IMPACT OF FINANCIAL INCENTIVES ON EMPLOPYEE

COMMITMENT ON NEPALESE COMMERCIAL BANKS

A Proposal by

Sudeep Poudel

Symbol No.: 162/20

T.U. Reg No. 7-2-302-155-2020

A research project proposal submitted in partial fulfillment for the degree

of Bachelor of Business Management in Applied (BBM-A)

Submitted To:
Department of Business Administration
Lumbini Banijya Campus (LBC)

Butwal ,Rupandehi
June 2024
 Table of Contents
CHAPTER 1: INTRODUCTION..........................................................................................................1

1.1 Background of the study.............................................................................................................1

1.2 Statement of the Problem..........................................................................................................3

1.3 Objectives of the Study..............................................................................................................4

1.4 Research Questions....................................................................................................................4

1.4 Research Hypothesis..................................................................................................................4

1.5 Rationale of the Study................................................................................................................5

1.6 Limitations of the Study.............................................................................................................5

CHAPTER 2: LITERATURE REVIEW...............................................................................................6

2.1 Theoretical Review......................................................................................................................6

2.2 Empirical Review.........................................................................................................................7

CHAPTER 3: RESEARCH METHODOLOGY..................................................................................8

3.1 Research Design...........................................................................................................................8

3.2 Population....................................................................................................................................8

3.3 Sample Selection..........................................................................................................................8

3.4 Sources of Data............................................................................................................................8

3.5 Methods of Analysis.....................................................................................................................9

3.6 Conceptual Framework...............................................................................................................9

REFERENCES......................................................................................................................................10

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 CHAPTER 1: INTRODUCTION

1.1 Background of the study

Financial incentives are widely recognized as crucial tools in influencing individuals'

behavior and organizational performance across various sectors. These incentives, typically
in the form of monetary rewards or benefits, are designed to motivate individuals or
entities to achieve specific goals, enhance productivity, or adhere to desired behaviors. One
of the primary theories supporting the effectiveness of financial incentives is the principal-
agent theory, which posits that individuals (agents) may not always act in the best interest
of those they represent (principals), necessitating the use of incentives to align their actions
with organizational objectives (Holmstrom, 1979). Moreover, research in behavioral
economics highlights the importance of incentives in shaping decision-making processes,
demonstrating how individuals are often guided by the prospect of rewards or penalties
(Gneezy &Rustichini, 2000).

A financial incentive is a form of compensation that is provided to employees specifically

to motivate them to perform better or achieve specific objectives (Pink, 2009).Grant (2013)
defined that financial incentives are a means of motivating employees through the use of
financial rewards, such as bonuses or commissions, for achieving specific performance
targets or goals. According to Armstrong (2010), financial incentives are rewards offered
to employees in exchange for their contribution to the organization's goals. Similarly, Pink
(2009) financial incentives have remained a popular tool for motivating employees in the
workplace. In recent years, many organizations have shifted away from traditional forms of
financial incentives, such as bonuses and commissions, and have instead focused on other
forms of compensation, such as profit-sharing and stock options. Likewise, Latham &
Locke (2007) financial incentives are monetary rewards provided to employees for
meeting or exceeding performance goals or targets.

Harter et al. (2002) stated that incentives can be effective to encourage the employees to
take risks and think outside the box. Financial incentives have long been used to inspire
employees and strengthen their loyalty to their employers. Bonuses, stock options, and

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profit-sharing schemes are all designed to reward employees for their hard work and
motivate them to keep performing well. While some research indicates that financial
incentives can be effective in increasing employee commitment, there is also evidence that
they may not always have the desired effect. Financial incentives can be used to promote
customer loyalty. Incentives can also be used to encourage teamwork and collaboration.

In the context of Nepal, researchers have delved into understanding the significance and
impact of financial incentives on different aspects of the economy. According to a study by
Adhikari and Acharya (2018), financial incentives have been observed to incentivize
entrepreneurship and innovation among Nepali youths, thereby contributing to the
country's economic growth. Moreover, (Sharma et al. 2020) emphasizes the role of
financial incentives in promoting agricultural productivity in Nepal, highlighting how
subsidies and grants encourage farmers to adopt modern techniques and technologies.
Furthermore, research conducted by (Bhattarai and Shrestha 2019) underscores the
importance of financial incentives in enhancing healthcare access and utilization in rural
areas of Nepal, indicating how financial incentives for healthcare providers can lead to
improved health outcomes and reduced disparities. These studies collectively illustrate the
multifaceted impact of financial incentives in driving positive changes across various
sectors of the Nepali economy, from entrepreneurship and agriculture to healthcare access
and utilization.

Financial incentives play a crucial role in shaping employee commitment within

organizations. When employees are offered financial rewards such as bonuses, promotions,
and other monetary benefits, it can significantly impact their level of dedication and
loyalty to the organization. Research studies, such as those by Saleem (2011) and Shrestha
and Timalsena (2023), have shown a positive correlation between financial incentives and
employee commitment. These incentives not only enhance employee performance but also
reduce turnover rates, indicating that employees are more likely to stay loyal to an
organization when their financial needs and desires are met. Additionally, financial
incentives can act as a motivational tool, encouraging employees to work with enthusiasm,
put forth high levels of effort, and align their goals with those of the organization. Overall,
financial incentives are instrumental in fostering a sense of commitment among

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employees, leading to improved performance, reduced turnover, and a positive
organizational culture.

The above discussion shows that the studies dealing with the impact of financial incentives
on employees’ commitment are of greater importance. Hence, this study focuses on the
impact of financial incentives on employees’ commitment in Nepalese commercial banks.

1.2 Statement of the Problem

Many organizations, who have the view of encouraging employee loyalty and fostering
teamwork which in turn results in developing and increasing employees' job satisfaction
and organizational commitment, are investing huge sums of money in rewards and
recognition programs (Denning, 2001). It ensures that employees have an awareness of
how organizations expect them to perform in relation to organizational goals after their
performances are evaluated. Financial incentives can improve employee job satisfaction in
the IT industry, it is important to note that using financial incentives as a motivator may
have some drawbacks. Employees, for example, may become unduly focused on reaching
specific targets or goals to the detriment of other vital components of their work, such as
creativity or teamwork. Furthermore, financial incentives may be perceived as unfair or
unequal, leading to employee resentment or dissatisfaction. It is also possible that financial
incentives may not be the most effective way to improve employee job satisfaction in all
contexts. Other factors, such as opportunities for career advancement, a positive work
environment, and supportive management, may be equally or more important in promoting
job satisfaction and overall employee well-being (Wang and Huang, 2018).

Regmi and Adhikari (2019) assessed the impact of financial incentives on employee
engagement in the Nepalese retail industry. The study found that employees who received
financial incentives such as bonuses, commissions, and profit-sharing are more engaged in
their work and have higher levels of job satisfaction and organizational commitment.

Above mentioned are the empirical evidences in the context of other countries and in
Nepal. Therefore, in order to support one view or the other, this study has been conducted.

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1.3 Objectives of the Study

The main objective of the study is to identify the impact of financial incentives on the
employee commitment in Nepalese commercial banks. The other specific objectives are as
follows:

 To analyze the perception of bonus, compensation, pay, fringe benefits and

employee commitment among the employees.
 To determine the relationship of bonus, compensation, pay, fringe benefits with
employee commitment.
 To examine the most significant financial factor that affects the employees’
commitment in Nepalese commercial banks.

1.4 Research Questions

 What is the perception of bonus, compensation, pay, fringe benefits and employee
commitment among the employees?
 Is there any relationship between bonus, compensation, pay, fringe benefits with
employee commitment?
 Which is the most significant financial factor that affects the financial incentives on
employees’ commitment in Nepalese commercial banks?
Hence, this study deals with the impact of financial incentives on employees’ commitment
in Nepalese commercial banks.

1.4 Research Hypothesis

Research hypothesis is a formal statement that presents the expected relationship

between an independent and dependent variable. The hypothesis for the research study
are as follows:
 H1: There is a positive relationship between bonus and employee commitment.
 H2: There is a positive relationship between compensation and employee commitment.
 H3: There is a positive relationship between pay and employee commitment.
 H4: There is a positive relationship between fringe benefits and employee commitment.

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1.5 Rationale of the Study

This research therefore seeks to examine the effect of financial reward on the commitment
of employees in Nepalese commercial banks as there is very limited research done on
Nepalese bank and its employees. As commitment is important to organizational success
especially given the competitive nature of the banking industry it is important to know how
financial rewards contribute to this commitment. Since the socio-cultural setting of the
actual investigation is Nepal, generating motivational and loyalty incentive systems is what
research will deliver. At the same time, the findings will provide theoretical and practical
values for the expansion of knowledge assets and for the practical beneficial use by the
bank management and policymakers to facilitate the performance improvement.

1.6 Limitations of the Study

The study on the impact of financial incentives on employee commitment in Nepalese

commercial banks provides valuable insights into the relationship between financial
incentives and employee commitment, it is essential to acknowledge its limitations. The
limitations of the study are as follows:

 The study will be based on primary source of data regarding impact of financial
incentives on employee commitment in Nepalese commercial banks. Therefore, the
reliability of conclusions of the study depends upon the accuracy of the information
provided by the respondents.
 The study will be based on the assumption of linear regression between the
dependent and independent variable. The study excluded the non-linear regression
assumptions.
 The study is based on four independent variables only which were considered as
major ones as per the literature review.
Addressing these limitations in future research through larger and more diverse samples,
objective measures, and consideration of confounding variables and cultural factors can
contribute to a more comprehensive and subtle understanding of the relationship between
financial incentives and employee commitment.
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 CHAPTER 2: LITERATURE REVIEW

This section presents the review of literature conceptually and empirically. The conceptual
review aims to introduce all the variables that are associated to the study. The empirical
review aims to present the previous studies conducted related to the topic of study.

2.1 Theoretical Review

The key theories and framework that provide the theoretical foundation for the employee
commitment are explained below:

Expectancy Theory: According to expectancy theory, proposed by Victor Vroom,

individuals are motivated to act in a certain way based on their belief that their actions will
lead to desired outcomes. In the context of financial incentives, employees are likely to be
committed to their work when they believe that putting in effort will result in receiving
rewards or incentives. The theory suggests that the perceived correlation between
performance and rewards influences employee commitment.

Social Exchange Theory: Social exchange theory posits that individuals engage in social
relationships based on the expectation of reciprocal benefits. In the workplace, employees
may perceive financial incentives as a form of exchange for their contributions to the
organization. When employees receive rewards or incentives for their commitment, they
are more likely to reciprocate by increasing their level of commitment to the organization.

Agency Theory: Agency theory focuses on the relationship between principals (e.g.,
employers or shareholders) and agents (e.g., employees or managers) and how conflicts of
interest between them can be mitigated. In the context of financial incentives, employers
use incentives to align the interests of employees with those of the organization. When
financial incentives are linked to performance or commitment, employees are more likely
to exhibit behaviors that contribute to organizational goals.

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2.2 Empirical Review

Several studies have established a positive relationship between financial incentives and
employee commitment. For instance, a study by Meyer et al. (2002) found that
organizations that offer competitive financial rewards experience higher levels of
employee commitment, particularly in service-oriented sectors such as banking. This
suggests that financial incentives play a crucial role in enhancing loyalty among
employees.

Numerous studies have identified job satisfaction as a mediating factor in the relationship
between financial incentives and employee commitment. For example, a study by Ramlall
(2004) demonstrated that financial rewards positively impacted job satisfaction, which in
turn enhanced organizational commitment. This underscores the importance of considering
how financial incentives can improve job satisfaction to foster stronger employee
commitment.

Research by Judge and Piccolo (2004) supports Vroom's Expectancy Theory, showing that
clear performance expectations linked to financial rewards lead to increased motivation
and commitment. Their findings indicate that employees are more likely to demonstrate
commitment when they perceive a strong correlation between their performance, the
financial rewards received, and their overall job satisfaction.

In the banking sector, a study by Bhatia and Purohit (2019) found that financial incentives
significantly enhance employee commitment, particularly in environments characterized
by high competition and stress. Their research indicates that tailored financial incentives
can lead to improved performance and commitment among bank employees in India,
suggesting similar patterns may exist in the Nepalese context.

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 CHAPTER 3: RESEARCH METHODOLOGY

3.1 Research Design

Correlational research design will be used to examine the relationship between financial
incentives and employee commitment.

3.2 Population

The population of this study will consists of all employees of commercial banks in Nepal.
This study will be conducted to gather the information from the employees regarding the
impact of financial incentives on employee commitment. The employees who work in
commercial banks will be selected for this study.

3.3 Sample Selection

Stratified random sampling will be used to select a representative sample of employees

from Nepalese commercial banks. This method involves dividing the population into
strata based on relevant characteristics (e.g., bank size, employee level). Then, a random
sample is drawn from each stratum to ensure that the sample is representative of the entire
population.

3.4 Sources of Data

To collect the data, a survey will be carried by distributing a set of structured

questionnaires to the employees of commercial banks. The primary sources of data will be
used to extract the information on the impact of financial incentives on employee
commitment. The data obtained from the questionnaires survey will be analyzed through
SPSS. The instruments are descriptive statistics and inferential statistics. The questionnaire
will be divided into two sections. The first section, 'A' contains questions on profile of the
respondents. Section B contains Likert type questions on financial incentives variables that
employee commitment which scale ranges from 1) (Strongly disagree) to 5) (Strongly
agree).
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3.5 Methods of Analysis

The main purpose of data analysis in this study is to analyze the impact of bonus,
compensation, pay, incentives and recognition on employee commitment in Nepalese
commercial banks. First, all the data will be collected through questionnaire. After
gathering all the completed questionnaires from the respondents, it will be analyzed and
presented in proper tables. The questionnaire will includes personal information about
respondent such as gender, age, academic qualification and job position along with the
percentage frequency distribution of the general information of the respondents. The data
will be analyzed by using SPSS. The function of SPPS is to analyze the result of the
questionnaire and then helps to intercept the findings.

3.6 Conceptual Framework

This study has considered employee commitment as dependent variable whereas bonus,
compensation, pay, incentives, and recognition as independent variables in order to find
out the impact of financial incentives on employees’ performance in Nepalese commercial
banks.

Bonus

Pay Employees’Commitment

Compensation

Fringe Benfits

Source: Sharma (2021), Saleem (2011)

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 REFERENCES

Bhatia, S., & Purohit, H. (2019). Financial Incentives and Employee Commitment: A
Study in Indian Banks. International Journal of Bank Marketing, 37(3), 597-615.

Bonner, S. E., & Sprinkle, G. B. (2002). The effects of monetary incentives on effort and
task performance: theories, evidence, and a framework for research. Accounting,
Organizations and Society, (27), 303-345.

Chaundary Nupur & Sharma Bharti, (2012). Impact of Employees Motivation on

Performance in Private Organization. International Journal of Business Trends and
Technology, 2 (4) 29-35.

Fatah, A., Suhandini, Y. (2019) The effect of employee incentives and rewards on
employee performance. Journal of Economic Appreciation, 7(1), 46-55.

Ghimire, B., Dahal, R.K., & Rai, B. (2023). Employee performance factors in the Nepalese
commercial banks: Insights from emerging markets. Journal of Logistics, Informatics
and Service Science. 10(2), 29-42. DOI: 10.33168/JLISS.2023.0203

Judge, T. A., & Piccolo, R. F. (2004). Transformational and Transactional Leadership: A

Meta-Analytic Test of Their Relative Validity. Journal of Applied Psychology, 89(5),
755-768.

Meyer, J. P., Becker, T. E., & Van Dick, R. (2006). Emotional, Social, and Functional
Commitment to Work: A Multifaceted Approach. Journal of Vocational Behavior,
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Ramlall, S. (2004). A Review of Employee Motivation Theories and Their Implications for
Employee Retention Within Organizations. Journal of American Academy of Business,
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Salah, M.R. (2016). The influence of rewards on employee performance. British Journal of
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Saleem, S. (2011). The impact of financial incentives on employee’s commitment.
European Journal of Business and Management, 3(4).

Sharma, K. (2021). The impact of financial and non- financial incentives on employee
performance in NIC Asia bank and Global IME bank.

Smith, J. (2020). The role of performance bonuses in employee motivation. Journal of

Business Studies, 15(2), 123-135.

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