Introduction
Corporate culture is an integral part of every organization and affects many aspects of how it operates, including productivity, innovation, employee engagement, and customer satisfaction. One of the key factors that has a major influence on corporate culture is compensation strategy. Compensation isn't just a tool for retaining and motivating employees — it's also an important lever for reinforcing corporate values and goals.
Every organization can be characterized by a natural tension between two sets of values: Change vs. Stability, and External vs. Internal focus. We call this tension the competing values.
The OCAI model (Organizational Culture Assessment Instrument), developed by Kim Cameron and Robert Quinn, provides a tool for assessing corporate culture based on four main types: clan, innovative, market, and hierarchy culture. Each of these cultures has its own values and principles that should be factored into compensation strategy. This article looks at how different culture types call for different approaches to compensation, and how these strategies can be optimized to reinforce corporate culture.
Types of culture
Hierarchy culture
Risk or mistakes have no place in this kind of environment. To that end, hierarchy cultures build internal systems, structures, and control mechanisms designed to eliminate risk. Innovation here happens through incremental improvements to systems, structures, and standards. For employees themselves, the most effective approach is simply to follow these governing structures. A hierarchy culture is typically organized around a leader who monitors, organizes, and controls what happens in the company, or in the part of it they oversee, through formal systems. When a problem arises, a hierarchy culture typically interprets it as a lack of control or a missing process. Each of the dominant cultures has its own strengths and weaknesses. A hierarchy culture makes it possible to maintain high quality and coordinate large groups of people into functioning wholes. Its weakness is the gradual growth of bureaucracy and the resulting loss of employee motivation. In overgrown hierarchy cultures, employees often feel they have to do things without anyone really knowing why, or who's actually responsible for them. Organizations that need more structure and order today typically adopt various software tools for monitoring work processes and invest heavily in planning. They try to break existing problems down into the smallest possible pieces and understand every detail. They run regular audits to catch deviations from mandated procedures and performance standards.
Competitive culture
Its mission isn't necessarily to always do things right, but above all to do them fast. To that end, a competitive culture puts heavy emphasis on what's currently happening in the market, tracks every move the competition makes closely, and tries to respond to even the smallest change as quickly as possible. The goal is to stay a step ahead of the competition in the customer's eyes, win market share, and hit the plan. A competitive culture is defined by competitive managers. They're hard-driving people who keep raising the performance bar expected of employees. They set the pace, deliver high output, and reward winners. When a problem shows up, a competitive culture typically attributes it to insufficient pressure on results. A competitive culture has its downsides too. Its primary focus is short-term results and hitting targets. During periods of major transformation in society and the economy, an overgrown competitive culture can ignore critical external trends and prevent the organization from making deeper transformational changes. When you and your competitors are all heading toward a cliff, speed is the last thing you need. When an organization wants to strengthen its competitive culture, it invests resources in closely tracking trends — and above all, every move the competition makes. Employees and customers are regularly asked what they need to perform better or feel more satisfied. A competitive culture won't hesitate to implement anything that saves even a second of time, a dime of cost, or earns an extra crown. Competitive cultures often form strike teams to eliminate problems, and "steering committees" with a mandate to make immediate decisions. A competitive organization rewards high performers well above average and quickly eliminates initiatives that aren't delivering.
Clan culture
Its mission is long-term change that's sustainable for both people and systems. A clan seeks harmony and getting the most out of each individual's potential. A clan culture emphasizes belonging and a collective approach to problems. The primary goal of a clan culture is developing people, because only when everyone brings out their best can the organization thrive in the long run. A typical representative of a clan culture may be an unassuming leader at first glance. They don't seek the spotlight, and they try to turn their people into the heroes. They're a patient facilitator of difficult discussions, a mentor, and a builder of devoted teams. As the name suggests, the clan culture has its archetype deep in human history. Belonging, psychological safety, and trust in a shared future are among the deepest psychological needs people have. Organizations that learn to tap into these motivators achieve remarkable results, whether in sports, business, or elite units. But an overgrown clan culture has its downsides too. Employees may start focusing on keeping each other comfortable, stop feeling personally responsible for results, and, out of fear of damaging relationships, stop bringing up difficult topics. Organizations that want to strengthen a clan culture look for ways to actively involve everyone affected by a change in the design, planning, and implementation process. Employees get room to talk about their views and feelings. Management is constantly and actively looking for honest advice from employees themselves on how to better handle difficult situations. The organization's leaders actively get involved in coaching and mentoring employees and help them integrate their personal and company goals.
Innovative culture
In this culture, relationships, rules, and structures are all thin and temporary. Everything is subordinated to creating an environment that maximally supports change. This is typically where new companies are born, but more and more organizations are looking for ways to build and scale the agile elements of an innovative culture even within large organizations. A typical representative of an innovative culture is an entrepreneurial innovator and visionary. They have a gift for seeing connections between seemingly unrelated worlds, and they regularly feed the people around them fresh ideas that challenge the status quo. An innovative culture is the exact opposite of a hierarchy culture. The systems of these two cultures contradict each other, which is exactly why so many traditional organizations struggle unsuccessfully with agile transformation. Out of the chaos of an innovative culture come revolutionary projects and entirely new industries, but failure and confusion are, in this culture, basic tools of production. When building an innovative culture, organizations form cross-functional teams and various kinds of gatherings where employees from different professions exchange ideas and try to surface questions and problems worth a closer look. When approaching problems, quick action is encouraged: try something first, and discuss it afterward. The cost of individual experiments is minimized in an effort to run them quickly and in large numbers.
Compensation system
So what are the right approaches to compensation for each culture type? Let's first define the individual components of compensation, and then look at how well-suited each is to the different culture types.
First, a few terms:
Pay distribution — defined as the number of pay levels within an organization, including the size of the differences between them. There are two main types of pay systems:
Egalitarian pay system — characterized by fewer pay levels and smaller differences between them.
Hierarchical pay system — characterized by a high number of pay levels and large differences between them.
Compensation strategy — the principle on which compensation is based. A relatively commonly used strategy is Pay for Performance (PFP) — where individual or team performance evaluation plays a major role in determining pay increases or bonus amounts.
An effective compensation system is key to reinforcing corporate culture, and it includes both the pay system and the compensation strategy. Research shows that compensation can be used to strengthen a company's culture, helping employees move more effectively toward a shared vision and goals. The compensation system should therefore reflect the characteristics of each type of corporate culture.
If we go back to Figure 1 for a moment, the top part shows the flexibility (change) dimension, showing that clan and innovative cultures lean toward freedom, change, and are more organic than hierarchy and market organizations. This approach requires a higher degree of collaboration among members of the organization, and also reflects a higher level of mutual interdependence. In these types of cultures, large pay gaps between team members often create tension and reduce willingness to cooperate. Overly hierarchical pay structures can therefore have a negative effect on organizational performance, since employees become less inclined toward teamwork. Research also shows that when employees perceive unequal pay among colleagues, turnover tends to rise — a particular risk for clan and innovative cultures, which are built on collaboration and talent development.
The above suggests that an egalitarian pay system is better suited to clan and innovative cultures.
Hierarchy and market cultures, on the other hand, focus more on individual performance than on team collaboration. The lower need for cooperation here makes hierarchical pay structures acceptable, with pay increases tied to performance (market culture) or to tenure and level of oversight responsibility (hierarchy culture). A hierarchical pay system here reinforces the competitiveness and individual accountability that are characteristic of these cultures.
When it comes to an organization's internal versus external orientation, internally oriented clan and hierarchy cultures are best supported by minimal use of Pay for Performance (PFP). A hierarchy culture values stability and control, and failure is seen simply as failure. This type of organization, often typical of government institutions or highly regulated industries, doesn't favor PFP, because risk and performance aren't its core values. A clan culture also tends to avoid risk, though employee development matters more to it than a high degree of control. What's more, a clan culture relies on employees' intrinsic motivation, which is long-term by nature and can be undermined by PFP, which is geared toward driving short-term goals.
Externally oriented cultures, on the other hand, like innovative and market cultures, can benefit from PFP. A market culture emphasizes short-term performance and a results-driven orientation, which pairs well with incentives tied to achieving targets. An innovative culture also emphasizes innovation, collaboration, and entrepreneurial spirit, so incentives for taking risks can support creativity and team commitment.
Recommendations
Clan culture: equality and long-term development
A clan culture, oriented toward collaboration and personal development, operates on principles of openness and long-term employee development. An egalitarian compensation system is therefore appropriate, as it supports equality among employees and minimizes pay gaps. Pay for Performance (PFP) doesn't work particularly well here, because short-term incentives aren't aligned with this culture's long-term focus, which is built on intrinsic motivation and stability.
Innovative culture: innovation and managed risk
An innovative culture emphasizes innovation, teamwork, and tolerance for risk. Organizations with this culture are usually market-oriented and focused on short-term projects. An egalitarian compensation system is the best fit here too, as it supports teamwork and reduces the sense of competition among employees. However, unlike a clan culture, it's worthwhile in an innovative culture to implement PFP to encourage innovative thinking and risk-taking, both within teams and among individuals.
Hierarchy culture: control and rule-following
A hierarchy culture focuses on stability, control, and adherence to procedures. In this type of organization, compensation is distributed based on a hierarchical pay system, which reinforces rule-following and control mechanisms. PFP strategies don't carry much weight here, because organizations with this culture prefer stability and limit risky behavior. Compensation is therefore usually based on gradual pay increases tied to position and tenure or loyalty.
Market culture: performance and competition
A market culture emphasizes performance and a results-driven orientation, with little need for collaboration among employees. A hierarchical pay system combined with a PFP strategy works well here, rewarding employees for hitting short-term performance targets and supporting individual performance. This motivates employees to achieve high performance and to compete effectively in the market.
Conclusion
Based on this analysis of the four main types of corporate culture and their relationship to compensation, one key question emerges: does the compensation system in your organization genuinely reflect the values and goals of your corporate culture? Is compensation structured to support collaboration, development, or competition — depending on which of these your company is actually built on?
If your compensation system doesn't support — or even undermines — the principles your culture is built on, it can lead to lower motivation, higher turnover, and lower employee engagement. So it's worth asking yourself whether adjusting your compensation strategy could help bring your corporate values and what your people actually get out of compensation into closer alignment — and ultimately contribute to the success of the whole organization.