The Role of Compensation in Enhancing Employee Performance: Evidence from Nepal’s Private Sector

Abstract

A key component of human resource management is compensation, which includes both monetary and non-monetary benefits given to staff members in appreciation of their services. While non-financial compensation refers to things like job security, professional development chances, recognition, and other intrinsic rewards, financial compensation covers things like salary, bonuses, and cash incentives. In order to improve job satisfaction, employee motivation, and eventually organizational success, effective pay systems are essential. The purpose of this study is to examine the impact of compensation on employee performance in private sector of Nepal, with a focus on both financial and non-financial compensation, and the mediating roles of job satisfaction and employee motivation. Maslow’s Theory of Motivation was adopted as the theoretical framework, offering comprehensive insight into how compensation drives employee behavior and performance. An explanatory research design was employed, and primary data were collected from 405 respondents using a non-probability convenience sampling technique. Structured questionnaires were administered via the KOBO toolbox, and the data were analyzed through descriptive and inferential methods using MS Excel and Smart PLS 4.0. The findings reveal that financial compensation (B=0.475, p=0) and non-financial compensation (B=0.469, p=0) positively and significantly influence job satisfaction, which in turn enhances employee motivation (B=0.474, p=0). Employee motivation subsequently has a strong positive effect on employee performance (B=0.749, p=0). Moreover, both job satisfaction and motivation significantly mediate the relationship between compensation and performance, highlighting that monetary and non-monetary rewards together drive better outcomes. The study concludes that fair and well-structured compensation packages are critical for motivating employees, improving job satisfaction, and enhancing overall performance. These findings underscore the need for private-sector organizations in Nepal to adopt holistic compensation strategies that integrate financial and non-financial incentives to optimize employee productivity and organizational success.