10 Chapter 2: Literature Review 2.1 Introduction This chapter provides a comprehensive review of the relevant literature concerning employee performance improvement. It examines various theories and models that explain how different factors, including traditional allowances and token economy systems, can influence employee performance. The review includes an analysis of motivational theories, performance management frameworks, and empirical studies related to employee incentives. 2.2 Literature Review 2.2.1 Definition and Types of Allowance Allowance or Provision allowance refers to additional financial or non-financial benefits provided by companies to employees, in addition to their basic salaries. These allowances aim to support employee welfare, compensate for work-related expenses, and enhance employee motivation (Dessler, 2020). Allowances play a dual role: first, ensuring employees’ basic needs are covered, and second, acting as a performance driver when linked to employee achievements or contributions (Simamora, 2013). Allowances can take various forms, depending on company policies, industry standards, and employees’ needs. Common types of allowances include: 1. Performance-based Allowances – Bonuses or incentives tied to individual or team performance outcomes, directly encouraging employees to achieve targets. 2. Non-monetary Allowances – Benefits provided in facilities or opportunities, such as training programs, flexible working hours, or career development. 3. Health and Insurance Benefits – Coverage for medical expenses, life insurance, and retirement plans, reflecting the company’s commitment to employee well-being. 4. Seniority-based Allowances – Rewards based on years of service, fostering employee loyalty and retention. 11 5. Special Achievement Allowances – One-time bonuses or rewards for extraordinary contributions or innovations. 6. Daily Operational Allowances – Support for daily expenses such as meals, transportation, or communication. At PT Ecodu, traditional allowances have been a long-standing part of the compensation system.