CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY

One of the fundamental tasks in human resources management is compensation management. It is a complex task that occurs periodically, demand accuracy and must not be delayed. Compensation management requires integrating employees’ processes and information with business process and strategies to achieve optimal organizational goals and objectives. This can be attributed to the fact that compensation management is an essential tool to “integrate individual efforts with strategic business objectives by encouraging employees to do the right things with ever improving efficiency”. (ASH, 1993). In other words, compensation management is a powerful means of focusing attention within an organization. They send clear messages to all employees of the organization informing them about expected attitudes and behaviors (Schell and Solomon, 2007).

Furthermore, researchers have argued that compensation management system can create and sustain a competitive advantage for organizations (Milkovich and newsman, 2002). In recent years, the inclusion of non-financial measures has gained some popularity in compensation management, while some schools demonstrate positive effects of incorporating non- financial measures into the compensation management system empirically (Widmier, 2002). He further states that, human resources model of compensation generally assume that higher performance requires greater effort or that is in some other ways associated with disutility on the part of workers. In other to provide incentives, these models predict the existence of reward systems that structure compensation so that a worker expected utility increase with observed productivity. These reward can take many different forms including praise from suspensor and co-workers, implicit promise of future promotion opportunities, feelings of self esteem that comes from superiors achievement and recognition and current and future cash rewards related to performance.

Koln (2003), argues that failure of compensation system is due to inadequate assumption about human motivation, reason for this can be attributes rather to the measurement of employee satisfaction and employee loyalty to the organization. Hence, there is a strong need for the development of a holistic reward and performance measurement model enabling an organization to derive company specific success drivers and identify cause and effect relationship when linking rewards to measure such as employees satisfaction and loyalty. Thus, Dalton McFarland (2008), asserted that among the various devices for eliciting the loyalty, cooperation and effort of individuals are the various forms of economic rewards’

According to Ojo (2007) there are three components of employees compensation in an organization which are (i) the basic pay (ii) the fringe benefits and (iii) performance incentives or bonus. The basic pay is the basic wage in form of salary, fringe benefits are supplementary compensation awarded to employers over and above the basic wage or salary. Since the coming of the term “Fringe Benefits” during world war ii, the scope of employees benefits has widened markedly in both developed and developing countries. Such benefit covers a wide range of rewards which provides security, deferred remuneration and various services for employees.

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