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2.2 Indirect financial
Mondy (2008) define indirect financial as the satis-
faction that a person received from the job itself or
from the psychological or physical environment in
which the person works (Phonsanam, 2010). A good
leader [managers], should not assume that the mon-
etary compensation act as the only factor that boost
employee morale, but, they must also acknowledge
the true meaning of non-monetary compensation.
Figure 1. Component of total compensation program
(Wayne, 2008, p. 242).
2.3 Compensation in the service sector
(hospitality industry)
In Crick and Spencer (2011) works postulated that
hotels could have a higher employees' retention
rates if they are provided with good financial incen-
tives. In addition, they also asserted that employees
tend to quit their jobs, if hotel employer concen-
trate solely on the pay itself. Furthermore, hotels in
Malaysia should offer different types of incentives
to attract the best talent available. To support that
contention it was also suggested that hotels employ-
ers should clearly communicate organization's com-
pensation policies and disseminate their goals to
employees on what to achieve (Phonsanam, 2010).
essential. It was known that there are two types of
compensation program namely; direct and indirect
financial compensation. Fundamentally, compen-
sation practice can be divided into two categories
that are financial and non-financial. As the name
implies, the financial compensation involved all
benefits in terms of monetary given to employ-
ees. Financial rewards can be further divided into
two categories that are direct reward and indi-
rect reward. Wages, commission, bonuses are all
known as direct reward. Meanwhile, non-financial
compensation refers to the satisfaction received
by the employees from the job environment itself.
Non-financial can be divided into two categories;
the job and the job environment (Wayne, 2008).
Examples of indirect rewards are; medical leave,
life insurance, retirement plan, social security and
paid vacation. For the non-financial reward, it
refers to the skill and knowledge gained through
the job surrounding. The component of compen-
sation system is depicted in Figure 1.
The cost of living in Malaysia nowadays encour-
aged many job seekers to be more demanding in
choosing employment. Hence, the need to find a
appropriate job that will help them to survive is
significant. Therefore, we could summarize that if
an effective and efficient compensation practice is
implemented by top management on a continuous
basis; employees will tend to perform well in their
work (Frye, 2004; Gounaris, 2008; Nebel, 1991).
2.4 Performance appraisal system
This literature review will start with differenti-
ating the term 'Performance Management' and
'Performance Appraisal'. Generally, Performance
Management (PM) and Performance Appraisal
(PA) are intertwined, however, different. Perform-
ance management is defined as a continuous proc-
ess that includes several stages such as; planning,
monitoring, developing, appraising and rewarding
employees (Hayes & Ninemeier, 2009). For that
reason, in order for organizations to maintain pro-
ductivity, they must take a good care of their per-
formance management program (Ahmad & Ali,
2004). Some of the common methods for perform-
ance appraisals are; Behaviorally Anchored Rat-
ing Scales (BARS), Behavioral Observation Scale
(BOS), Management by Objective (MBO), Peer
Evaluation, Upward Assessments and 360-Degree
Appraisal (Hayes & Ninemeier, 2009). Besides that
there are also methods used such as Rating Scales,
Critical Incident, Essay Method, Work Standard,
Ranking Method, Forced Distribution and Result-
Based System (Wayne, 2008).
2.1 Direct financial
Direct financial compensation can be defined
as pays that a person received in a form of sal-
ary, wage, bonus and commission (Wayne, 2008).
Direct financial often been classified as something
that has to do with monetary incentives (Phon-
sanam, 2010). A compelling compensation system
can encourage employees not only to perform well,
but also boost their productivity and strengthen
their job performance (Lin, 2000). Gould-Williams
(2003) proposed that compensation is not just a
return for labor service but it is also a crucial tool
that managers could use to encourage and shape
employee behavior.
2.5 Performance appraisal in the service sector
(hospitality industry)
In service industry, conflict exists in the process of
performance appraisal and it can't be avoided. Cit-
ing from Bretz, Milkovich and Read (1989) review
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