e., intrinsic, extrinsic, and public service motivation) can moderate these effects. They showed that financial incentives have no significant effect on managers' efforts. Furthermore, the link between financial incentives and managers' effort, which was statistically insignificant overall, is negatively influenced by participants' intrinsic motivation, positively by extrinsic drive, and not influenced by public service motivation.

On the other hand, intrinsic rewards, moral incentives, have a positive and significant influence on the performance of the employee in an organization. Their results further indicate that extrinsic rewards such as pay, bonuses, promotion, and benefits have more effect on the job performance of an employee than moral incentives such as career development, responsibility, recognition, and learning opportunities. Incentives were found to be positively correlated with employee performance.

In today's business environment, which is characterized by volatility, a firm's success is determined by the capabilities of their management to reshape its business environment (freedom to perform independently), adopting bright approach of strategic capabilities and ultimately the potential success of an organization is dependent upon its organizational performance. Moreover, the rapid changes in business environment in terms of technology, consumers' behavior and market requirements require quick response, high productivity from employees which can be altered to discovering new opportunities in order achieve organizational performance. In this context, the concept of employees' performance defines the idea of the result, achieved the objective and the economic aspect of efficiency and effectiveness. In this regard, core competencies that refer to firm's distinctive resources and capabilities including employees Know-How capability are critical sources of sustained competitive advantage. Studies have proven that motivated employees perform their job more effectively as reflecting their work environment, rewards and incentives have a positive influence in performance. That is, maintaining highly skilled individuals who are motivated, hence rewarded, by professional human resources systems are a vital component in achieving superior performance. On other hand, weak system causing employees not finishing their tasks and job in an appropriate manner or required standard, this capability issue is outside the control of an employees. Recent studies indicated that employees who perceived compensation system are positively contributing to organizational performance and increasing their productivity. A study conducted in non-western context using a single industry indicated that incentives and rewards system have a positive impact on employees' performance.

Hypothesis (H1). Incentives and rewards have a positive influence on employee performance.

Incentives & Rewards and Job Satisfaction

Incentives are defined as the utilized tools by organization leadership to recognize and provide structured compensation for their respective teams. Incentives can be moral or financial and can be performance based, or time based. Flat bonuses (additional incentives) based on achievements are another type of incentive that is widely used in professional organizational settings.

The first type of incentive is monetary. Financial incentives, which are defined as tangibles which provide support in satisfying human needs, encourage employees to do their best, and increase the level of their competencies such as through prompt payment of salaries, bonuses, allowances, profit-sharing and one-time rewards. Financial incentives may take the form of a lump sum payment, monthly installments, or any other form of compensation that generates more revenue for employees, such as bonuses. Financial incentives are distinguished by their rapid and immediate effect, which gives employees direct feedback on their efforts and performance. A contrary perspective on financial incentives is that they may not be applicable to a variety of professional, service-based tasks that are not quantifiable in terms of output but rather on the basis of services such as library services, supervision, security, and scientific research.

The second type of incentive is non-financial, moral incentives. A moral incentive is defined as a collection of motivations aimed at achieving emotional and psychological balance and meeting the humanitarian needs of employees through proper treatment and resolution of issues that may cause complaints, the application of reward and punishment rules, the provision of systemic and entertainment services to employees, and spiritual enhancement in the workplace. This form of incentive creates a favorable emotional response from employees and serves to push them to continue improving as well as making necessary behavioral modifications. Moral motivation may influence an employee's behavior if the employee has been educated to believe that doing so is the right, decent, or admirable thing to do. Moral incentives are related to psychological requirements; interest in this area has grown with the emergence of human relations theories. These intangible benefits are contingent upon companies respecting their employees' feelings, dreams, and aspirations. Moral incentives may take the form of participatory decision-making, recognition awards, training and development, and celebrations for notable personnel, among other things. Additionally, they could take the form of a letter of appreciation to an employee or designating them as an honorary employee in the company. Increasing an employee's satisfaction and loyalty to their work results in increased cooperation with their colleagues, which includes the opportunity for promotion, recognition and appreciation of job efforts, taking on a position, career impact, participation in decision-making, opportunities for growth and innovation, and the freedom to articulate their opinion.

It is argued that moral motivations are just as essential to job satisfaction as financial motivations. Moral incentives consequently elevate the spirit of individuals through job enrichment, vacations, health insurance, appropriate post, nature of supervision, sense of belonging, stability, job security, participation in decision-making, promotion, trust in the firm's objectives, system proposals, inclusion in a panel of honor, social harmony, literarily and morally differentiating.

Many studies have examined the relationship between job satisfaction and incentives and rewards in a variety of contexts. The main finding of their study is that intrinsic rewards have a positive and significant impact on employees' job satisfaction. For example, studies found that intrinsic motivation and appreciation, moral incentives, play a vital role in the satisfaction of employees rather than financial incentives. However, those intrinsic rewards and moral incentives, have a positive and significant influence on the performance of the employee in an organization. Their results further indicate that moral incentives such as career development, responsibility, recognition, and learning opportunities have less effect on the job performance of an employee than extrinsic rewards such as pay, bonuses, promotion, and benefits. Employees prefer to receive immediate monetary benefits than recognition of their work. To examine this relationship in the Saudi industrial sectors, the researchers developed the following hypothesis:

Hypothesis (H2a). Incentives and rewards have a positive influence on job satisfaction.

Job Satisfaction and Employee Performance

Job satisfaction is an important quality in the labor market and is a useful collective indicator of efficiency in the workplace. Hoppock first proposed the concept of job satisfaction in his book titled 'Job Satisfaction' in 1935. He established that job satisfaction is a combination of psychological, physiological, and environmental factors that makes a person arrive at the conclusion that they are happy in their job. He considered job satisfaction to be the worker's mental and physical feelings of contentment with their circumstances, that is to say, the objective reaction of the worker to the work situation, and this subjective reaction is a consequence of interpreting the operating characteristics based on his or her reference system. Incentives and rewards are considered the most important determents of job satisfaction, because its link with a wide-range of organizational outcomes including performance.

The literature on job satisfaction and its expected outcomes is widespread. It has been found that job satisfaction has a beneficial effect on performance, as it enhances efforts by minimizing employees' shirking and wasteful job tasks. Additionally, job satisfaction is positively correlated with performance. Job satisfaction is related to people's views toward their work; positive attitudes toward work increase job satisfaction, whilst negative attitudes decrease it. The concept of job satisfaction may be understood in two ways: through the lens of facet satisfaction and overall satisfaction. Facet or factor satisfaction can be derived from a range of employment characteristics (e.g., compensation, supervisors, or work challenges), while overall satisfaction can be derived from an individual's internal state. Working with friendly coworkers, receiving generous compensation, and having forgiving managers all contribute to the formation of a positive internal state. It has been indicated that intrinsic motivators connected to job content, such as Hackman and Oldham's job characteristics model, are critical for job satisfaction development. Moreover, Economic Theory demonstrates that salary, working hours, and work patterns all have a significant impact on job satisfaction.

A plethora of researchers cite factors as causes of job satisfaction in their work. Job satisfaction has several components such as satisfaction with work, pay, supervision, quality of work life, participation, organizational commitment, and organizational climate. Despite the popular belief amongst researchers that these facets are correlated, the fact remains that each of these facets can be thought of as an independent construct. Satisfaction with one facet does not guarantee satisfaction with all other satisfaction facets. Despite this independence, a relationship between demographic variables with diverse satisfaction facets has been found in a number of studies. Demographic factors such as age, education, tenure, and experience have a significant influence on job satisfaction, making demographics an important consideration when evaluating satisfaction.

In a study, the majority of respondents believe compensation to be the most important factor of job satisfaction. Numerous other studies including show a strong correlation between salary level and job satisfaction, despite the fact that these research were mainly conducted in the hospitality industry. Through mixed methods approach, indicate that pay has a significant impact on job attitudes and satisfaction in Hong Kong. Gallardo, R.Y.; Carmona, M.A.; Novales, M.R. evaluate 2524 valid questionnaire responses from Spain and Portugal and conclude that compensation is a highly significant predictor of job satisfaction in both countries. Esen et al. examine a variety of job satisfaction dimensions and sub-variables. Their model includes prospects for job advancement, benefits, the ability to balance personal and professional life, and well-being.

Most of the existing research concentrates on the relationship between job satisfaction and employee performance with their results demonstrating that job satisfaction has a large positive relationship with contextual performance, supporting individuals in promoting their performance. Other researches provide a mixed bag of results, namely, both negative and positive associations between these two factors. According to a study conducted by Sousa-Poza, workforce performance increased because of increased job satisfaction practically in women, employees' satisfaction has a positive influence on performance and employees' well-being among frontline staff, it results in increasing productivity, organizational responsibility, and physical and mental health, all of which contribute to increase employees' performance and overall organizational success. Another study examined the relationship between individual characteristics and frontline staff performance and job satisfaction and reveals that these two variables have a favorable correlation. The relationship between employees' job satisfaction and customer-oriented behavior has been examined. These studies report that employee job satisfaction has a significant effect on employee customer-oriented behavior (job performance).

On the other hand, a relationship exists between specific job features, sociodemographic parameters, and employee job performance and there is insignificant effect of job satisfaction on employees' performance. Researchers report that there is less evidence of a strong association between satisfaction and output.

Despite the findings from these studies, the majority of researchers support the premise that satisfaction results in employee performance and confirm that job satisfaction has a positive effect on performance and substantiate the claim that understanding how to improve employee satisfaction is just as critical for an organization as understanding how to improve employee performance. Therefore, the proposed hypothesis is:

Hypothesis (H2b). Employee's job satisfaction has a positive influence on employee's performance.

Employee Performance

Employee performance is catalyzed by the type of reward system in place within organizations. A study proposes that employee performance is a measure of an employee's financial or other outcomes that is directly related to the organization's success and achievement. Employee performance is defined in an organizational setting as the extent to which an organizational member contributes to the achievement of the organization's goals. Organizations that do not have an effective incentives and rewards system will be faced with challenges such as low staff morale, ineffective employee performance, or a high employee turnover rate. Organizations can assess employee performance by analyzing the quantity and quality of output, as well as the timeliness and productivity of work. Employees' level of motivation, behaviors, and attitudes toward their organization are factors that influence their perception about the organization, as such, their actions are critical to the society, management and overall organizational success. That is, employees' actions and behavior have an effect on the organization's reputation. Successful supervision, training & development, and empowerment of employees are critical components of an organization's performance, Consequently, the employee's results can be quantified using indicators that describe their performance pattern over time.

One way that employee performance can be measured is by productivity, which is defined as the duration over which goods or services can be produced. It can also be quantified; in which case it is treated as a variable. Employees' productivity is a measure of an organization's overall success in employing its labor, equipment, and capital to convert employees' efforts into usable output. It has been proven that the contextual performance and task performance behavior referring to job description independently contribute to an organization's performance as a whole, affecting employees' rewards over the time. Performance has a critical input in the incentives and rewards system, because when employees perform at a high level, they expect adequate payment in return. If employees are unable to accomplish their goals and exhibit poor performance within an organization, and at the same time are not incentivized to perform, they will experience dissatisfaction.

Previous research have indicated a positive influence of incentives and rewards on performance. Thus, the rewards system performs a motivational role in increasing productivity and employees' job performance in order to achieve organizational goals. In the same line, a developed reward and incentives system is inevitable to be implemented for achieving job satisfaction and subsequently high performance.

Researchers, therefore, have directed the attention towards studying potential intervening variables to this relationship. Many factors could potentially add to the understanding of the relationship between incentives and performance. Such potential factors may include for example: motivation. Motivation as a mediating factor was examined and they found that employee's motivation significantly mediates the association between intrinsic rewards and the employees' performance. Several researchers advocated the impact of rewards on job performance through the employees' behavior such as job satisfaction. For instance, Kumari, K.; Barkat Ali, S.; Abbas, J. examined the mediating effect of job satisfaction between motivation, rewards, and job performance. Their findings indicate that the relationship between rewards, motivation, and employees' job performance is more powerful through job satisfaction.

Hence, it can be predicted that the relationship between incentive and rewards system and employees' performance would be mediated through job satisfaction. Hence, this research aims to investigate the mediating role of job satisfaction on the relationship between incentives and rewards systems and employees' performance in Saudi Arabia. To facilitate this investigation, it was hypothesized:

Hypothesis (H3). Job satisfaction mediates the relationship between incentives/rewards systems and employee's performance.