Culture, Culture, Culture. It’s a fun topic to write about because there’s no right answer and what works for one company may or may not work for others making it endlessly interesting to talk about. Most executives spend plenty of time struggling to improve the cultures of their organizations. While this may track with the plethora of business books on the topic, there are few companies that arguably have succeeded solely based on culture and many examples of those who have succeeded despite culture.

Certainly, a quality culture frequently corresponds with excellent business performance, but most of these examples have lots of other things also working for them besides just great culture.

So, is there not a real correlation between culture and business performance?

No, there is a correlation, but there is usually an even stronger correlation between incentives and business performance. Great culture can drive a good business to great success, but it almost always requires the support of well-designed incentives to have the impact it gets credit for.

Look at both intended and unintended consequences

If you set culture aside for the moment to verify that your incentives are working for – not against – you, start by looking at both what your incentives are designed to do AND the messages that they might unintentionally be sending.

People listen to what their leaders ask of them, but they are more prone to respond to how their leaders pay them. Most leaders would not attempt to implement a reward system that encourages back-stabbing, but backstabbing environments wouldn’t exist if there wasn’t an incentive structure motivating people to behave that way (or at least fails to deter them from doing so).

For example, in a system where a group of employees gets regularly ranked and then compensated based on their rank order, an incentive gets created for people to perform at their peak, which is a positive for the organization. However, there is also an incentive for each employee to have his/her peers perform poorly thereby elevating his/her own rank. This unintended consequence can lead to hoarding of information, lack of collaboration, factioning, back-stabbing and a host of other generally counter-productive behaviors.

Trying to eradicate these behaviors through “cultural change” without also changing the incentive structure promises to be at best an arduous task and is most likely an ill-fated one. It’s hard to craft a positive culture that supports business ambitions if the compensation system is fighting against the culture.

Consider both aspects of incentives

Safi Bahcall describes incentives as having two elements: one’s share of outcomes and his/her perks of rank. In the simplest situation these two can be respectively represented as equity and cash, but broadly it is often more complex.

Imagine a company with ten employees all with equal ownership stake in the company. Each would have a 10% stake in the company. While they each have a cash earnings associated with their job, it is likely that those earnings pale in comparison to the potential earnings from their 10% stake in the company. However, if instead, there was a majority owner in the company who holds 90% of the company, the employee stake would fall to 1%. This makes the cash compensation relatively more appealing than the compensation related to ownership compared with the prior situation. Now consider the population as 100 people with equal share. They would have the same 1% stake as in the prior example, yet the average direct influence of each person’s contributions on business outcomes would seem smaller due to the greater number of people.

Now, focus the cash compensation aspect of these examples. At 10 employees, it is very conceivable that inputs from any employee, regardless of title, will be heard and considered resulting in all employees feeling like they can influence company outcomes (and their personal stake in those outcomes). However, when you grow the business to 100 or especially 1,000 employees, each employee’s title starts to matter much more in terms of getting ideas heard, considered and implemented.

Even if you assume that all 100 or 1,000 remained equal in their stake of company outcomes, a smaller subset would have obviously direct impact on those outcomes making the status of being influential more attractive and valuable. With compensation of this smaller, usually more senior cadre of influential people in most real companies being higher and employee stakes in company outcomes rarely being consistent across all employees, the perks of rank become more and more significant as businesses grow and influence becomes inconsistent in distribution.

Recognize the connection between culture and incentives

Incentives are in many ways the structure on which culture is built. Read a company’s compensation plan and you can get a pretty good, albeit incomplete, idea of what the culture will be like.

  • Want people to think and behavior like an owner?
    • Increase their stake in outcomes which they can control (or at least heavily influence).
  • Want to decrease the distractions brought on by internal politicking?
    • Separate the people making subjective decisions on compensation from the people who would benefit from influencing those decisions makers.
  • Want people to collaborate?
    • Design a structure which pays them when they do and doesn’t when they don’t. 

When skillfully designed, the messages sent by leadership communications and the compensation program will be aligned and will reflect the ambitions for the set of values and behaviors the company wants its employees to exhibit (i.e. its culture).

Build the structure first then polish it

Doing things well seems important, but doing the wrong things well is hardly a more promising path to success than doing the right things poorly. Before optimizing culture and thereby adjusting how people execute their work, make sure employees are incentivized to focus on doing the right things.

A strategic vision for a company defines the “why” employees work. The incentive program will define “what” employees do and culture will define “how” they do it.

Companies who look to cultural change to address performance gaps without having the right incentives in place are setting themselves up for discouragement and frustration. Cultural change is fantastic for getting from good to great, but if you’re starting from less than good, you should probably give your incentives a close inspective and proper update before going all-in on a cultural transformation.


Recommended Reading

Blog: 3 Most Common Mistakes in Compensation Design

White Paper: Creating Competitive Compensation