The Impact of Compensation and Reward System on the Performance of the Nigerian Banking Industry
(A Case Study Of Some Selected Banks In Kebbi State)
This research work adopts a cross-sectional survey method to investigate the impact of compensation and reward systems on the performance of a bank organization. Primary data were collected through the instruments of questionnaires and interviews. Structured questionnaires were designed to collect data from randomly sampled respondents from 5 banks which form the sample for the study. The study thus adopted a simple random sampling technique to select 100 employees from 5 deposit money banks (DMBs) in Birnin Kebbi. Bank performance was the dependent variable, while other variables like wellbeing; compensation structure; staff promotion; incentive/ rewards were the independent variables for this investigation. Analytical techniques like Pearson correlation and regression analysis were applied to analyze the data collected for the study. The findings revealed that poor staff wellbeing in the banking industry is counter-productive to the banks. The finding also revealed that the present compensation system is detrimental to the bank’s‟ improved performance. It was found however, that staff promotion has a positive effect on bank performance. The finding also revealed that incentives/reward systems in the banks promote the improved performance of banks. It was also revealed that the BSC model adopted by some of the banks is inadequate. Based on the findings of this study, it was recommended that banks should evolve a compensation structure that is developed from a performance management model that is deeply dedicated to identifying and rewarding performance. The banks should redesign the BSC model to correct the inadequacies identified. There should be regular promotions as at when due to further encourage staff to put in the very bests to their jobs. Also, Banks should emphasize rewarding and encouraging peak performance.
1.1 Background to the study
Employee compensation and reward are synonymous with performance management. Performance management is usually a fundamental function of the Human capital management department in any organization. Human capital management is primarily concerned with managing the relationship between people and work. Armstrong (1992)
It is widely believed by scholars and practicing professionals that employee performance has implications on production capacity and service delivery. The output capacity of a firm is often assumed as its strength and one of its adaptations for survival in a competitive environment.
The compensation and Reward system is an important tool that management can use to motivate employees and alter their attitudes and make them enthusiastically strive towards the accomplishment of organizational goals. Motivation involves influencing an employee to willingly perform extraordinarily towards the accomplishment of predetermined goals. (Cole 1995). For an organization to meet its obligations to shareholders, the top management must develop a relationship between the organization and employees that will fulfill the continually changing needs of both parties. Employees expect their organization to provide fair pay, safe working conditions, fair treatment, recognition, and reward for exceptional performance.
Ordinarily, compensation and reward system should boost performance but may also hurt organizational performance when the compensation and reward system used within an organization in addition to its culture fails to recognize and reward performance but rather gives most of its attention to her bureaucratic staff grading system without doing everything possible to identify and retain staff on which it had an absolute cost advantage.
Organizations can hardly exist without a workforce. This workforce constitutes a large chunk of the total operating expenses of any organization. The larger the workforce the larger the associated cost of maintaining and retaining such a massive level of the workforce. Hence the need to prudently manage all processes that will keep staff costs at a minimal level.
When an organization operational policy fails to adequately take note of the inherent cost implication of staff on its balance sheet and also provide a vivid source of generating funds through its operations that will adequately mitigate the effect of identified staff costs on their balance sheet it is safe to assume that such organizations in a matter of time will run into financial crises emanating from the cost of keeping and retaining several unproductive staff. (Michael 2015).
The productivity level of a staff or workforce group could always be influenced by compensation structure. A compensation structure that is developed from a performance management model that is deeply dedicated to identifying and rewarding performance and subsequently at a reasonable level reprimanding poor performance could trigger an organizational culture that will encourage staff to put in their best as they see a clear relationship between performance and reward.
It is important to note that each compensation policy a firm decides to employ has related cost implications. Efficient consideration and management of cost implication of compensation policy are vital to the growth and survival of firms.
One of the problems identified in the Nigerian banking industry is the staff compensation policy used by banks to pay their staff. Some banks have adopted a model that ensures that each staff adds financial value to the organization by assigning varying degrees of business targets to staff according to their ranks, irrespective of their department. But it was observed that most banks, have not attached necessary targets to their non marketing staff and have in turn suffered high staff cost of retaining a large number of unproductive staff, thereby resulting in persistent loss-making by most branches.
The compensation and rewards system in banks is the interest of this research work as a major cause of the lingering poor performance of the Nigerian banking industry.
This research shall extensively investigate compensation and reward as the endpoint of performance management in consonance with the Balanced Scorecard performance measurement model.
1.2 Research Problem
The banking industry has for almost a decade now witnessed constant and persistent disengagements of staff, divestment of foreign subsidiaries, rationalization of branches due to flagrant loss-making, persistent loss of income to divisions, directorates, or even the bank at large, and several others are ominous signs connoting that the existence of banks in Nigeria is threatened.
It is observed that many banks have remained in an ailing condition despite the government’s relentless efforts to make banks in Nigeria very sound and stable.
Some specific problems identified in this research work include the following.
The banks have Poor Compensation Structure. The salaries of executives and senior staff members of the banks are too large for the present income generated by banks to sustain and usually, their salaries are not tied to direct performance target targets some banks any targets are assigned to such outrageous salaries. The aggregate of these salaries engulfs most income made by the banks as the task of this group of staff does not add any form of financial value that is commensurate to their pay. They are rated by group performances rather than by individual performance contributions. The present compensation model in use in banks is toxic to the health of the bank. There is a need for senior staff pay cut or assignment of business targets that will at least justify their monthly salaries, or even implement the duo to revert the present status.
Another problem is the lack of an effective performance Management Model. At this point in the banking industry where every kobo is important, it is apparent that banks need to operate a performance model that will energize the staff to work very hard to get businesses for the banks. But it is observed that most banks lack effective staff performance monitoring and measurement system-a performance measurement system which is unbiased i.e that gives more to where income is coming from. The systems in operation in various banks reveal that laggards take the lion’s share of income as salaries. This research has identified the shortcomings of the present compensation model as a model that allow laggards to grow to sensitive positions that require prudent skills and attitude. It is also not cost-effective and cost-efficient as people get paid without having to personally contribute financially to the company’s income through meeting business targets. Furthermore, it was observed that the present model affects the promotion of staff. Staff is not promoted as at when due, as there are no adequate funds to meet up with cost implications of staff promotion. Finally, it is safe to assume that the present model is biased as it gives many havens to unproductive workers.
Poor staff retention and succession management plan is another serious problem that was identified. An assessment of the banks showed that they hired most of their top managers rather than growing them from within the system over time. Any serious organization grows its managers from the within-such organization has no entry-level point i.e any staff that shall man their management level desk must have grown through the organization and can never be hired from outside. Staff retention is achieved through an effective talent management system that identifies and sieves performers from laggards and tries to develop these star performers to grow and occupy strategic positions within the organizations.
Unfair labor practice also constitutes part of the problems facing banks. Within the Nigerian banking industry workers are perpetually denied their right to membership of trade unions or workers committees as specified by the part II of the International Labour Act(2006). Violation of workers’ right to association and prohibition of formation of workers union is a deliberate attempt of banks to continuously exploit their staff. One of the fundamental goals of workers union is to protect workers‟ rights at work and also bargain for better conditions of service. Unfair employee compensation may also be tantamount to unfair labor practice (ULP) which is any failure to act, or unfair act of an employer towards a worker concerning promotion, demotion, trial periods, training or benefits; suspending a worker or disciplinary action; refusing to re-employ a worker as agreed; and may also occur when an employer makes circumstances difficult for a worker who was forced to make a protected disclosure, (Rycroft, 2009). ULP has been known to be a major catalyst for the development of a demoralized workforce who in turn directly and actively militates against the achievement of predetermined goals.
Denial of staff promotion was prevalent among many banks due to the present ailing condition of the banks. The staff has suffered a high degree of denial of earned promotions. Unfortunately, staff promotions were based on years of service rather than a combined approach of service year and individual staff contribution in terms of financial value-added, and so, performing staff are not adequately recognized.
Stagnated wage levels for the support staff that constituted over 60% of the workforce in banks is another monumental element affecting the performance of this group of staff within the banking industry. This is a regressive wage system intentionally targeted at the support staff group within the banking industry. The stagnated wage system provides a meager amount as a monthly salary and does not attach any value to employee number of service years, additional qualifications, and employee performance. It is a demeaning wage system that lacks respect for workers’ dignity and right to the good life because it allows workers to spend their productive and energetic period of life receiving and living on a meager salary as their total monthly emolument. This practice has been observed to be repugnant to natural justice, equity, a good conscience, and fairness. It adds to the woes of the poor. The continuing stagnation of the income levels for support staff has put the larger workforce within the banking industry at the most disadvantaged position in terms of attainment of a more humane condition of living.
Outsourcing is a major trend in the banking industry. Outsourcing is the practice of sending certain job functions outside a company instead of handling them in-house to gain a cost advantage. But this has been abused in the Nigerian banking industry and many other companies as a way to grow by using it to restrain staff cost by putting some of its workers on the outsourced payroll, which offers a static wage system. Outsourcing if well practiced should not ordinarily mean the flagrant and intentional violation of workers’‟ rights to dignity and good life. This research work views the current practice in the Nigerian banking industry as tantamount to civilized slavery where the might of a productive worker is priced for a plate of meal. Most workers within this category suffer degradation, lack of recognition, pain, harassment, housing hardship, etc. They are exposed to varying degrees of needs problems as enumerated in the work of Abraham Maslow Hierarchy of needs.
This research work shall therefore address these identified problems as related to compensation and reward systems in Nigerian banks to arrest the lingering poor performance of the Nigerian banking industry.
1.3 Research Question
Following the above, therefore, the following research questions shall guide the investigation.
i. What is the relationship between workers’ wellbeing at work and employees’ productivity?
ii. What is the impact of the present compensation system on the bank’s performance?
iii. To what extent does staff promotion affect workers’ productivity?
iv. What is the relationship between incentives, rewards, and the performance of the organization?
1.4 Objective of Study
This research work aims to investigate the impact of compensation and reward systems on the performance of the Nigerian banking industry. It is assumed as one of the reasons for the persistent decline in the performance of banks and why the ailing conditions of banks have lingered. The specific objectives of this research work include the following:
i. To examine the relationship between workers‟ well-being at work and their productivity.
ii. To establish the relationship between compensation structure and productivity.
iii. To investigate the relationship between promotion and productivity
iv. To investigate the relationship between incentives, reward, and performance of the organization.
1.5 Statement of Hypothesis
To achieve the objective of this research work, the following hypotheses shall be tested. The hypotheses are stated in Null form and shall be tested to either confirm or reject the Null hypothesis as the case may be.
H1 – There is no significant relationship between workers’ wellbeing and their productivity.
H2 – There is no significant relationship between compensation structure and productivity.
H3 – There is no significant relationship between promotion and productivity.
H4 – There is no significant relationship between incentive, reward, and organizational performance.
1.6 Significance of the study
This study shall demonstrate the imperative of appropriate compensation and reward system as a panacea to the persistent decline in the performance of banks in Nigeria.
This study shall also improve managerial understanding of the impact of performance measurement on organizational performance and overall healthiness, dwelling richly on the experiences within the Nigerian banking industry.
The study results will enable the management to establish the effects of human resource management strategies on employees ‟s performance, hence identifying the areas where improvements are needed. It will also help the management in planning for the development and implementation of effective and efficient human resource strategies that will lead to improved performance of the banks. This will in turn help in ensuring the economic growth and stability of the country. Other researchers who may need a reference to information on the role of compensation strategies on employees‟ performance will also benefit by being able to assess previous approaches used to solve similar management questions and revitalize their compensation models. In addition, they will be able to spot flaws in the logic, errors in assumptions, or even management questions that are not adequately addressed by the objectives and designs of the current performance management technique in use in their organizations.
A compensation model that will considerably improve the employee‟s performance in the Nigerian banking industry will also be developed. If the same is employed, it will trigger a revolution in the performance of staff and the organization as a whole.
This study re-amplifies the balanced scorecard model and reflects it in a way that will address the challenges currently facing the banking industry in terms of staff cost and present economic recession.
1.7 Scope of Study
This study shall investigate the compensation and reward system in some selected banks in Birnin Kebbi, Kebbi State. The name of selected banks will not be disclosed for anonymity and due to the sensitivity of the subject matter of investigation, as utmost disclosure of the findings on selected banks will be disclosed without prejudice. 5 banks in Kebbi state were randomly selected and covered in this investigation.
It focused on compensation and reward system as one of the internal factors affecting the performance of banks, with emphasis on the monumental erroneous use and application of the balanced scorecard model (BSC Model) as one of the factors that have actively contributed to the persistent failure of banks in Nigeria.
The researcher distributed questionnaires as well carried out a few interviews with the respondents among the sampled banks.
1.8 Limitation of the study
One of the major constraints of this research was finance. The researcher incurred a huge cost to finance the cost of carrying out the research work all over the banks covered.
Another limitation was the oath of secrecy signed by the bank’s staff, which has made it difficult for staff to make adequate disclosures. Some of them were also reluctant to collect the questionnaires.
The oath of secrecy almost frustrated this research work, as the employees refused to collect the questionnaires. But after pleading with the branch manager, they ended up collecting them and giving back their responses under the condition of anonymity as the questionnaires were designed in a way that does not require the respondent to identify him/herself. So responses offered were anonymous.
Despite all the seeming challenges, however, the research was still able to overcome them and meet up to the required standard. The impediments were also mitigated by researching within Kebbi State alone.
1.9 Definition of terms
COMPENSATION: Compensation is the act of compensating or the state of being compensated with something such as money, given or received as payment or reparation for a service or loss.
PAY STRUCTURE: It consists of the various salary grades and their different levels of single jobs or groups of jobs.
PERFORMANCE: It is a process of collecting, analyzing, and reporting information regarding individuals or groups, or organization. It depicts the extent to which an employee achieves work targets assigned to him.
EMPLOYEE: An individual, who works part-time or full time under a contract of employment, whether oral, written express, or implied.
EMPLOYER: A Legal entity that controls and directs a servant or worker under an express or implied contract of employment and pays him wages or salary as compensation.
MANPOWER: Power in terms of people available or required for work.
EMPLOYEE WELLBEING: This refers to the physical, moral, psychological, social, economic, and mental health of a worker at work
INCENTIVE: This is a form of payment made more than the normal pay to employees to stimulate, motivate or encourage performance.
WAGES: These are the payment made to manual workers
SALARY: This is a fixed periodical payment to a non-manual employee.
KEY PERFORMANCE INDICATOR (KPI’s): are performance measures that indicate progress towards a desirable outcome.
STAFF COST: are costs associated with recruitment, maintenance, and retention of staff within an organization.
OUTSOURCING: Outsourcing is the practice of sending certain job functions outside a company instead of handling them in-house, to gain a cost advantage.
UNFAIR LABOUR PRACTICE(ULP): Unfair labor practice means any failure to act or unfair act of an employer towards a worker concerning, promotion, demotion, trial periods, training or benefits; suspending a worker or disciplinary action; refusing to re-employ a worker, as agreed; and may also occur when an employer makes circumstances difficult for a worker who was forced to make a protected disclosure.
SCORECARD: a statement showing a comparison of employee actual performance against set assigned targets to determine the degree to which an employee has met his target.
BANKING INDUSTRY: Comprises of all the banks operating in Nigeria the Nigerian banking industry currently consists of 19 commercial banks, a regional commercial bank, and one non-interest bank.
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