The impact of compensation and benefits on employee performance and organizational effectiveness depends on the existing compensation and performance management programs at an individual company. Typically, most employees respond to increases in pay and benefits with a positive and more productive attitude. However, the opposite is true as well. Sometimes, employees only notice rewards of a salary increase the day the increase is communicated to them, and the day they receive the first paycheck that includes the salary increase.
Generally speaking, the best people are most often drawn to the companies that pay the most and offer the best opportunity for advancement. There are still some people in the work force that have a very strong work ethic, and continue to stay motivated regardless of the compensation package provided. On the other hand, there are also employees that need constant increases in pay, better benefits, more work-life balance, etc., in order to perform well on a consistent basis. In both of these cases, compensation is irrelevant and individuality is more important.
In the long run, the effects of compensation and benefits diminish as employees begin to feel a sense of loyalty and organizational commitment. When employees begin to feel they are an indispensable part of the organization, they often become dissatisfied with their compensation and benefits. Finally, when employees feel they are a superior part of an organization, they typically believe that the organization owes them much more than what they are already receiving. At this point, compensation is simply the glue which holds many dissatisfied employees in place. Furthermore, it does not mean that there is a positive correlation between better compensation and better performance.
On a final note, employee work ethic, loyalty, and good character far outweigh the effects of compensation and benefits. Highly competitive compensation packages do not make for talented employees. Rather, good employees make highly competitive compensation possible.