My friend Kevin is writing an article for a magazine on compensation, and asked me for a few quotes on how compensation is tied to culture and to strategy.

Compensation is tricky to get right; how we reward our employees sends overt and subtle messages that can reenergize a culture or flip it upside-down.  Let’s face it, we’re all sensitive about money.  For some, our self-worth is tied to how much money we make. For others, pay rates bring up issues of fairness and justice.  Some see compensation as a way to reward behavior; others see it as a way to punish those who don’t comply.

There has been a hundred years of research on whether or not money motivates us. One thing is clear – how satisfied we are at work and how effectively we perform in our jobs is influenced by more than just money – intrinsic motivation matters – but companies get compensation systems wrong at their peril, not necessarily because employers don’t pay enough, but because employers send the wrong messages to their employees about what is important and what’s not important.

Compensation has a huge impact on culture, for good or for ill.  Let’s say your strategy calls for a collaborative approach to technology development, but you incent individual performance.  Guess what you will get? Individual performance, and you will not execute well on your strategy.  Another example is customer service. Let’s say your strategy is built on long-term relationships and customer loyalty, but you incent sales growth. Your employees have no reason to serve customers well after they first get the business, and will be unlikely to focus on service beyond that point.

Compensation plans are cues for what is important to an organization’s leadership – they focus employee attention.  If you want compensation to support your strategy and your culture, you have to incent the behaviors that align with your strategic outcomes and your values. Misalignment will focus employees on the wrong things, leading to poor execution and unintended cultural outcomes.

When you develop your compensation strategy, take a broader view than how much money you pay people or what benefits you provide.  Think about how you recognize and reward performance. Think about the subtle things you offer, like parking, flex-time, birthday parties, or the company holiday party.  Think about how well your performance management systems complement your compensation goals – a poorly executed performance management system will undermine the integrity of any compensation system, especially merit-based programs. All of these items add up to a total compensation strategy, which can reinforce the kind of culture you are trying to create and ultimately determine how effectively you execute on your strategy.

When polled on what motivates performance, employees routinely rate trust in leadership at the top of the list, and compensation near the bottom.  One is culturally driven, the other is systems driven, and both impact performance. By aligning your compensation programs with your culture and with your strategy, you address both.

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A great recent HBR blog based on compensation and motivation: http://blogs.hbr.org/cs/2013/04/does_money_really_affect_motiv.html