Effects of Employee Rewards on Organisational Commitment

CHAPTER 1

INTRODUCTION

1.0 Overview

In any organization, employee’s rewards usually given to attract, motivate and retain the employees to stay longer and contribute a good quality services to ensure the successful of the organization; in other words, rewards play an important role in creating, building and maintaining the commitment among employees with the purpose to ensure high standard of performances and workforce stability. According to the individual – organizational exchange theme, individuals enter the organization with special qualification and skill, desire and goals, and expect in return a work setting where they can use their skill, satisfy their desire, and achieve their goals (Mottaz, 1988). At the minimum, employees expect their organization to provide fair pay, safe working condition, and fair treatment. (Beer, Spector, Lawrence, Mills, & Walton, 1984). It simply implies that employees offer or increase their commitment when organization meets employees’ expectation regarding fulfillment of their important needs. Thus, the exchange perspective explains organizational commitment as a function of work rewards and work values (Lambert, 2000; Mottazz, 1988), and suggests the importance of work rewards for continuously encouraging employees. According to exchange theory and reciprocity norm, employees repay the rewards received from organization through increase commitment to the organization, which re-enforce the exchange prevalent in the employee – employer relationship in a mutually beneficial manner (Blau, 1964; Haar and Spell, 2004).

In addition, Vroom, V.H (1964) maintained in his expectation theory that everyone works in expectation of some rewards in both spiritual and material. In the other words, the level of reward influences the quality and the quantity of work, and will response on their commitment to doing the job in the workplace.

Therefore, this paper will study the relationship between various type of rewards (extrinsic/intrinsic) received by the employees and the component of organizational commitment (affective, continuance and normative) focusing on hypermarket (retail industry) in Kota Kinabalu.

1.1 Research Problem

Over the last two decades, much research has explored issues related to effects of employee benefits or rewards at individual levels. On the whole, most studies explored the impact of employees benefits or reward on turnover intention, satisfaction, productivity, mobility, attraction, retention also motivation. Little is known about whether rewards or benefits have impact on organizational commitment, specially in hypermarket (retail industry) in Malaysia context.

Meyer and Smith (2000) had found out that despite the vast literature on job atttitue, the issue of commitment still remain ill-defined and ill-conceptualized. Reseachers argue these dissappointing reseach outcomes are due to a ‘lop-sided’ approach towards the study of commitment, which conceptualized as a uni-dimensional construct (Mowday et al., 1982) whereas commitment is actually found to be multidimensional construct comprising three components (Allen and Meyer, 1990). Thus, the relationship between rewards and commitment also required further attention because majority of studies have based their approach solely on the affective component of commitment, negleting the other two; continuance and normative (Dunham et al., 1994; Meyer and Smith, 2000). It is argue that reseach is required to explore further the entencedents, especially, with regard to normative and continuance commitment (Allen and Meyer, 1990; Dunham et al., 1994). Previous study by Neeru Molhotra at el (2007) tends to fill the gaps in the existing literature by doing the comparative effect of extrinsic and intrinsic rewards on the three components of commitment. However, as mention by reseachers, the possible differential antecedent of the three component model of commitment should continue to develop (Culpepper et al., 2004, Hacket et al., 1994; Meyer and Smith, 2000 ; Neeru Molhotra, Pawan Budhwar and Peter Prowse, 2007). Furthermore, it is essential for top management also to understand which rewards mean the most to which employees, given that the bases of thier commitment are distinct. Nevertheless, the great of the greater understanding of this organizational phonemenon increase daily. The major driving force behind this continue recognition of commitment in the management literature for more than three decades is that is often seen as the key of ‘business success’ (Benkhoff, 1997).

The retail industry has always suffered from high employee turnover rates. High employee turnover is costly to retailers not only because it increases administrative costs in recruiting and training employees but it also reduces the operational capability of the retailer. Good et al (1988) had noted that the retail industry has one of the highest turnover rates at 30 percent. Turnover rate among retail management trainees, the entry position for retailing graduates, had been especially high with one study reporting the employee turnover rate as high as 49 percent. Yet, as Akehurst et al (1995) had noted, despite the importance of personnel issues in the retail industry, retail employment is a comparatively under-researched area.

It had been suggested that high employee turnover in the retail industry is the result of the unique human resource environment in the retail industry. A career in the retail industry is not appealing to many workers. Coupled with the need to employ large numbers of workers in the industry, the retail industry is forced to employ large number of workers who are not motivated or interested to remain in the industry. This has resulted in high employee turnover rates in the industry. This statement was admitted by HR Manager of Giant and Servay Hypermarket, they’ve said that turn over rate in their hypermarket quite high where employees reported in and out monthly.

Meanwhile, these day one of the major problems by all companies is the lack of the total commitment from their employees. In Malaysia for example, it is comman complaint that employees are no more loyal as they used to be in the past. As a result of lower commitment, employees leave their companies for slighty higher pay. And to cope with this problem, they have to adopted many programmes and strategies, which tries to restore employee’s commitment.

Higher salaries can increase the attractiveness of a job, including in the retailing job (Swinyard et al 1991). To motivate employees, retailers should review their reward policies and ensure that they are still competitive (Levy et al 2001). Base on above analysis, this study tends to examine the relationship between various intrinsic and exrinsic rewards and three component of organization commitment, taking the multidimensional perspective of commitment in retail industry which is hypermarket in Kota Kinablu area.

1.2 Research Question

The study aims to understand the relationship between rewards and organizational commitment among workers in hypermarket (Kota Kinabalu). Accordingly, few main research questions are examined in the research;

1. Is there a significant relationship between extrinsic rewards (working condition, pay satisfaction, satisfaction with fringe benefits and promotional opportunities) and organizational commitment (affective, continuance and normative) among workers in hypermarket (Kota Kinabalu).
2. Is there a significant relationship between intrinsic rewards (supervision, training and feedback) and organizational commitment (affective, continuance and normative) among workers in hypermarket (Kota Kinabalu).

1.3 Research Objective

Based on the assumption that employees rewards tend to attract, retain, and motivate employee, which eventually increase employee commitment, the purpose of this study are;

1. To examine the relationship between extrinsic rewards (working condition, pay satisfaction, satisfaction with fringe benefits and promotional opportunities) and organizational commitment (affective, continuance and normative) among workers in hypermarket (Kota Kinabalu).
2. To examine the relationship between intrinsic rewards (supervision, training and feedback) and organizational commitment (affective, continuance and normative) among workers in hypermarket (Kota Kinabalu).

1.4 Scope Of The Study

The retail industry is used in this study to measure the relationship between rewards and organizational commitment in the industry. This is because; retail industry is the most important sector in terms of volume and value. Retail has been one of the most active sub-sectors in the Malaysian economy, also the second biggest contributor to the national GDP, contributing RM31,081 million (AUD14,603 million) in 2000 (Eighth Malaysia Plan, 2001). Based on Euromonitor‘s Retailing Report in Malaysia (2008), four main retail formats are hypermarket, supermarket, convenience store, and traditional grocery store; however, this study will only focus on one of retail format which is Hypermarket.

The study was conducted in the Kota Kinabalu area using non probability and convenience sampling. Kota Kinabalu was chosen due to the number and large variety of choice of formats available and also its highly dense population in Sabah.

1.4.1 Retail Industry in Malaysia

The rapid expansion of the Malaysian economy over the last few decades, combined with external and social influences has led to a boom in the retail industry. Consequently, the retail industry in Malaysia is highly fragmented, as there are a lot of retailers entering the competitive market each year.

Retail in Malaysia is wide-ranging; from department stores, hypermarket, supermarkets and mini markets, specialty shops, convenience stores, provision stores, pharmacies, medical halls, direct sale, wet market stalls to pavement shops and petrol kiosks (Seventh Malaysia Plan, 1996). Such variety reflects the changing demands and expectations among consumers for better quality products and services.

The retail environment in Malaysia has undergone a continuous and marked change over the decades. New facilities ranging from supermarkets and superstores to retail warehouses and convenience stores have been added to the retail landscape, much at the expense of the traditional shop houses. The retail sector has been very active in the last few years due to the strong economic growth which had led to an increase in income levels and spending power. Furthermore, Malaysia has become a prime target for foreign investors like the Japanese, Americans and Europeans. Participation by foreign investors will support the industry by introducing future products for the higher quality of life as well as environmentally-friendly products.

1.4.2 Definition of Retail

Retailing refers to all activities directly related to the selling of small quantities of goods and services, at a profit, to the ultimate customers for personal consumption and non-business use (Mohd-Said, 1990). Guy (1980) for instance has categorized retail trade into three groups: (a) convenience goods which include groceries and daily provisions; (b) shopping or comparison goods which refer to relatively more expensive items bought at less regular intervals; and (c) specialty goods which are unique items that appeal to customers of the higher income level.

Goldman and Hino (2005) have divided the retail trade depending on size – large scale or small scale. The 13 small scale retailers are also referred to as the traditional retail store where they include the single propriety stores, wet market, and mini market. Whilst the large scale retailers, which are also known as the modern retailers include superstores, department stores, hypermarkets, and discount stores. Nevertheless, according to Miller and Layton (2000), many stores can still be grouped into the following retail types;

A department storecarries a wide variety of shopping and specialty goods, including apparel, cosmetics, house wares, and electronics products. Some departmental stores even attached a supermarket.

A superstore or hypermarketis a very large store that aims at meeting consumers‘total needs for routinely purchased food and non-food items. It carries personal care products, alcoholic beverages and tobacco products, stationary and sewing supplies, hardware items, garden products, some clothing some leisure-time products and offers household services such as dry cleaning, laundry and shoe repairs.

A discount storeis a retailer that competes on the basis of low price, high turnover and high volume.

Supermarketsare large, low cost, low margin, high volume, self-service stores that cater to serve the consumer‘s total needs for food and household products.

In Malaysia, the supervision of the wholesale and retail sector falls under the supervision of the Ministry of Domestic Trade and Consumer Affairs (MDTCA) through the Committee on Wholesale and Retail Trade. The Committee was set up in 1995 to regulate and supervise the industry, including foreign participation in the sector.

1.4.3 Hypermarkets

In Malaysia, the hypermarket has grown rapidly since the 1990s. The emergence of hypermarkets has altered the structure of the distributive trade in Malaysia to some extent. The existence of hypermarkets has allowed the consumers to do their shopping easily with less hassle as they can purchase the grocery products and mass merchandise under one-roof. A research carried out by Euromonitor (2008) revealed that hypermarkets recorded sales of RM6,217 million in 2007, which represents a 263.2 percent increase since 2002. Euromonitor has forecasted that the sales in hypermarkets will reach RM11,199.5 million by 2012. The success of the hypermarket chains is largely due to their low price, wide range of offerings, customer service and strategic location (Seiders and Tigert, 2000; Carpenter, 2008).

The hypermarket industry is dominated by the foreign retailers, namely, Carrefour, Giant, and Tesco. This is because multinational companies have a greater capability in terms of outlet expansion, development of private label products, and offer extensive ranges of products and value-added services. In 2007, the hypermarket market was led by Giant, followed by Carrefour and Tesco (Euromonitor, 2008). The dominance of Giant is largely due to the high number of outlets available in Malaysia.

Despite there being only a few key players, the hypermarket environment is highly competitive. This is because the retailers employ similar positioning strategy in order to attract more consumers. Most of the hypermarket operators compete on pricing and promotion to attract more customers. Some retailers even reduce prices permanently in order to attract more people to the stores. Major promotions and advertisements are some of the key growth strategies utilized

In the hypermarket segment, the main players are foreign owned retailers such as Carefour (France), Makro (Holland), Jaya Jusco (Japan), Tesco (United Kingdom) and Giant (Hong Kong) which account for 46 per cent of the hypermarket sector (Economic Report, 2005/2006). By 2005 there were around 400 foreign supermarkets and hypermarkets spread around the country including the sub-urban areas in Kuala Lumpur and Selangor, and other states such as Perak, Johor, Negeri Sembilan, Melaka, Kedah, Sabah and Sarawak. This retail segment was the best performers among the retail sub-sector with 18.3 per cent growth during first month of 2006 (Economic Report, 2006/2007).

This study was confined to the hypermarket in Kota Kinabalu area. According to Trading Licence Listing(Table 1.1) from Kota Kinabalu City Hall, there are only two hypermarket in Kota Kinabalu, namely Giant and Servey Hypermarket & Parkwell.

Giant Hypermarket, which is owned by Giant Capital Holdings (GCH), is one of the largest hypermarkets in Malaysia. It was founded in 1944 by the Teng family in Kuala Lumpur. It’s headquarter is based at Shah Alam, Selangor, meanwhile Sabah-Sarawak-Brunei Regional headquarter is located in Kolombong Outlet, Kota Kinabalu. Giant Hypermarket currently has around 1,000 employee in Sabah itself, and 10,000 employees in total nationwide. There are about 14 outlet store of Giant Hypermarket around Kota Kinabalu; 4 hypermarket, 7 supermarket and 3 superstore. However, this study will only focus in Giant Hypermarket which is located either in Kolombong, 1Borneo, Putatan and City Mall.

Furthermore, Servay & Parkwell are the homegrown Sabah & Sarawak proud success story, operating one of the leading hypermarket Sabah & Sarawak. It is formed in 1979 under Evergreen Trading (1979) Sdn Bhd. Under the group of companies, it encompasses 5 major subsidiaries companies label, they are the retail brands of:

1. Servay Hypermarket (Sabah) Sdn Bhd
2. Servay Supermarket Sdn Bhd
3. Servay Hypermarket (Sandakan) Sdn Bhd
4. Servay Jaya Superstore Sdn Bhd
5. Parkwell Departmental Stores Sdn Bhd

Currently, Servay Hypermarket has 10 store outlet around Sabah; 4 hypermarkets, 5 supermarkets and 1 departmental store. However, this study will only focus in Servay Hypermarket in Kota Kinabalu which is located either in Penampang, Putatan, KK Plaza and Likas.

1.5 Significance of the Study

This research will endeavor to make both a theoretical and practical contribution to the existing literature:-

1.5.1 Significance to Body of Knowledge

This study will contribute additional knowledge to the construct of organizational commitment in relation to extrinsic and intrinsic rewards. Thus far, there is evidence that these rewards are positively related to Organizational Commitment (Neeru Malhotra., et al (2007), Bunmi Omolayo, A.B. Owolabi (2007), Ian O. Williamson at el., (2009), However, it is hoped this study will add to the body of knowledge in terms multidimensional construct of Organizational Commitment among hypermarket employees in Malaysia, especially in Kota Kinabalu.

1.5.2 Significance to Human Resource Practitioners

The significance of this research is aimed to produce some kind of practical guidance and benefits to the human resource managers in to help them better plan and move towards retaining their employees through designing a good and attractive rewards system. It is hoped that this study provides some valuable insights to any retail organization which seeks to create the appropriate work environment or establish the significant organizational rewards which encourage hypermarket employees to be committed to their current organization and continue their service with them.

Additionally, this study might contribute to a better understanding of three dimensional of organizational commitment, and also its role in enhancing employees’ sense of attachment and membership to their organization. Therefore, the results of this research may guide human resource managers to incorporate organizational rewards to improve the work environment, motivational level, and retention, enhance O.C. and thereby reduce turnover, increase productivity, and enhance performance. Each committed employee is a vital ingredient to the success of any hypermarket organization.

1.6 Definition of Key Variable

In order to have a sound understanding of this study, the following are the definitions of the key variables for this study.

1.6.1 Rewards

Reward refers to all forms of financial returns, tangible services and benefits which an employee receives as part of an employment relationship (Bratton and Gold, 1994). According to Porter and Lawler (1968), rewards can be divided into two type; intrinsic and extrinsic rewards.

Katz and Van Maanan (1977) have further classified work rewards into three distinct categories of task, social and organizational rewards. Task rewards are intrinsic rewards, while social and organizational rewards are extrinsic rewards.

Extrinsic rewards are those that resulting from extrinsic, non-job-related factors. Social rewards (friendly, helpful and supportive co-workers and considerate supervisors) are those that are derived from interaction with others on the job; while organizational rewards (working conditions, pay satisfaction, benefits, and promotional opportunities) are those that are provided by the organization and are aimed at motivating performance and maintaining membership. On the other hand, intrinsic rewards are inherent in the content of the job itself. They include motivational job characteristics such as feedback (Hackman and Oldham, 1976). Individuals at all levels of the organization recognize the importance of continually upgrading their skills, and regard access to training as a ‘key element in the overall reward package’ (Armstrong, 1993: 121). Training is regarded as an important non-financial motivator and thus can be considered as an intrinsic reward.

1.6.2 Organization Commitment

The concept of organizational commitment has been defined in many ways. Zheng Wei Bo et al (2009) had concludes the evaluation of OC from 1960-2009 in different period to defined Organization Commitment. From side-bet thinking till affective dependence even multi-dimension period, commitment author have identified different theories to explain the correlations between the foci of OC and outcome.

Commitment was initially defined and studied as one dimensional construct tied either to one’s emotional attachment to an organizational (Porter et al., 1974), or to the costs associated with the exit (Becker, 1960). As work in this area progressed, this view of commitment converged and a new, multidimensional dimension framework was adopted base on three distinct but related form of commitment: affective, continuance and normative (Allen & Meyer, 1990). The affective commitment refer to sn emotional attachment and the involvement with an organization while continuance commitment denotes the perceived costs of leaving an organization (Allen & Meyer, 1991). Normative commitment ia newer addition to commitment to the commitment topology and its views as felt responsibility to support and remain a member of an organization (Allen & Meyer, 1990).

1.7 Summary and Organization Of The Study

This study present in three chapters. Chapter 1 concerned on the study overview, problem statement, research question and objectives, scope and significance of the study as well as definitions of key variables. Whereas Chapter 2 the Literature Review focus on the previous research and discusses the key variable such as extrinsic and intrinsic rewards as independent variables in this study as well as the dependant variable. In Chapter 3 represent the research methodology, in which explain how study is designed in terms of its sample size, data collection method, instrument and data analysis technique.

CHAPTER 2

LITERATURE REVIEW

2.0 INTRODUCTION

Encouraging employees to work and be committed toward achieving organization’s goals and objectives is one of the most significant challenges for any management. It involves active relationship with the organization in which employees are willing to give something of them in order to help the organization to succeed and prosper. According to March and Simeon (1958:52), real commitment often evolves into an exchange relationship in which individuals attach themselves to the organization in return for certain rewards or outcomes.

Usually, employees will feel committed when their needs are met and fulfilled by their organizations. According to Maslow (1954), human needs are arranged in a hierarchical order, and once a need is satisfied, the individual move to the next unsatisfied need which now forms the basis for his/her behavior. These needs are the physiological needs (which include food, clothing, shelter, water, and sex), security needs (such as job security, protection of life and property), social needs (such as need for affection, friendship, and sense of belonging), esteem needs (which include need for recognition, accomplishment, achievement, and self respect), and self-actualization needs (which is the need for an employee to reach his/her highest potential at workplace in conquering his/her environment).

Rewards are something given or obtained in return for work done or service rendered. Vroom (1964:134) asserts that the expectation (reward) of employees on task performed motivates and encourages them to be committed. Thus, the higher the expectation of workers, the greater the commitment. On the other hand, the lesser the expectation of workers, the lower the commitment.

2.1 Literature Review & Conceptual Background

2.1.1 Organizational Commitment (OC)

Research on OC spans over four decade and remains an area of interest to both researchers and practitioners. Commitment of an employee to his or her employing organization or known as Organizational commitment (OC), has received much attention in the literature but different definitions continue to be used. Zheng Wei Bo et al (2009) had concludes the evaluation of OC from 1960-2009 as illustrated in Table 2.1. From side-bet thinking till affective dependence even multi-dimension period, commitment author have identified different theories to explain the correlations between the foci of OC and outcomes.

Table 2.1: Evaluation Of Organizational Commitment

Commitment was initially defined and studied as one dimensional construct tied either to one’s emotional attachment to an organizational (Porter et al., 1974), or to the costs associated with the exit (Becker, 1960). As work in this area progressed, this view of commitment converged and a new, multidimensional dimension framework was adopted base on three distinct but related form of commitment: affective, continuance and normative (Allen & Meyer, 1990). The affective commitment refer to sn emotional attachment and the involvement with an organization while continuance commitment denotes the perceived costs of leaving an organization (Allen & Meyer, 1991). Normative commitment ia newer addition to commitment to the commitment topology and its views as felt responsibility to support and remain a member of an organization (Allen & Meyer, 1990).

Furthermore, the concept of commitment in the workplace is still one of the most challenging and researched concepts in the fields of management, organizational behavior and Human Resource Management. A great deal of research has been devoted to studying the antecedents and outcomes of commitment in work setting. The conceptual and operational development of organizational commitment has affected the conceptualization and measurement of other commitment forms such as commitment to the occupation, the job, the workgroup, the union and the work itself (Cohen, 2003; Gordon, Philpot et al., 1980; Morrow, 1993).

Blau and Boal (1987) discussed two approaches in defining commitment. The first one, referred as behavior approach where the individual viewed as committed to an organization if he/she is bound by past actions of “sunk cost” (fringe benefit, salary as a function of age or tenure) and the second one are referred as attitudinal approach where organizational commitment is viewed as a more positive individual orientation towards the organization; here, organizational commitment is defined as a state in which an employee identifies with a particular organization and its goal, and he/she wishes to maintain membership in the organization in order to facilitate its goals. Attitudinal commitment is affective in nature; employees are emotionally attached to the organization and view their goals and organizational goals are similar.

In summary, OC can be defined as a psychological state characterize an employee’s relationship with the organization that has implication for the employee’s decision whether to remain or leave the organization. Commitment reflects the employee’s acceptance of the organization’s goal and willingness to engage in the behavior that is specified in the job description. OC can be considered to be affective response or attitude which link or attach an employee to the organization. In the other words, OC can be defined as the degree to which an employees experiences a ‘sense of oneness’ with their organization.

However, for the purpose of this study, the following definition of OC as provided by Allen and Meyer (1990) was used. It has become clear that during the last decade, OC was conceptualizing as multidimensional construct that involve three dimensions as mention before.

2.1.2 Allen’s and Meyer’s Model of Organization Commitment (OC)

Meyer and Allen (1990) had defined OC as pychological state that bind the individu to the organization. For that extend, they have developed a three component conceptualization of organizational commitm