The impact of compensation, reward, and punishment on the performance of SME employees in Surabaya

Abstract

Small and Medium Enterprise (SME) is a significant sector in the local and national economy, a provider of employment and a driver of economic growth. However, challenges in human resource management, including compensation, reward, and punishment, often affect employee performance and business sustainability. This study aims to analyse the effect of compensation, reward, and punishment on employee performance in SMEs in Surabaya City. Using the SEM-PLS analysis method and involving 50 SME employee respondents, this study found that: (1) Compensation has a significant positive effect on employee performance; (2) Reward and punishment also have a significant positive effect on employee performance; and (3) Punishment has a significant positive effect on employee performance. The results of the study indicate that compensation has the most dominant effect on employee performance in SMEs. These findings provide suggestions for SME business actors to evaluate and develop compensation, reward, and punishment programmes periodically to maximise employee performance and achieve company goals.