The Effect of Compensation and Career on Turnover Intention: Evidence from Indonesia

Abstract

This study aims to investigate the determinants of turnover intention among company managers in Indonesia. Based on the literature, this research hypothesizes that job satisfaction is a mediator in the relationship between compensation, career and turnover intention of companies in Indonesia. Respondents as research samples are grouped into middle managers from two industries, namely, manufacturing and services. A total of 215 questionnaires were returned from middle managers. Data analysis used Structural Equation Model - Linear Structural Relationship (SEM LISREL). The research results prove that compensation and career have a positive effect on job satisfaction. Compensation, career, and job satisfaction have a negative impact on turnover intention. Compensation is known to be one of the motivating drivers of workers around the world. From this study it can be said that, if middle manager teachers are well compensated, they will be encouraged, persuaded and will have positive feelings toward their work, and this will result in staying put. It works also with career and job satisfaction. If both variables are considered carefully, intention to move tends to be low. These findings provide new insights into the field of international human resources in developing multinational companies and service businesses.

1. Introduction

There is a large amount of research about turnover intentions and the why’s and how’s over the centuries. Studies have been conduct in different countries, industries, time, levels of workers and many other criterions. This study is focusing on middle managers in Indonesia in specific industries: manufacture and service. According to Harvey (2013), globalization and growing competition among companies has resulted in battle for talents in which companies compete for the recruitment and retention of talented employees. Employee turnover can affect financial and non- financial aspects of a company (Ingsih, Prayitno, Waluyo, & Suhana, 2020). According to Islam, Bangish, Muhammad, and Jehan, (2016), the expenditure costs included are the costs of recruiting, training and apprenticeship, loss of productivity, reduced engagement, and disruptions in service that have a negative influence on company culture.

Researchers have identified factors that influence employee turnover intentions (Lee, 2017). These factors can be categorized into individual characteristics such as gender, worker age, length of work (Cho & Lewis 2012; Jung, 2010; Pitts, Marvel, & Fernandez, 2011; Wynen & Op de Beeck, 2014; Endri et al., 2020), the category of managerial practice in companies such as work involvement, work performance and salary, and company policy (Kim, Tam, Kim, and Rhee, 2017; Lee, Huang, & Zhao, 2012; Moynihan & Landuyt, 2007), job satisfaction categories with different determinants such as the type of work itself, compensation and other benefits (Jin, McDonald, & Park, 2016; Lewis, 1991; Wang, Tao, Ellenbecker, & Liu, 2012; Nguyen et al., 2020), categories related to superiors and coworkers (Pitts et al., 2011; Wynen et al., 2013), and compatibility to organizations (employee-organization fit) related to the company’s goals and values (Jin et al., 2016). From an organizational point of view, retaining the best employees is as important as balancing technological progress (Kuean, Kaur, & Wong, 2010; Dawley, Houghton, & Bucklew, 2010).

2. Literature Review

Turnover intentions refer to a person’s behavior to leave a company. Robbins et al. (2015) defines turnover as “the voluntary and involuntary permanent withdrawal from an organization”, translated in the departure of someone from the organization voluntarily and not voluntarily. Mathis and Jackson (2011) suggested turnover as a process whereby employees leave the organization and the job position must be replaced by someone else. According to Pitts et al. (2011), turnover is a big problem for organizations; turnover costs can cause an organization to fail. Business leaders may not realize the reasons behind turnover. If business leaders can determine why employees consider leaving the organization before they actually leave, there is an opportunity to change the results. Ong and Koh (2018) state that, given the high costs spent, organizations focus on retaining talented employees and reducing turnover. Bambacas and Kulik (2013) stated that, if there is employee change, it will interfere with company activities, especially if employees with good performance leave the company, while the company still relies on them. Hay (2002) found that most employees choose career, learning and development opportunities as the main reason for staying in an organization, which leads to job satisfaction. According to Ingsih et al. (2020), most companies will measure employee satisfaction every year by using surveys to reduce the employee turnover rate, which is most important for the company. Hassan (2014) stated that it is important that employees are satisfied with their overall salary because this can affect their attitudes and behavior. If the company offers professionals the opportunity to engage in challenging and exciting work, they will be more involved and satisfied in their company, more dedicated to their company, and finally, less likely to leave (Igbaria, 1991; Igbaria & Greenhaus, 1992; Igbaria et al., 1994; Tutuncu & Kozak, 2007).

Compensation theory, according to Dessler (1997), states that compensation is one form of payment or compensation given to employees because the employee is employed by the organization, which includes the dimensions:

1. Financial compensation: included in financial compensation are wages or incentives, commissions and bonuses.

2. Non-financial compensation: those who enter the non- financial category include health benefits or health insurance, entertainment, and all that is given is not in the form of money. Compensation can mean something different for different people. Basic compensation is needed to maintain the employee’s proper lifestyle. However, compensation also provides a tangible measurement about an individual’s value for the organization. Compensation payment is human resource strategic functions that give a significant impact on other human resource functions.

Mathis et al. (2006) suggested that a career is a series of positions related to work occupied by a person throughout his life. Careers are the sequence, status, level and experience of work, position or position of a person both in the company, organization or freelance, so that demands responsibility and better work ability. Advancement is primarily associated with employees’ actual status or position changes in the organization, and includes the likelihood of promotion. In addition, growth is linked to the advancement opportunities beyond the current time, since advancement refers to the actual status or position changes in this moment.

Advancement and growth from Herzberg’s motivator factors reflected the process in employees’ career movement to be offered the chances to upgrade themselves in terms of new knowledge and skills through various learning methods and thus, have the opportunities to produce further outstanding results in work performance and fulfill personal career commitment refer to as career advancement (Norzaidi et al., 2013). 

Kroon and Freese (2013); Cardy and Lengnick- Hall (2011) conclude the organizations that provide development opportunities as a way to demonstrate care over their employees’ career advancement can increase their commitment to stay within the current workplace. Stichler (2005) also found the characteristic of high retention culture is derived from development opportunities that encourage continuous learning. From the above literature, this study develops a model and hypothesis framework as below:

H1: Compensation has a positive effect on job satisfaction

H2: Career has a positive effect on job satisfaction 

H3: Compensation has positive on turnover intentions 

H4: Career has positive associated on turnover intentions 

H5: Job satisfaction has positive associated on turnover intentions

3. Research Methods

This research was conducted with a quantitative approach to middle managers with a minimum of one year working in service or manufacturing institutions in Indonesia. This study used a survey method, which was conducted by distributing 215 questionnaires to manager-level workers in companies in Indonesia. Each item in the questionnaire was measured using a Likert scale of 1 to 7. The methods used are descriptive survey method and explanatory survey method. These methods spell out the condition of the variable or the relation between the variable, and also the affect between the variables (Andrén-Martinez et al., 2013). Investigation type in this research is causalities. The definition of operational variable intended to clarify the variables that will be examined, consisting of:

Figure 1: The Model

Table 1: Accuracy of model

a. Compensation (ξ1) as variable free.

b. Career (ξ2) as variable free.

c. The satisfaction of working (η1) as variables between. 

d. Turnover intentions (η2) as variable bound.

The research model was tested using Structural Equation Modeling (SEM) of LISREL software type where the sample is ranging from 150 to 400. In this study, 215 valid responses used as the sample, so it was considered sufficient.

4. Result and Discussion

4.1. Measures

All constructs were measured on a 7-point Likert scale ranging from (1) strongly disagree to (7) strongly agree. Items were adapted from established scales widely used in the literature. Table 1 shows that there are five suitable sizes of the hybrid model (full SEM) that have the consistency of the good fit index measurement model, namely, GFI, RMSEA, NNFI, IFI and CFI, while the three sizes of consistency hybrid models (full SEM) have the measurement index of marginal fit, namely, AGFI, NFI and RFI. Marginal fit is the condition of consistency scaling model under the criteria of absolute fit, as well as incremental fit, but can still be continued in further analysis, because it is close to good fit size criteria.

Results from the analysis measurements obtained from each variable tested are shown in Table 2.

Exogenous variables are compensation and career, while job satisfaction and intention to move are endogenous variables. The validities of the variables are good since all sub-variables have standardized loading factor ≥0.5 and t-value ≥1.96 (on α = 0.05). Also, latent exogenous as well as endogenous variables have a good reliability, indicated by all variables construct reliability having a value > 0.70 (CR ≥ 0.70) and a larger variance extract value from 0.50 (VE ≥ 0.50). Analysis of structural models is performed with the purpose to study the relationship between latent variables (LV) in research in the model. Results from significant testing of the relationship between latent variables or trajectory between two latent variables can be seen in Table 3.

The purpose of the study is to examine whether the variables of compensation, career and job satisfactions impact on turnover intentions among middle managers in Indonesian manufacture and service industries. Table 3 shows an absolute positive and significant result of each construct. The explanation on each relation follows.

4.2. Compensation towards Job Satisfaction

Based on the results of testing the hypothesis (Table 3), it is known that there is a significant positive relationship between compensation and job satisfaction. In other words, the compensation will predict job satisfaction through the eight indicators chosen to represent the compensation variable. The indicator that can best explain the good compensation is the perception that the company has placed compensation as a top priority. It concluded that a good compensation will lead to increased employee job satisfaction, while a poor compensation will lead to a decrease in employee satisfaction. This result supports the studies conducted by Yaseen (2013), Susanto et al. (2020) that indicated that there is a significant effect of compensation on job satisfaction.

4.3. Career towards Job Satisfaction

Data obtained from the results of SEM analysis shows that not all selected indicators are used to measure employee motivation variables. Such as the perception of guarantees provided by the company for the life of employees in old age who have a validity value lower than 0.66, so that they cannot be included in the testing of structural models. Likewise, the perception of the challenges of the assignment given has a validity coefficient of 0.378, so that it needs to be removed from the analysis of the proposed structural model. This might be due to questions that are related to the company’s circumstances. However, the results of testing the hypothesis (Table 4) confirms that the relationship between employee motivation and employee performance is significantly positive, which means that employee motivation can predict employee performance. In other words, high motivation will improve employee performance; on the contrary, low employee motivation will reduce employee performance. This is in line with the results of Zameer, Alireza, Nisar, and Amir (2014), which state that the level of employee performance is positively influenced by the level of employee motivation.

4.4. Compensation towards Turnover Intention

From the result it was found that compensation has a negative significant effect on turnover intention. According to Robbins and Timoty (2013), employee compensation can include many different types of rewards and benefits such as salaries, incentive payments and other benefits and services that trigger the level of motivation. Respondents in this study who were middle managers likely had other priorities when deciding whether to stay or leave; ultimately compensation – direct or indirect – is not the only decision maker. This related to study by Ghafoor (2017).

Table 2: The Analysis of model

Table 3: Testing of Hypothesis

4.5. Career towards Turnover Intentions

In conclusion, it has been shown that career concern was a factor for which middle managers reported dissatisfaction, which ultimately increase the manager turnover intention. The finding of this particular study where the respondents are middle managers gives strong support to the argument that career concern absolutely influences turnover intention. It also indicates that failure to implement this factor might be one of the reasons organizations were not more successful in reducing employee turnover. Therefore, the managers and policy-makers should design strategies and policies for career development of employees. This study supported the previous research by Ferreira, Coetzee, and Masenge (2013); Omar and Noordin (2013) ; Savickas et al. (2009).

4.6. Job Satisfaction towards Turnover Intentions

The result shows that there is a significant negative relationship between employees’ job satisfaction and turnover intention. This result is in line with the study by Akhigbe, Felix, and Finelady (2014); and Susanto et al. (2020), who found that there exists a significant relationship between job satisfaction and turnover intention.

5. Conclusion

The study sought to satisfy the need to know what are the determinant factors that influence middle managers in Indonesia to stay or leave. The results of this study can be summarized as follows: Compensation has an influence on the middle managers intention to leave. This means that good compensation can improve employee motivation and make them stay. One of the main objectives of this study was to examine the effects of career concern on turnover intention, and the findings confirm that this variable has a significant positive effect on turnover intention. In this case, when middle managers are highly concerned about their careers, especially if their prospect of advancing their career is not clear or non-existence, they will move from one organization to another. Compensation is one of the drives that motivate workers all over the world. From this study it can be argued that, if middle managers teachers are compensated well, they will be encouraged, assured and will have positive feelings towards their job and this would result in making them stay. This works as well with career and job satisfactions. If attention is properly paid to both variables, the turnover intentions are likely to be low.

This study has several limitations. First, the industries where the respondent works are limited to manufacture and service, future research should take either a broader view covering other areas or a more narrow and deeper view of specific industries. Different or specific industrial sectors may have distinctly different employment cultures that could influence employee attitudes. Second, the focus on turnover intentions rather than actual turnover could not provide support for establishing causality. Normally, when an employee leaves his companies, there are interesting exit procedures and documents that can be a source of data to get a more accurate reason for leaving. Finally, while the sample reflects the profile of the workforce – middle managers – the real situation and regulations on employment are also dealing with short-term employment, or another term of employment, which will affect the turnover decision.

Future research could get more accurate results by examining sub-groups in relation to certain professions, in other industries, and in other cultural settings. The cooperation from peers or managers may be useful to minimize distortion from self-serving bias. Future research may use the longitudinal design and multi- source data to find out the cause-effect linkage among the variables proposed in the model and to determine the effect on actual turnover behavior. Furthermore, since organizational support can build up employees’ job- related skills, knowledge, and abilities (e.g. Eisenberger et al., 1986; Silitonga et al., 2020), future research should examine other possibilities of mediating roles and measure the actual turnover.