Problem statement Currently, many companies and organizations fail to compensate their employees competitively as a way of enhancing job satisfaction. In fact, employees’ compensation stands out as an important component of every organization. The reason is that it shapes other aspects of an organization including efficiency and strategy. Compensation’s main objective is to attract and enhance the company’s ability to retain employees. A firm that retains employees through competitive compensation benefits from high productivity and increased job satisfaction. Salgado (1997) argues that competitive compensation is important for organizations and subsequently, it constitutes the largest cost for many companies in the world. There are many ways of compensating employees in both the private and public organizations although there is none that is generally practiced across the business environment. How does pay for performance lead to job and employees satisfaction? Theories of Compensation Many social scientists have proposed theories that attempt to explain the psychological, behavioral and economic perspectives of compensation. Outstandingly, cognitive theories articulate that human beings are driven by the urge to get rewards. Human beings tend to repeat actions that yield them the highest level of happiness. This crosscuts across all societies, organizations, and countries. In organizations, competitive compensation tends to reward hard work (Salgado, 1997). Cognitive theorists argue that employees interpret hard work as an action. Repeating this action will increase their rewards and happiness. Consistency in actions and rewards leads to job satisfaction. This is according to the reward theory. In business contexts, a motivated team of staff is an asset for the company. It gives the organization a competitive edge over rivals and competitors. When the employees are motivated to work owing to competitive compensation, the organization retains them with ease. Agency theory is central to any compensation method applicable to the modern business environment. It proposes that compensation of employees is an organizational strategy (Chen, 2011). A firm uses a compensation method due to its costs and perceived benefits. Agency theorists argue that organizational costs come about due to the apparent differences in employees and firms. One source of costs for an organization is when employees fail to put maximum effort in their productivity leading to reduced efficiency. The rationale is that an organization pays number of hours than when the employees put their maximum effort into the work. Further, the theory says that firms seek to maximize their revenues and profit margins by motivating, recruiting, and acquiring high skilled and qualified employees. Nonetheless, employees are consumers. They, therefore, seek to maximize utility. This is through increased income that affects the utility in a positive way. The theory, however, cautions that employees who seek to maximize their utility must strike a balance between disutility and utility (Riordan, Vandenberg & Richardson, 2005). Employees are likely to assume that the increased effort typical of pay for performance is costless. T