Compensation Strategy and Culture: 3 Steps to Create Alignment

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Compensation Strategy and Culture: 3 Steps to Create Alignment

The compensation strategy plays a crucial role in ensuring clarity when making salary and benefits decisions within your organization. With a clear framework for compensation, you will be able to help your organization become more competitive when it comes to attracting and retaining talent. 

But it is not enough to just have a compensation strategy — you need one that is aligned with your organizational culture. This is how you can ensure that your employees feel valued, motivated, and satisfied. You need to encourage them to behave and perform in a way that will help the organization achieve its goals. 

In this article, we will discuss what a compensation strategy is and how it relates to organizational culture. Then we will outline three steps you can take to create a culture-based compensation strategy. Let’s get started! 

Contents
What is a compensation strategy?
Why does your organization need a compensation strategy? 
The link between compensation strategy and culture
How to create a culture-based compensation strategy

What is a compensation strategy?

A compensation strategy outlines your organization’s approach towards pay and benefits for your employees. This includes your business’ position on the job market, the level of the total cash, the main bonus principles in the organization, rules for the base salary, and employee benefits. As it greatly influences an organization’s budget, the owner of the compensation strategy is always the executive management. The HR and/or Compensation & Benefits teams provide input and shape the strategy.

Compensation strategy aims to set the guiding principles to determine what goes into your compensation scheme and what compensation elements you need to prioritize. 

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Another thing to pay attention to is that the compensation strategy needs to align with the business and HR strategies. This is because you need to have a strong compensation strategy to attract and retain the talent your organization needs. Additionally, compensation also reflects what top management expects from employees in terms of behaviors, performance, and results.

Why does your organization need a compensation strategy?

Having a solid compensation strategy is critically important to the success of your organization. You can think of this in terms of the areas of the business that a compensation strategy influences. Here are a few examples.

Talent acquisition 

Without a good compensation strategy, effective recruitment cannot exist. You can have excellent recruitment marketing strategies, but at the end of the day, to attract the talent your organization needs, you need to be able to offer total rewards packages that are both competitive and aligned with your internal policies and budgeting. 

Providing clear information about your compensation strategy during the hiring process can help you find candidates that resonate with your strategy faster. This will allow you to decrease your time to hire and your recruiting budget in the long run. 



A compensation strategy will also help you understand how you can stand out among your competitors as the employer of choice. In other words, it will contribute to your employer branding strategy. This is especially important in the Great Reshuffle when more than 4.5 million workers have quit their jobs by November 2021 in the US alone. 

Talent retention

A strong compensation strategy does not only help you attract talent but also retain the talent that you have spent so much effort and money hiring. With the right strategy, you will be able to make sure that your employees are satisfied and motivated enough to be more productive and less likely to leave the organization.

This means that you will not need to continuously spend time, money, and energy to hire new employees.

Budgeting 

By establishing a clear compensation strategy, you will be able to calculate and track pay ranges, salary differentials, and other compensation metrics more effectively. It also ensures consistency and transparency when it comes to salary and benefits decisions.

A compensation strategy enables you to stay within your forecasted budget and maintain internal pay equity.

The link between compensation strategy and culture

You can think of compensation as a system that rewards employees for how well they behave and perform according to the expectations of the organization. If your employees live by the organizational values and beliefs — in other words, the organizational culture — they expect to be rewarded accordingly. When the reward system does not align with the organizational culture, your employees can feel disillusioned and dissatisfied. 

How you compensate your employees plays a critical role in shaping your organization in the desired direction. For example, if you want your core value to be innovation, this needs to be reflected in your compensation strategy. That means that you cannot, in practice, give out the same salary increase and benefits for everyone regardless of whether they can come up with new ideas or not. This will have the opposite effect of encouraging innovation.

On the contrary, it sends out the message that what you truly value is order and sameness. Your employees will not feel incentivized to put in the extra effort to innovate. In the long run, this will hurt your plan to build an innovative culture. 

Compensation Strategy and Culture
Image adopted from Madhani (2014).

How to create a culture-based compensation strategy

Now that we have established the link between compensation strategy and culture, let’s take a look at the three steps that you need to go through to tie your compensation strategy with the organizational culture. 

1. Understand your organizational culture

The first step in creating alignment between compensation and culture is to have a good understanding of your organizational culture.

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The Organizational Culture Assessment Instrument (OCAI) based on Competing Value Framework is an excellent tool that you can use to identify the current and desired cultures of your organization. This framework is the best-known classification of types of organizational culture created by Kim Cameron and Robert Quin at the University of Michigan.

With this framework, you can define opposing forces within the organization that either promote or hinder certain behaviors. You will then be able to understand how culture influences organizational effectiveness and performance. 

The Competing Value Framework classifies cultures based on two factors: 

  • Focus: Some companies are effective when focusing on the internal process, while others are effective when focusing on external positioning. 
  • Stability: Some organizations show efficiency when they are flexible and adaptable, while others thrive on stability and high levels of control or structure. 

To describe an organizational culture type, you would need to look at the degree of flexibility versus stability, and the degree of internal focus versus external focus of that organization. The graphic below shows the resulting four cultural typologies.

Competing Values Framework - Culture Types

Most organizations will have all four culture types present in their culture. The larger your organization, the higher the chance of having more than one culture. What is important here is the extent to which each type is represented and how you can create the right positive tension between them for your organization to be effective.

Here’s what the result of your assessment could look like charted on the Competing Values Framework:

Competing Values Framework Results

2. Identify the behaviors to promote your desired culture 

As your culture is linked to your compensation strategy, different reward options will promote different culture types (as outlined in the Competing Values Framework).

Thus, to build and maintain the desired culture of your organization, you need to determine the kind of behaviors that you want to encourage using your compensation strategy. When creating your compensation strategy, these behaviors will act as the guiding principles. 

If your desired organizational culture is the Clan Culture, your approach to compensation needs to promote teamwork, dependency on each other, and cooperation. You want to build an organization that will act as a group of close-knit and interrelated families or a group of people with strong common interests. 

For the Market Culture, you need an approach that rewards results and high individual performance. Your compensation strategy will need to focus on three guiding principles: 

  • Compensation needs to be equal to or higher than the external market to keep talented employees from leaving. 
  • Compensation needs to have high visibility and public recognition, and it should provide employees with incentives to perform well. 
  • Compensation needs to show the message that anyone performing below what is acceptable needs to step up or be removed. 

With an Adhocracy Culture, you need an approach that encourages innovation and entrepreneurial behaviors. As such, your compensation needs to balance between showing appreciation for low performers and showing higher performers that they are valued. It also needs to promote collaboration. Additionally, your compensation needs to emphasize employees’ flexibility, creativity, and innovation. 

If your goal is the Hierarchy Culture, you need an approach that rewards consistency and quality. This means that your compensation should: 

  • Emphasize the importance of doing things right all the time, every time; 
  • Be highly structured and mechanical, and certain rewards might be provided according to the level of seniority; 
  • Be predictable, focused on the long-term, and consistent.

3. Determine your direct and indirect compensation elements 

Once you’ve established the type of behaviors you want to encourage through rewards, it’s time to decide what goes into your total rewards package. The table below presents several examples of what you can include as direct and indirect compensation according to each culture type. 

Culture type Direct compensation Indirect compensation 
Clan culture – Slight differences in salary increase between different levels of performance– Shared team rewards, such as annual recognition events and experiences
– Benefits to encourage collaboration and a sense of shared connection such as employee share schemes, long-term incentives, and extensive L&D opportunities
– Benefits to promote a culture of care, including wellness initiatives, paid parental leave, and childcare benefits
Market culture – Large gap in salary (increase) between bottom performers and top performers
– Big and frequent bonuses based on results
– Few or no benefits in terms of medical care, well-being programs, and pension
– High-value total compensation package where employees are free to decide which benefits are important to them
– L&D opportunities only for top performers and focused on prestige (e.g., doing an MBA at a leading business school)
Adhocracy culture – Higher salary reserved for those with exceptional performance
– Bonuses reserved for employees who come up with new inventions, products, or services 
– Opportunities to attend conferences, join societies, write down their learnings, share their ideas, and participate in world-leading events. 
Hierarchy culture – Small salary differences between those who are performing
– Much lower salary increase for those below the successful performance rating
– Salary increase calculated based on the same principles every year
– Bonuses paid out over time
– Some rewards depend on the level of the employees (e.g., managers might participate in a long-term incentive pool, while employees receive a 13-month bonus)
– Formal recognition programs to reward and recognize employees for consistently showcasing the right behaviors over time

Summing it up

Building a culture-based compensation strategy is key to helping your organization effectively attract and retain talent, and achieve its goals.

On the one hand, the principles that you use to compensate your employees can highlight the kind of behaviors and performance you want to encourage. In turn, this will strengthen (or weaken) your organizational culture.

On the other hand, the type of culture that you want to promote in your organization will influence how you determine things such as salary increases, L&D opportunities, or even niche non-monetary benefits.

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