Aligning Pay Structure With Company Culture: A Step-By-Step Guide
Your compensation strategy and your organisational culture are both super important when it comes to attracting and retaining talent. But you could be sending mixed messages if they’re not aligned with each other.
In this article, we’ll dive into the link between compensation and company culture — and why you need to start thinking of them as two sides of the same coin.
The link between compensation and culture
The way you compensate employees tells them what you want them to do. For example, if you give bonuses, extra perks and pay rises to employees based on how long they’ve been with your company, this shows them that loyalty is important to you.
And your company culture also tells employees what’s expected of them — albeit in a more subtle way. Remember, your culture isn’t just defined by the values you have listed on your website (though those are important too). It’s also about the norms, conventions, behaviours and attitudes that are prevalent in your organisation. For example, if everyone on a team works late in the run-up to big project deadlines, that’s part of your culture too — whether you intended it or not.
What happens when culture and compensation are misaligned?
When a company’s compensation strategy is out of sync with its culture, employees can end up confused about what’s actually expected of them.
Here’s an example: imagine a company that prides itself on its collaborative culture. One of the company’s core values is that employees should be working together towards a common goal, celebrating each other’s successes and helping each other overcome hurdles along the way.
Now imagine that that company awards bonuses not for overall performance, but for individual contributions. Wouldn’t that be confusing? Does the company want its employees to work together and help each other — or to strive to hit goals as individuals?
How compensation feeds into culture
Company culture doesn’t exist in a vacuum. It’s influenced by the behaviours and attitudes that are dominant in your organization. That means that when compensation systems promote certain behaviours, those end up becoming part of your company’s culture.
Without careful attention, you might find that your company culture is completely different from the one you imagined based on your core values, mission and vision.
So, what’s the solution? Simple: you need to align your compensation strategy with your company culture, so that you’re not giving mixed signals to your employees and messing up the culture you’ve worked so hard to create.
Read on for our step-by-step guide for putting this into action.
1. Understand your organisational culture
Before you can start thinking about aligning your pay structure with your company culture, you need to figure out what that culture actually looks like.
One of the most cited ways of categorising a company’s culture comes from two academics called Kim Cameron and Robert Quinn, who came up with something called the ‘Competing Values Model’ (CVM).
Basically, this model looks at two important facets of an organisation’s culture:
- Whether its focus is internal or external
- The degree of flexibility or control in its operations
Based on this, Cameron and Quinn suggest that there are four basic culture types that an organisation can have: hierarchy, clan, adhocracy and market.
Hierarchy culture (internal focus + control)
Hierarchy culture is characterised by rules, formal procedures and bureaucracy. Its key values include stability, efficiency and uniformity, and there’s little room for flexibility or risk-taking. Decisions are typically made centrally by management, and employees are rewarded for loyalty, long tenure and adherence to company norms.
Picture this: A large financial institution that’s been operating for decades. It has a clear hierarchical structure, with a CEO at the top, and upper management, middle management and rank-and-file employees underneath.
Clan culture (internal focus + flexibility)
Companies with clan cultures are egalitarian and warm, and may describe themselves as being ‘like a family’. Because of this, employees feel a strong sense of belonging, and things like collaboration, teamwork and commitment are highly valued. These companies don’t put much emphasis on formal controls, and senior leaders act as mentors and coaches for employees.
Picture this: A family-run furniture shop that’s been in business for many years. Over time, some employees have worked their way up from shop-floor positions to the back office thanks to mentorship from the company’s leaders.
Market culture (external focus + control)
Companies with market cultures are all about efficiency and meeting goals. These companies often use things like benchmarking and best practices to develop policies, and the focus is on enhancing the company’s competitive position in the market. Employees are rewarded for individual performance and an entrepreneurial approach.
Picture this: A leading e-commerce company that uses a data-driven approach to work, with set process in place to ensure maximum efficiency. Employees might not feel personally linked to the company, but they work hard and are rewarded well with significant bonuses for top performance.
Adhocracy culture (external focus + flexibility)
The word ‘adhocracy’ comes from the phrase ‘ad hoc’. Companies with this type of culture tend to be future-oriented and innovative. They encourage employees to take risks and use their own initiative. This type of culture is typically found in dynamic, fast-moving businesses like high-tech startups. While collaboration is encouraged, employees also need to be able to act alone and make quick decisions.
Picture this: A tech startup building an innovative new product. Employees are encouraged to be creative, and anyone is welcome to pitch their ideas to the company’s founders. People don’t necessarily have fixed roles, but work according to their unique skills and abilities.
2. Identify the behaviours you want to encourage
The next step is to determine which behaviours you want to reward with your compensation strategy. In other words, you’re looking for behaviours that are in line with the culture you want to build for your organisation.
Keep in mind that the framework we outlined above is just that — a framework. That means that you shouldn’t expect your organisation to slot neatly into one of the four boxes we’ve described. Each company needs to decide on its desired culture for itself, and that may well include elements of each culture type we’ve talked about.
For the sake of simplicity though, let’s take a look at some of the behaviours that you might want to encourage for each of the four culture types identified under the Competing Values Model.
Desired behaviours in a hierarchy culture
- High-quality work
- Consistent following of processes
- Adherence to company policies
Desired behaviours in a clan culture
- Collaborative problem-solving
- Loyalty (long tenure)
- Cooperation and participation
- Demonstrations of commitment
Desired behaviours in an adhocracy culture
- Innovation and risk-taking
Desired behaviours in a market culture
- Individual performance
- Going above and beyond
- Efficiently completing tasks
- Meeting core targets
- Driving profit
The above are just ideas — it's important to think carefully about the types of things you’d like to encourage in your organisation.
3. Build your compensation strategy around these behaviours
The next and final step is to figure out how you can use your compensation strategy to encourage the behaviours you’ve identified and build a company culture that’s in line with your values.
Here are some ways you might do this for each of the four culture types:
- Hierarchy culture: Promote loyalty, consistency and efficiency by ensuring your pay structure includes a higher proportion of fixed vs. variable pay. Award bonuses based on long-term performance, and reward employees for long service with promotions and raises.
- Clan culture: Foster collaboration, idea-sharing and teamwork by awarding bonuses based on team or organisational performance, to show employees that they’re all in it together.
- Adhocracy culture: Encourage individual initiative, flexibility and risk-taking by making these things a key part of your pay system. For example, you could award bonuses to employees who bring innovative ideas to the table.
- Market culture: Using a high proportion of variable pay can help encourage employees to go above and beyond and drive profit for your company. It’s also a good idea to explicitly link bonuses and pay reviews to measurable performance goals to keep everyone on track.
Tying it together with a compensation philosophy
Your compensation strategy should reflect the type of organisation you want to be. In turn, that helps you to attract candidates that are well-suited to your particular company culture, and who will be able to meet your expectations.
And one of the best ways to get the word out about who you are as an employer is by distilling this strategy into a compensation philosophy that clearly sets out your position.
This philosophy isn’t your compensation strategy or policy — it’s much simpler than that. It’s basically a statement of the fundamental principles that guide you when making decisions about pay, be they big or small.
Want to learn more about what makes an effective compensation philosophy (and how to start creating your own)? Check out our full guide for more info — there are even examples of compensation philosophies from real companies (including Figures) in case you need some inspiration!