CHAPTER TWO
REVIEW OF LITERATURE
This chapter reviews the literature on compensation strategies and employee productivity. It does
this in three ways — conceptually, empirically, and theoretically — and then sets out the
summary and the gaps that remain.
2.1 Conceptual Review
This section explains the main concepts of the study: what they mean, what marks them out, and
where their strengths and weaknesses lie. The concepts are compensation strategies (financial
compensation, non-financial compensation, and benefits and incentives) and employee
productivity (task efficiency, work quality, and innovative work behaviour).
2.1.1 Compensation Strategies
The way writers understand compensation has shifted a great deal over the years. Compensation
has been defined in different ways over the years, reflecting changes in how organisations
reward their employees. Earlier studies viewed compensation mainly as the payment employees
receive for the work they perform, focusing largely on salaries, wages, and allowances (Barczak
et al., 2021). As organisations became more concerned with attracting and retaining skilled
employees, later studies described compensation as a management tool for ensuring that
employees are rewarded fairly while remaining competitive with labour market conditions
(Khudhair et al., 2020). More recent perspectives extend this view by describing compensation
as a strategic approach that aligns employee rewards with organisational objectives and desired
performance outcomes (Boudlaie et al., 2020). Some researchers also argue that compensation
should support employee development by encouraging learning, career growth, and long-term
commitment to the organisation. Haque and Ntim (2020) further explain that modern
compensation strategies now form part of broader organisational strategies, helping organisations
promote innovation, sustainability, and long-term performance. These perspectives suggest that
compensation is no longer viewed simply as employees' pay but as a comprehensive reward
system that combines financial and non-financial elements to support both employee and
organisational success.
An effective compensation strategy goes beyond paying employees for the work they perform. It
should be fair, transparent, flexible, and consistent with organisational policies and legal
requirements (Barczak et al., 2021). Among these characteristics, fairness remains particularly
important because employees' perceptions of fairness influence their level of trust, motivation,
commitment, and overall job satisfaction (Boudlaie et al., 2020). An effective strategy should
also combine different forms of rewards, including basic pay, incentives, employee benefits, and
non-financial rewards, to meet the diverse needs of employees. When organisations achieve this
balance, they are better positioned to attract competent employees, improve retention, increase
motivation, and enhance overall organisational performance. However, compensation strategies
also present certain challenges. They may involve significant financial costs, become difficult to
administer, or unintentionally reduce employees' intrinsic motivation if rewards are not properly
designed. Trzaska et al. (2021) further note that poorly designed reward systems or unrealistic
performance measures can reduce their effectiveness and even create dissatisfaction among
employees. For this reason, organisations need to ensure that their compensation strategies
remain fair, practical, and aligned with both organisational objectives and employee
expectations.
[Link] Financial Compensation
Financial compensation refers to the direct monetary rewards employees receive in exchange for
the work they perform. Earlier studies focused primarily on salaries and wages as the main
components of financial compensation (Kurbatova and Perederii, 2020). As reward systems
evolved, researchers expanded the concept to include bonuses, commissions, allowances, and
other financial benefits that influence employee motivation and job satisfaction (Chatzitheodorou
et al., 2021). More recently, financial compensation has been viewed as an important strategic
tool for improving organisational performance, supporting long-term business objectives, and
strengthening corporate governance (Zhou et al., 2024). Under this perspective, financial
compensation is no longer seen simply as payment for work completed but as a means of
encouraging behaviours that contribute to organisational success.
Financial compensation commonly includes salaries, wages, allowances, bonuses, commissions,
and performance-based incentives. The combination of these rewards often varies across
organisations and industries depending on organisational objectives and the nature of employees'
responsibilities. When financial compensation is perceived as fair and competitive, it contributes
to higher job satisfaction, stronger employee commitment, improved productivity, and better
employee retention. On the other hand, compensation systems that are perceived as unfair or
poorly structured may reduce employee motivation, increase dissatisfaction, and weaken
organisational performance. Consequently, the effectiveness of financial compensation depends
largely on its fairness, its alignment with organisational goals, and the organisation's ability to
implement and manage it effectively.
[Link] Non-Financial Compensation
Non-financial compensation covers everything of value that is not money. The narrowest
definition says just that — rewards that leave out direct payment (Piesiewicz et al., 2021). But
that only tells you what it is not. Broader views fill in the picture: recognition, chances to
develop a career, and steps to balance work and life, all of which lift job satisfaction and
commitment (Manjenje and Muhanga, 2021). Some writers treat it as a deliberate HR tool, used
to raise engagement and bring individual and organisational goals into line (Sabatini et al.,
2021). Others stress that it works best alongside money rather than instead of it, keeping people
motivated in workplaces where the challenge is mental rather than manual. At its fullest, non-
financial compensation is a bundle of things — the reward that comes from the work itself,
recognition, room to grow, and psychological support — all aimed at keeping people engaged
and performing. What holds it together is less tangible than a pay cheque: it motivates through
satisfaction, belonging, and personal growth. That is also its weakness. It is hard to standardise, it
lands differently on different people, and if the rewards feel merely symbolic or out of step with
what employees actually want, they fall flat. Whether it succeeds depends on how well it fits the
people, the culture, and the aims of the organisation.
[Link] Benefits and Incentives
Benefits and incentives are often described in the plainest terms as outside rewards used to nudge
particular behaviour (Eroğlu, 2021). That captures the surface but misses the bigger role they
play. Broader definitions link incentives to taking part in wider efforts — energy efficiency, say,
or sustainability — so that one person's actions connect to goals well beyond the firm (Henni et
al., 2021). Others point out that these rewards work on two levels at once: something concrete,
like a rebate or a bonus, alongside something felt, like engagement and satisfaction (Fuchs et al.,
2020). More strategic accounts treat them as a way to line up the interests of the individual, the
organisation, and society, and to push innovation and long-term change (Bhattacharya et al.,
2022). They also sit inside policy and governance, where tax breaks and market-based rewards
shape how industries invest and behave. Their strength is that they can motivate, clarify what is
expected, and draw people into shared efforts. Their danger is that people can come to depend on
them, that they can be shared out unfairly, and that they can push short-term thinking or be
gamed. Like the other forms of reward, they work only when they are carefully designed, tied to
long-term aims, and watched over time.
2.1.2 Employee Productivity
Productivity used to be a simple sum: output divided by input, the number of tasks finished
against the time or resources they took (Gosnell et al., 2020). It is a tidy way to compare, but it
leaves out the things that are harder to count — creativity, fresh ideas, the knack for solving
problems (Tran and Vo, 2020). Later views tried to widen it by bringing in goals met and
satisfaction at work, though even these struggled to capture what an employee brings of their
own accord. The more recent picture is broader again, treating productivity as something with
several sides at once: quality, timeliness, innovation, and the effect on the customer. On this
reading, productivity is not a fixed number but a moving capability, shaped by people's skills, the
technology around them, and the way the organisation is put together. It grows out of the
interplay between what individuals can do, how teams coordinate, and whether managers and
systems support them. The upside of getting it right runs from lower costs and sharper
competitiveness to more innovation and better morale. The risk is chasing short-term output so
hard that you wear people down or ignore the longer view. A sensible approach, then, keeps
efficiency in balance with the growth and wellbeing of the people doing the work.
[Link] Task Efficiency
Task efficiency is usually introduced as speed — how fast work gets done with the resources at
hand (Popkova and Sergi, 2021). But speed alone is a trap, and the idea quickly grows to include
accuracy, since rushing that breeds errors and rework is no efficiency at all (Wu et al., 2020).
From there it broadens into how work is organised: cutting idle time and stripping out steps that
add nothing (Bogdanov et al., 2021). Newer accounts bring in data and forecasting, defining
efficiency as the ability to plan and act on good, timely information, especially in workplaces run
through connected technology (Motlagh et al., 2020). At a wider level still, efficiency is seen as
something that emerges from the fit between technology, people, and the way the organisation is
structured. Its signs have grown from simple counts like tasks per hour to error rates, standard
processes, and real-time monitoring, and its rewards are lower costs, steadier output, and better
decisions. Yet the same tools raise problems — the cost of the systems, the pull towards speed
over quality, employee unease about being watched, and real questions about privacy. Keeping
efficiency high, in the end, means blending the technical side with the human one rather than
letting either take over.
[Link] Work Quality
For a long time, work quality was defined by whatever could be easily counted — how many
tasks were done, how much was produced, how quickly it was delivered. On that view, quality
meant little more than the absence of mistakes and the speed of the work (Jovicic et al., 2023). A
second group of writers looked past the numbers to the rules, tying quality to meeting set
technical standards. It is a useful idea, but a narrow one, since it prizes compliance over the
creation of real value (Serban and Lytras, 2020). A third view turns on resources, treating quality
as the degree to which work cuts waste and gets the most out of what goes in — a reading
common in energy-sector studies (Liu et al., 2022). Others shift the focus onto the worker,
arguing that output is only as good as the skills behind it and how well those skills fit the job
(Kacprzak et al., 2022).
The stronger definitions move away from these fixed features towards relationships and systems.
Some hold that quality depends on the data and tools people are given to make decisions, a point
pressed in work on predictive maintenance and AI-driven energy systems (Majumder et al.,
2024). Others bring in the human environment, noting that when employees are stressed or
poorly supported, they grow less attentive, less creative, and more likely to cut corners (Tepe et
al., 2024). Leadership and planning matter too, since good oversight and risk management set the
stage for good work (Pieterse et al., 2024). Pulling these together, the fullest accounts treat work
quality as something with many sides: the standard of the output, the skill of the workers, the
tools they use, and the systems that back them, all combining to produce quality that holds up
and fits its context (Zhang, 2024).
[Link] Innovative Work Behaviour
Innovative work behaviour was first understood narrowly, as coming up with ideas or the odd
suggestion — which is only a small piece of how innovation actually adds value (Andrabi and
Rainayee, 2020). Broader views describe it as creative thinking backed by extra, voluntary effort
to improve the way work is done (Musneh, 2021). Others stress the whole journey, not just the
spark: generating an idea, winning support for it, and putting it into practice. That distinction
matters, because it separates real innovation from creativity that goes nowhere (Mansour et al.,
2023). Contemporary accounts add the conditions that decide whether potential turns into action
— emotional intelligence, a sense of empowerment, and leadership that backs people up. The
behaviour tends to show up as a mix of initiative, persistence, and a willingness to take risks, and
it moves through stages, each one shaped by the climate around it. Done well, it builds skills,
spreads knowledge across teams, and feeds a steady stream of improvements that lift efficiency
and service. It is not free of friction, though: unclear roles, tight resources, wary managers, and
short-term dips in performance can all get in the way. So innovative behaviour lasts only where
individual creativity meets real organisational support.
2.2 Empirical Review
This section looks at what earlier studies actually found about compensation strategies and
employee productivity, and about the measures used to capture them.
2.2.1 Financial Compensation and Task Efficiency
On the whole, the studies point the same way: money helps efficiency, most of all when it is tied
to clear goals. In the energy sector, Zhou, Saeed, and Agyemang (2024) found that well-designed
reward systems push operational performance up by getting employees to hit their targets, and
Malynovska et al. (2022) reported much the same for role-based pay. Kumar, Gupta, and Das
(2022) added that when compensation sits inside a broader sustainability effort, task completion
and efficiency both improve. Even executive pay plays a part — Ritz (2022) showed that tying it
to organisational targets brings individual behaviour into line with company goals. But the effect
is not automatic. Ferrara and Giua (2022) warned that some pay structures, especially those
driven by regulation, barely touch day-to-day efficiency at all.
The picture gets more mixed the closer you look. Baran et al. (2022) found that ESG-linked pay
improved financial results without always lifting task performance, and others argue that
structural and institutional pressures can outweigh money altogether in deciding how productive
people are (Kurbatova and Perederii, 2020). A recurring theme is that money works best in good
company. Where reward systems are transparent and seen as fair, efficiency rises
(Chatzitheodorou et al., 2021); where financial incentives stand alone, cut off from any wider
framework, their pull is weaker. The takeaway is that financial compensation does raise task
efficiency, but how much depends on fairness, alignment, and the non-financial conditions
around it.
2.2.2 Non-Financial Compensation and Work Quality
Most studies here find a clear, positive link. Almadana-Abón et al. (2024) reported that non-
financial rewards — recognition, career development, flexible working — had a real effect on
productivity in technology firms, and Sabatini et al. (2021) found that recognition and a
supportive environment lifted both engagement and output. Others make the same point from
different angles: Huda et al. (2024) showed that productivity climbs when non-financial benefits
sit alongside pay, while Mahathir et al. (2020) traced how skill development and job autonomy
raise motivation, and through it the quality of work. The effect also reaches beyond the
immediate task. Non-financial rewards help keep good people, which sustains high performance
over time by cutting turnover, and the pattern holds across organisational levels, from frontline
staff to managers.
Still, it is not guaranteed. Manjenje and Muhanga (2021) argued that these rewards only work
when they fit the organisation's culture and what employees actually expect. And simply offering
non-financial benefits is not enough — unless people see them as genuine and well-woven into
how the place runs, they make little difference (Piesiewicz et al., 2021). In other words, context
and perceived fairness decide whether non-financial compensation shows up in the quality of the
work.
2.2.3 Benefits and Incentives and Innovative Work Behaviour
The evidence generally shows that benefits and incentives encourage innovation, particularly
when they are clear and tied to the organisation's aims. In energy and utility settings,
Bhattacharya et al. (2022) found that well-designed incentives drew employees into innovation
by rewarding experiment with new ideas. Sarker et al. (2021) reported that fiscal and market-
based incentives sparked proactive, innovative behaviour in industry, especially when the
rewards were transparent and measurable, and Kaplan Dönmez (2023) showed that tax and
investment incentives helped new technologies take hold, which nudged employees towards a
more innovative outlook. There is a collective side too: shared community benefits and cross-
sector ownership can raise both the inner and outer motivation to innovate (Gorroño-Albizu,
2020).
The link is not unconditional, though. Eroğlu (2021) noted that in unsettled times — the COVID-
19 period, for instance — people often chose stability over experiment, and incentives lost some
of their force. Unclear policies and tangled governance can do the same, and leaning too hard on
financial rewards can even hold back innovation in the long run if recognition and development
are missing (Sarker et al., 2021). So benefits and incentives do promote innovative behaviour,
but the design has to be right and the balance between money and other rewards carefully kept.
2.3 Theoretical Review
This section reviews the theories that speak to compensation and productivity: Vroom's
Expectancy Theory (1964), Adams' Equity Theory (1963), and Herzberg's Two-Factor Theory
(1959).
2.3.1 Expectancy Theory (Vroom, 1964)
Vroom's Expectancy Theory explains motivation as a kind of reasoning. People weigh what they
expect to get before they decide how much effort to give, and their choice rests on three beliefs:
that effort will lead to good performance (expectancy), that good performance will bring a
reward (instrumentality), and that the reward is worth having (valence). Motivation is strongest
when all three hold. The theory assumes people act rationally, choosing what they think will pay
off, which makes it a natural fit for understanding motivation at work. It has its critics. Some say
it leans too far on cold calculation and misses how people really behave (Fang, 2023); others that
it is too focused on the individual and ignores social and cultural pressures (George and
Humphrey, 2021); and its three parts are notoriously hard to measure. But supporters value it for
exactly what managers need — a clear map of how rewards drive effort, and a way to spot where
motivation is breaking down. For this study, it explains a lot: when employees at Ikeja Electricity
Distribution Company believe their effort will earn rewards they care about, whether bonuses,
promotion, or recognition, their motivation and output rise, and where the reward system is weak
or unclear, both fall away.
2.3.2 Equity Theory (Adams, 1963)
Adams' Equity Theory turns on fairness. It says employees weigh what they put in — effort,
skill, experience — against what they get back — pay, benefits, recognition — and then compare
that balance with the people around them. When it feels fair, motivation holds steady. When it
feels unfair, the tension pushes them to put things right, often by easing off or pressing for better
rewards. What matters here is not the size of the reward on its own but how it measures up
against others'. Critics point out that these judgements are deeply personal, coloured by bias and
culture and hard to pin down (Kumari et al., 2023), and that the theory leans so hard on fairness
that it underplays other motivators like the satisfaction of the work itself. Even so, it remains a
practical guide to how people react to pay. In the case of Ikeja Electricity Distribution Company,
it explains how employees' sense of fairness over salaries, bonuses, and rewards feeds straight
into their productivity — and how a feeling of unfairness can drain effort, pull people back, or
send them out the door.
2.3.3 Herzberg's Two-Factor Theory (1959)
Herzberg split the things that affect motivation into two groups. Hygiene factors — pay, policies,
working conditions, relationships — do not by themselves make people happy, but when they are
missing or poor they breed dissatisfaction. Motivators — achievement, recognition,
responsibility, growth — are what genuinely lift satisfaction and performance. The lesson is that
an organisation has to get the basics right first to stop people being unhappy, and only then can
the motivators do their work. It follows that money alone will not sustain motivation, since the
deeper drive comes from the job itself. The theory has been challenged for drawing too sharp a
line between the two groups, because in real life they blur, and pay can sometimes act as a
motivator in its own right (Thant and Chang, 2021). Still, it is widely used for a good reason: it
helps managers tell apart what merely prevents unhappiness from what actually drives
performance. For this study, it matters because it frames compensation as both — a basic need to
be met, and, when tied to recognition and career progress, a real motivator that can raise
productivity at Ikeja Electricity Distribution Company.
2.3.4 Theoretical Framework
This study rests mainly on Vroom's Expectancy Theory, because it explains motivation and
productivity more fully than the alternatives for the question at hand. Its strength is the clear line
it draws from effort to performance to reward, which fits a study about compensation tied to
measurable results. Herzberg's theory is useful for understanding satisfaction, but it is less exact
about linking a specific reward to a specific outcome. Equity Theory captures fairness well, yet it
says little about the judgement employees make when they decide how much effort a given
reward is worth. Expectancy Theory speaks to precisely that. It lets the study ask not just
whether compensation exists at Ikeja Electricity Distribution Company, but how its design
shapes the choices employees make, the effort they put in, and the productivity that results —
and it points to where compensation fails to motivate, either because the link to reward is weak
or because the reward is not valued. For a study about how reward can be shaped to lift
productivity, it offers the most practical and fitting lens.
2.4 Summary and Gaps in the Literature
This section draws together what the review has shown and points to what is still missing.
Across industries, scholars broadly agree that compensation plays a large part in shaping how
motivated employees are, how they behave, and how well they perform. What stands out,
though, is how little of this work looks at electricity distribution companies in Nigeria, and Ikeja
Electricity Distribution Company in particular. Most of the research was done abroad or in
unrelated sectors, and few studies ask how structured compensation strategies affect productivity
in a utility. That absence is what makes context-specific evidence from Lagos State worth
gathering.
2.4.1 Summary of Literature
The review set out to deepen the understanding of compensation strategies and employee
productivity. It covered the independent variable, compensation strategies, through its three parts
— financial compensation, non-financial compensation, and benefits and incentives — and the
dependent variable, employee productivity, through task efficiency, work quality, and innovative
work behaviour, drawing on studies that explain what each one means, how it behaves, and
where its strengths and limits lie. Alongside this, three theories were examined — Expectancy,
Equity, and Herzberg's Two-Factor — with their proponents, assumptions, strengths, and
weaknesses laid out, and the study was anchored on Expectancy Theory as the best fit. The
empirical studies were reviewed both to build on earlier evidence and to note the methods used,
and they showed that the findings do not all agree: many report a positive effect of compensation
on productivity, but others find results that shift with context.
2.4.2 Gaps in the Literature
One clear gap concerns the fine detail of the relationship. Research keeps showing that both
financial and non-financial compensation raise productivity, but it has not produced a tested,
practical framework that tells an organisation what mix of rewards to use. That matters most in
fast-changing settings like the renewable and advanced-energy industries, where demands differ
widely from one firm to the next. A digitally intensive company leaning on innovation needs a
very different reward structure from a stable, compliance-focused one — yet most studies stop at
broad correlations and rarely compare how particular incentives, such as bonuses, flexible
working, or development rewards, play out across different industries, cultures, or generations.
The long-term effect of sustainability-linked pay on work quality is just as underexplored.
A second gap lies in how human strengths meet structural barriers. Research affirms that
inclusive leadership and emotional intelligence encourage innovation, but it has not looked
closely at how these run up against the things that block innovation — rigid hierarchies, stiff
reporting lines, thin resources. People can be motivated and able to innovate and still be held
back by the way the organisation is built. In technologically advanced energy systems, studies
tend to stress what is technically possible while overlooking why employees resist complicated
incentives. Future work needs to show how targeted rewards can spark innovation and ease these
structural constraints at the same time.
[Link] Financial Compensation and Task Efficiency
The evidence suggests financial compensation can lift task efficiency, above all when it is tied to
the organisation's wider aims. Zhou, Saeed, and Agyemang (2024) found that energy firms with
well-structured reward systems performed better operationally, since the pay gave employees a
direct reason to hit their targets. Malynovska et al. (2022) saw the same in energy organisations,
where pay tailored to people's roles raised their activity and output, and Kumar, Gupta, and Das
(2022) added that pairing performance-based pay with sustainability practices improved both
task completion and efficiency.
[Link] Non-Financial Compensation and Work Quality
Several studies show non-financial compensation improving work quality. Almadana-Abón et al.
(2024) found that recognition, career development, and flexible working had a substantial effect
on productivity in technology firms, and Sabatini et al. (2021) reported that recognition and a
supportive environment lifted both engagement and output. Huda et al. (2024) confirmed that
productivity rises when non-financial benefits accompany pay, while Mahathir et al. (2020)
showed that skill development and autonomy strengthen motivation and, with it, the quality of
work. The common thread is that when employees see real value in non-money rewards, their
commitment and their care in doing the job both grow.
[Link] Benefits and Incentives and Innovative Work Behaviour
Studies here point to a positive effect on innovation. Bhattacharya et al. (2022) argue that well-
structured incentives in energy and utility firms draw employees more deeply into innovative
work, since a clear, prompt reward makes people readier to experiment. Sarker et al. (2021)
found that fiscal and market-based incentives encouraged proactive behaviour, most of all when
the rewards were transparent, measurable, and aligned with the organisation's goals. Kaplan
Dönmez (2023) adds that tax and investment incentives in the energy sector helped new
technologies take root, which in turn fed a more innovative frame of mind among employees.
2.5 Conceptual Model of the Study
The study proposes that compensation strategies — financial compensation, non-financial
compensation, and benefits and incentives — act directly on employee productivity. Financial
compensation is expected to raise task efficiency, non-financial rewards to strengthen work
quality, and benefits and incentives to encourage innovative work behaviour. Together, these
three feed into overall productivity, giving a focused way to understand how reward systems
shape performance.