Academic journal article European Research Studies

Compensation, Employee Performance, and Mediating Role of Retention: A Study of Differential Semantic Scales

Academic journal article European Research Studies

Compensation, Employee Performance, and Mediating Role of Retention: A Study of Differential Semantic Scales

Article excerpt

1. Introduction

Compensation has a high effect on employee retention within a company because with satisfactory compensation, employees will feel that the company is caring about employee needs. Employee satisfaction will be shown by the stay of employees at the company or retention. The empirical literature has shown that the antecedent retention is compensation (Hong et al., 2012; Astuti, 2014). In addition, retention is also reported to have an impact on performance (Sumarni, 2011).

The results of these studies indicate that retention has a potential mediating variable in the effect of compensation on performance. Nevertheless, it has not been the attention of researchers compared to other variables (Dito & Lataruva, 2010; Kiswuryanto & Djastuti, 2014). The argument is supported by Maslow's motivational theory (1943) which in general considers that human needs are hierarchical from the most basic needs to self-actualization.

In this study, it is assumed that granting basic rights to employees such as salaries and the provision of health and safety facilities will encourage employees to remain stay in the company. This is because, employees can maximize the fulfillment of other needs such as social and appreciation to the level of self-actualization indicated by the improvement of employee performance. This study aims to examine the effect of compensation on performance. In addition, test the role of retention as mediation in the effect of compensation on performance, and to test self-efficacy as a moderator in the effect of retention on performance.

2. Employee Compensation and Performance

Compensation is all forms of financial return, services, and benefits received by workers as part of employment relationships (Milkovich et al., 2002). Compensation relates to the right that an employee receives from the sacrifices made to the organization. Murty and Hudiwinarsih (2012) argue that a motivated employee will be energetic and passionate about the tasks assigned by the company, and otherwise an employee with low motivation will often display discomfort and displeasure with his/her work resulting in their performance become bad and company goals will not be achieved.

Thus, it can be said that the management of good compensation will affect the performance of employees (Grabara, 2013). On the other hand, poor compensation management will result in demotivation that ultimately affects the declining performance of employees. The argument is based on Maslow's motivational theory (1943). Maslow's motivational theory generally explains that one's motivation for his needs is hierarchical and stratified. When the basic level of needs has been achieved, someone will go up to the next level, to the level that is the ultimate self-actualization. Compensation is assumed to be the company's efforts to meet the basic needs of its employees, such as salaries, health, safety facilities, etc. With the effort to meet these basic needs, it is expected to encourage employee motivation in terms of fulfillment needs at a higher level, such as social needs, rewards, and self-actualization. In this case, when these basic needs are met, it will encourage employees to further improve their performance. Based on these arguments can be indicated that the provision of compensation can affect employee performance. Hypothesis 1: Compensation positively affects on employee performance.

3. Compensation and Retention

Yensy (2010) revealed that well-managed or properly implemented compensation in the long run can be an effective tool for increasing employee morale. Hafanti (2015) states that there are ten forms of compensation for employees, namely salary, job bonus, holiday / pension allowance, family health insurance, employee involvement in insurance program, employee recreation program, awards for outstanding employees, and adequate leave periods. These forms of compensation are very concerned about things that are fundamental to the needs of employees. …

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