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 framework

Figure 1.1 showing conceptual framework

Remuneration
strategies
- Base pay
- Bonuses
- Monthly Human Effective
allowances resource employee
- Staff welfare management performance
schemes

Input (independent variables) Process Output (dependent variable)

Source; Research study, (2010)

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 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

Population Sample Sample

Department
Size proportion 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

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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 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?
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
________________________________________________

Page 34 of 36
 APPENDIX II – WORK PLAN

Activity Oct 1 – Dec Jan Feb March

Nov 30
Proposal
writing and
questionnaire
design
Data Collection

Data analysis

Report
adjustment
Report Writing
& Compilation

APPENDIX III: RESEARCH BUDGET

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

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ACTIVITY Kenya Shillings
Typing, photocopying and binding (3 hard cover copies) 4,000.00
of the research report.
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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