The relationship between compensation and corporate culture according to OCAI

Introduction

Corporate culture is an integral part of every organization and influences many aspects of its functioning, including productivity, innovation, employee engagement, and customer satisfaction. One of the key factors that has a fundamental impact on corporate culture is the reward strategy. Rewarding is not only a tool for retaining and motivating employees but also an important element for supporting corporate values and goals.

Every organization can be characterized by a natural conflict between two value systems: Change vs. Stability and External vs. Internal Focus. We call this mutual conflict the competition of cultures.

The OCAI (Organizational Culture Assessment Instrument) model, developed by Kim Cameron and Robert Quinn, provides a tool for assessing corporate culture based on four main types: clan, innovative, market, and hierarchical culture. Each of these cultures has its own values and principles that should be considered in formulating reward strategies. This article will focus on how different types of culture require different approaches to rewarding and how these strategies can be optimized to support corporate culture.

Types of Cultures

Hierarchical Culture

Risk or mistakes have no place in such an environment. To this end, internal systems, structures, and control mechanisms arise in a hierarchical culture, aiming to eliminate risks. In this environment, innovations occur through incremental improvements of systems, structures, and standards. For the employees themselves, it is most effective when these management structures are followed. Hierarchical culture is typically organized around its leader, who monitors, organizes, and controls the happenings in the company or the entrusted part through systems. If a problem arises, it is typically interpreted in a hierarchical culture as a lack of control or a missing process. Each of the dominant cultures has its strengths and weaknesses. Hierarchical culture allows maintaining high quality and linking large groups of people into functioning wholes. Its weakness is the gradual spread of bureaucracy and the associated loss of employee motivation. In overgrown management cultures, employees often feel that things must be done without anyone knowing exactly what their purpose is and who is responsible for them. Organizations that need more structure and order today typically adopt various software tools for monitoring work processes and invest a lot of energy into planning. They try to break existing problems down into the smallest parts and understand all the details. They organize regular audits to reveal deviations from prescribed procedures and performance standards.

Competitive Culture

Its mission is not necessarily to do things correctly all the time, but mainly to do them quickly. To this end, competitive culture places great emphasis on current market events, closely monitors every step of the competition, and strives to react as quickly as possible to the slightest changes. The goal is to stay a step ahead of the competition in the eyes of the customer, gain market share, and meet the plan. Competitive culture is characterized by competitive managers. They are hard workers who constantly raise the bar for performance expected from employees. They set the pace, have a high output, and reward winners. If a problem arises, it is typically caused by insufficient pressure for results in a competitive culture. However, competitive culture has its downsides. Its primary focus is on short-term results and meeting plans. During significant transformational changes in society or the economy, an overgrown competitive culture may ignore crucial trends in the external environment and hinder the organization from deeper transformational changes. When you and your competitors head towards a cliff, speed is the last thing you need. If an organization seeks to strengthen its competitive culture, it invests resources in carefully monitoring trends and, above all, every step of the competition. Employees and customers are regularly asked what they need to enhance performance or satisfaction. Competitive culture does not hesitate to implement anything that saves even a second of time, a penny in costs, or earns an additional crown. In competitive cultures, strike teams often arise to address problems and “steerca” with a mandate to make immediate decisions. Competitive organizations disproportionately reward high-performing employees and quickly eliminate initiatives that do not meet their purpose.

Clan Culture

Its mission is long-term change sustainable for both people and systems. The clan strives for harmony and maximum utilization of each individual's potential. Clan culture emphasizes belonging and a collective approach to problems. The primary goal of clan culture is developing people because only when everyone gives their best can the organization prosper in the long term. A typical representative of clan culture may appear to be a humble leader at first glance. They do not seek attention and strive to make heroes out of their subordinates. They are patient facilitators of complex discussions, mentors, and builders of dedicated teams. As the name suggests, clan culture has its archetype in ancient human history. Belonging, psychological safety, and trust in a shared future are among the deepest psychological needs of individuals. Organizations that learn to leverage these motivators achieve remarkable results, whether in sports, business, or special units. However, an overgrown clan culture also has its downsides. Employees may begin to focus on ensuring mutual comfort, stop feeling personal responsibility for results, and cease to open up complex topics out of fear of disrupting relationships. Organizations that strengthen clan culture seek ways to actively involve all employees affected by changes in the design, planning, and implementation processes. Employees are given space to talk about their attitudes and feelings. Management continuously seeks ways to get honest advice from employees on how to better handle complex situations. Leaders in the organization actively engage in coaching and mentoring employees, helping them integrate personal and corporate goals.

Innovative Culture

In this culture, only thin and temporary relationships, rules, and structures arise. Everything is subordinated to creating an environment that maximally supports change. It is here that new companies typically emerge, but more and more organizations are seeking ways to create and scale agile elements of innovative culture even in large organizations. A typical representative of innovative culture is the entrepreneurial innovator and visionary. They have the talent to see connections in seemingly separated worlds and regularly provide their surroundings with original ideas that disrupt the status quo. Innovative culture is the exact opposite of controlling culture. The systems of these cultures contradict each other, which is also the reason why so many traditional organizations struggle unsuccessfully with agile transformation. Out of the chaos of innovative culture, revolutionary projects and entire new industries emerge, but failure and confusion are basic production tools in this culture. When building an innovative culture, organizations form cross-functional teams and various forms of meetings, in which employees from different professions exchange ideas and try to discover questions and problems worthy of closer examination. In approaching problems, quick action is encouraged: first try something and only then discuss. Costs for individual experiments are minimized in an effort to conduct them quickly and in maximum quantity.

Figure 1: Framework of Competing Cultures

Reward System

What are the suitable approaches to rewards in individual cultures? Let’s first define the individual components of rewarding, and later we will address their suitability for each type of culture.

First, several terms:

Pay distribution – is defined as the number of pay levels, including the amount of differences between individual pay levels within one organization. There are two main types of pay systems:

Egalitarian Pay System – is characterized by a lower number of pay levels and small differences between individual pay levels.

Hierarchical Pay System – is characterized by a high number of pay levels and large differences between individual pay levels.

Rewarding Strategy – on what basis (principle) is rewarding governed. A relatively commonly used rewarding strategy is Pay for Performance (PFP) – the assessment of individual or team performance significantly determines the amount of wage increases or bonuses.

Figure 2: Comparison of Hierarchical and Egalitarian Reward Systems According to Different Characteristics

An effective rewarding system is key to supporting corporate culture and includes both pay systems and rewarding strategies. According to research, rewarding can further strengthen a company's culture, allowing employees to effectively move towards a shared vision and goals. Therefore, the rewarding system should reflect the characteristics of the different types of corporate cultures.

If we briefly return to Figure 1, at the top is the flexibility (change) dimension which shows that clan and innovative cultures are oriented towards freedom, change, and are more organic than hierarchical and market-oriented organizations. This approach requires a higher level of collaboration among organization members, while also being expressed by a higher degree of mutual dependence. In these types of cultures, large wage differences between team members often create tension and reduce willingness to cooperate. Excessively hierarchical structures of rewarding can have a negative impact on organizational performance, as employees are less inclined towards teamwork. Furthermore, research shows that if employees perceive inequality in rewards among colleagues, their turnover rate increases, which can be particularly hazardous for clan and innovative cultures that rely on collaboration and talent development.

From the above, it follows that an egalitarian pay system is preferable for clan and innovative cultures.

On the other hand, hierarchical and market cultures are more focused on individual performance than on teamwork. The smaller need for cooperation here makes acceptable hierarchical rewarding structures, while wage increases are linked to performance (market culture) or to length of service and responsibility for control (hierarchical culture). The hierarchical pay system here supports competitiveness and individual responsibility, which are characteristic of these cultures.

Regarding the internal and external orientation of the organization, internally oriented clan and hierarchical cultures are best supported by minimal use of performance-based reward strategies (PFP). Hierarchical culture values stability and control, where failure is seen as a downfall. Organizations of this type, often characteristic of governmental institutions or highly regulated industries, do not support PFP, as risks and performance are not key values here. Clan culture also avoids risks; however, employee development is more important to it than a high level of control. Moreover, clan culture relies on the internal motivation of employees (which has a long-term character), which can be undermined by using PFP, aimed at supporting the achievement of short-term goals.

In contrast, externally oriented cultures, such as innovative and market, can benefit from PFP. Market culture emphasizes short-term performance and results orientation, which aligns well with incentives for achieving goals. Innovative culture also emphasizes innovations, collaboration, and entrepreneurial spirit, thus incentives to take risks can promote creativity and team commitment.

Figure 3: The Relationship Between Organizational Culture, Pay System, and Reward Strategy (PFP)

Recommendations

1. Clan Culture: Equality and Long-Term Development

Clan culture, oriented towards collaboration and personal development, operates on the principles of openness and long-term employee development. Therefore, an egalitarian reward system is suitable, which supports equality among employees and minimizes wage differences. Performance-based rewards (PFP) are not often applied here, as short-term incentives are not aligned with the long-term focus of this culture, which relies on internal motivation and stability.

2. Innovative Culture: Innovation and Managed Risk

Innovative culture emphasizes innovation, teamwork, and tolerance for risk. Organizations with this culture typically focus on the market and short-term projects. The most suitable is an egalitarian reward system that promotes teamwork and reduces the sense of competition among employees. However, unlike clan culture, in an innovative culture, it is advantageous to implement PFP to foster innovative thinking and risk-taking within teams and individuals.

3. Hierarchical Culture: Control and Adherence to Rules

Hierarchical culture focuses on stability, control, and adherence to procedures. In this type of organization, rewards are distributed based on the hierarchical pay system, which reinforces adherence to rules and control mechanisms. PFP strategies do not hold great significance here, as organizations with this culture prefer stability and limit risky behavior. Therefore, rewards are mostly based on gradual pay increases depending on position and loyalty.

4. Market Culture: Performance and Competition

Market culture emphasizes performance and results orientation, with a minimal need for cooperation among employees. A hierarchical pay system with the use of PFP strategy is appropriate here, rewarding employees for achieving short-term performance goals and supporting individual performance. This motivates employees to achieve high performance and to compete in the market.

Conclusion

Based on the analysis of the four main types of corporate cultures and their relationship to rewards, a fundamental question arises: does the reward system in your organization truly reflect the values and goals of your corporate culture? Is the rewarding set up to support collaboration, development, or competition, according to the characteristics on which your company is built?

If the reward system does not support or even disrupts the principles on which your culture stands, it can lead to loss of motivation, higher turnover, and lower employee engagement. Therefore, consider whether adjusting the rewarding strategy could contribute to a higher level of alignment between corporate values and what your people take away from rewarding – and ultimately to the success of the entire organization.