CHAPTER ONE

Introduction
Organizational Compensation system has been practiced by numerous organizations since
centuries. It is one of the most important requirements for successful business and human
resource policy of the organization. As employees are one of the most important assets of the
organization, the practice of valuable organizational compensation system is an inherent as well
as inseparable part of the organizations life.
In an organizational context, all attempts of administrators are supposed to increase the
employees’ drive to perform at higher level. Performance of course results from interaction of
physical, financial and human resources. The first two are inanimate. They are translated in to
productivity only when the human element is introduced in to work place with certain qualities
that lead for effective organizational compensation administration.
Thus, designing effective organizational compensation system helps the company to obtain well
capable, skilled, competent as well as motivated employees. It also helps the organization to
retain these employees in attaining strategic as well as shorter term objectives. However,
unfavorable organizational compensation system can bring many problems for the company
including employee’s low morale, decreased company as well as employee productivity, a
lessening of employee enthusiasm and less support for the organization (Neo, 1990).
In general, having satisfied work force leads for higher productivity, for instance it leads for:
 maintaining high employee’s effort that initiate, motivate, as well as energize
competent and able individuals in using their potential to work better for the
accomplishment of organizational goals.
 delivering higher quality of goods and services with high performance as well as
innovative features that can bring a competitive advantage.
 creating higher customer satisfaction that makes them to feel pleasure resulting from
comparing perceived performance of goods or services with expectation.
 more repeat business in which satisfied customers make purchase from the same
company of either the same or other products as well as announce the good will of the
company through word of mouse communication to others.
 higher growth and profits by developing new products as well as markets with
increasing earning capability of the organization.
 higher stock holder satisfaction by sustaining profitability or maintaining social welfare
in achieving organizational objectives.
 more investment by establishing different ventures in expanding the capacity of the
organization with utilizing the existing profitability.
1.3. Background of the Study
People often join organizations in order to secure compensations as a result of their active
participation in achieving objectives under taken by the organization. Organizational
compensation system consists of compensations ranging from direct and indirect financial
compensations to complex non-financial including psychological (intrinsic) compensations
enjoyed by employees as a result of their involvement in the activities of a particular
organization (Robbins, 1989). In this modern world, people often joined organizations in
pursuit of compensations that satisfy their needs. The organizational compensation system is
the most effective motivation related tool at the organizations disposal. It has a significant
impact on the job satisfaction and employee motivation. Organizational compensation system
affects job satisfaction by making the employee more comfortable. It influences employee
motivation primary through the perceived value of the organizational compensations including
their contingency on performance.
Organizational compensation covers both financial and non-financial compensations that are
incorporated with different categories such as direct and indirect organizational financial
compensations, fringe benefits, the work environment, job context, harmony of relationship as
well as the behavior of administrative strategy. Thus, in addition to direct organizational
material incentives human beings need to secure other organizational compensations that
cannot be tangibly expressed in terms of pay or other material compensations. This may be
why Armstrong (2007), argues that organizational compensation system must incorporate all
compensations that range from simple extrinsic to complex intrinsic compensations.
Therefore, proper recognition and selection of organizational compensations to be offered are
critical for the system to function effectively. Organizations must recognize what employees
perceive as meaningful organizational compensations. Since employees are stakeholders in the
organization, their needs should be addressed to meet the needs of both the organization and
its stakeholders. The overall objective is to compensation people fairly, equitably, and
consistently in accordance with their value to the organization in order to further achievement
of the organizations strategic goals (Armstrong, 2007).
Statement of the Problem
Management is a problem-solving process to achieve organizational objective through efficient
use of physical, financial and human resources in changing environment. In this regard the
organization needs to have employees who are competent and productive to the organization
they are working for. To retain a satisfied work force that is productive to its organization the
management needs to focus on maintaining a suitable working condition.
Any organization whether it is profit or nonprofit define goals set to achieve and requires
resources to attain its goals. Resources may be composed of financial, material, human etc. to
achieve the desire goals; the human resource component is a primary and fundamental
resource to all organizations. Because employee’s of the organizations are a supreme factor
that critically involved in the operation of organizational activities. The other resources like
financial, material, information and time resources serve useful purposes only when employees
involved to the nobility of their profession and accompanying their responsibilities. Successful
and effective organization depends on the success and effectiveness of those who work in it.
Hence it should be noted here that the quality performance on organizations operation are to
be develop and maintained, careful attention should also be given to effective personnel
management of employees within the organization (Armstrong, 2007). Studies that have been
conducted on this topic indicates that the most common problems in organizations today that
they miss the important component of organization compensation system which is lack of
employee benefits, subjectivity of employee performance evaluation and inadequacy of
employee opportunities for further education that leads employees dissatisfied and limited the
productivity of the organization (Global journal of management and business research volume
11 issue 4 version 1.0 March 2011). Consequently, in bringing well qualified employees to
organizational operations, the need for having an effective both financial and non-
organizational compensation system for employees are crucial factors.
The study will attempt to the extent which the contemporary way of thinking on human
resource is not only employing staff, but also believes on serious considerations for employees
physical as well as psychological organizational compensation system so that organizational
goals can be achieved.

Research Questions
The study will aim for assessing the practices of both financial and non-financial organizational
compensations in xxxx. The study will Attempt answers to some of the underlying set of
research questions.
 What does the organizational financial compensation system look like?
 Do employees satisfy with organizational financial compensations?
 What does the organizational non-financial compensation system look like?
 Do employees satisfy with company’s non-financial compensations?
 Is there any significant difference on organizational compensation system between
managerial and non-managerial employees of the bank?
 Which components (financial and non-financial) of organizational compensations are
more satisfied to employees?
1.5. Objectives of the Study
5.1. General Objectives
The general objective of this study is to assess the state of organizational compensation system
in xxxxxx.
5.2. Specific Objectives:
More specifically this research will have the following objectives:
 To describe the organization’s financial compensation system
 To find out employees’ satisfaction of company’s financial compensation system
 To describe the organization’s non- financial compensation system
 To find out employees’ satisfaction of company’s non-financial compensation system
 To describe the differences between managerial and non-managerial employees on
satisfaction of organizational compensation system
 To compare financial and non-financial organizational compensations on satisfaction of
employees

3.10. Significance of the Study

This study will have practical significance with in the domain of xxxx in compensation
alternative approaches to alleviate the draw backs experienced in its organizational
compensation administration and the findings and recommendations of this study may serve as
reference to the management of the Bank. This report is also provides fresh reference on the
subject that others may use it in their research. It may also initiate others to carry out extensive
studies in organizational compensation systems and compensation administration of different
organizations.
3.11. Scope of the Study
The study is limited to the data obtained by using questionnaires in xxxx. Regardless of the
multifarious impacts of organizational compensation system and its various uses for under
taking administrative decisions the report is limited to practices of organizational compensation
system in xxxx ( Adama city). More over managers and professional employees were
participants of this study.
3.12. Limitations of the study
There will be uncontrollable variables that hinder the smooth implementation of the study. For
instance, lack of cooperation of respondents and their commitment to complete filling of the
questionnaires, lack of interviewees cooperation in devoting their time to provide a relevant
information to the researcher will seriously limited the outcome of the research.
METHODOLOGY OF THE STUDY
3.1 Organization Background
xxxx was established on February 15, 1996 with subscribed capital of birr 25 million, an
authorized capital of birr 50 million and paid capital of birr 25 million. The bank has since
registered tremendous growth. For instance, in june,2006 its total asset has reached birr 3.0
billion, where as its subscribed, authorized and paid up capital has gone up to birr 265 million,
530 million, and 265 million respectively. The bank now boasts 51 branches throughout the
country, 28 of them are in Addis Ababa and around 1734 employees throughout all branches.

Research Methodology
The researcher will use sequential mixed method that is design to start with quantitative data
from the employees and workers of the company then followed by qualitative data (interviews)
with the human resource manager of the organization in exploring its detail perception about
the practices of compensation system in xxxx .
Data Collection Procedure
The researcher will collect the data by distributing closed-ended questionnaires to the
employees that are selecting by purposive random sampling with human resource manager
that are selected purposively.

Types of Data
I. Primary Data: to collect primary data from the samples, closed-ended questionnaire will
design and distribute to the employees and workers to selected management bodies of the
xxxx.
II. Secondary Data: review of documents and records of the institution about its
employees, policies, procedures and performance will use to collect secondary data.
Sampling Strategy
The total population of the company are 230 among these 50 of them will select to conduct this
research by purposive random sampling which approximately 41% of the total population from
xxxx.

Data Analysis and Validation Procedures

The researcher will analyze according to the objectives of the study. The individual analyses of
each objective will be presented in the following section.
Demographic characteristics will summarize using frequencies and percentage for all variables
including age, sex, years in the organization, years on the current job or position and
educational level.
Percentages will use in analyzing data regarding the compensation system of the organization
and its major components.
The researcher will validate the study by making appropriate selection of samples and
appropriate designing of the sample size, making appropriate follow up on the procedures.