Professional Documents
Culture Documents
22kerr and Slocum
22kerr and Slocum
22kerr and Slocum
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The concept of corporate culture has captured the with a basis for effectively managing long-term
imagination of executives and researchers alike.1 cultural change. In this article, we will describe
For executives struggling to manage organizational the reward systems operating in a sample of firms
change, corporate culture has become an important and show how these systems reinforced and influ-
tool. They realize that significant strategic or struc- enced cultural values and norms. We will then link
tural realignment cannot occur if it is not supported reward systems and culture to the corporate strat-
by the organization’s values and behavioral norms.2 egies pursued by top managers in these firms.5
Yet, culture has proved to be a subtle, intangible
phenomenon—pervasive but difficult to manage or
Examining Reward Systems
influence. Many managers have found that culture
cannot be manipulated directly.3 Reward systems are concerned with two major
Most have an intuitive understanding of culture. issues: performance and rewards. Performance in-
Anthropologist Clyde Kluckhohn has defined cul- cludes defining and evaluating performance and
ture as “the set of habitual and traditional ways of providing employees with feedback. Rewards in-
thinking, feeling and reacting that are character- clude bonus, salary increases, promotions, stock
istic of the way a particular society meets its prob- awards, and perquisites.
lems at a particular point in time.” (p. 86)4 A corpo- Of course, large corporations with several differ-
ration’s culture simultaneously determines and ent businesses may have multiple reward systems.
reflects the values, beliefs, and attitudes of its And while they may share some fundamental phi-
members. These values and beliefs foster norms losophies and values, they may differ according to
that influence employees’ behavior. While most the particular business setting, competitive situa-
managers are aware of their companies’ cultures, tion, and product life cycle. Thus multiple reward
they are unsure about how it is maintained, trans- systems can support multiple cultures (or subcul-
mitted, or influenced. tures) within one organization.
We believe that the reward system represents a Subcultures are a natural by-product of the ten-
particularly powerful means for influencing an or- dency of organizations to differentiate. As organi-
ganization’s culture. Much of the substance of cul- zations grow with respect to the number of prod-
ture is concerned with controlling the behaviors ucts, services, and divisions, subcultures may
and attitudes of organization members, and the reflect a number of distinct work and social envi-
reward system is a primary method of achieving ronments. Through increasing differentiation, op-
control. The reward system defines the relation- portunity for the emergence of countercultures is
ship between the organization and the individual also increased. Countercultures are shared values
member by specifying the terms of exchange: It and beliefs that are in direct opposition to the
specifies the contributions expected from members patterns of the dominant culture. To the extent that
and expresses values and norms to which those in divisional reward systems reinforce these distinct
the organization must conform, as well as the re- behavioral norms and belief systems, subcultures
sponse individuals can expect to receive as a re- and countercultures are likely to be articulated
sult of their performance. and even reinforced.
The reward system—who gets rewarded and
why—is an unequivocal statement of the corpora-
Data-Collection Methods
tion’s values and beliefs. As such, the reward sys-
tem is the key to understanding culture. An anal- We studied the reward systems of 14 companies
ysis of reward systems can provide executives in the northeast and midwest regions of the United
130
2005 Kerr and Slocum 131
States. All but one of the companies were included Two Kinds of Reward Systems
in Fortune’s listing of the top 500 corporations.
From these interviews, we identified two distinct
Sales ranged from $125 million to over $8 billion.
reward systems: the hierarchy-based system and
The companies ranged from single-product indus- the performance-based system. Eight firms were
trial firms to multidivisional conglomerates. classified as hierarchy-based and six as perfor-
Initial contact in each firm was made with the mance-based. Of course, the descriptions of re-
top human resources (HR) manager. HR managers ward systems and cultures that follow are compos-
were key informants and provided the names and ites representing “pure” types. Actual reward
titles of other managers in their firms who might systems and cultures showed some variation but
be willing to participate in the study. To ensure the conformed to these general types.
selection of knowledgeable managers, we asked
that only those who had been with the company for
at least five years and had received significant The Corporate Hierarchy
rewards (for example, salary increases, bonuses,
In the hierarchy, superiors defined and evalu-
perquisites) be included. In addition, at least one
ated the performance of subordinates. Performance
manager interviewed in each firm was responsible
was defined qualitatively as well as quantitatively.
for authorizing rewards for subordinates. Thus, Nonquantifiable aspects of the subordinate’s role
both sides of the reward relationship—allocating were sometimes considered to be more important
and receiving—were represented in the sample. than quantifiable ones. Superiors were free to de-
In all, 75 interviews were conducted. Interview fine those aspects of a manager’s role that would
time per manager ranged from one hour to five or be considered important. Thus, performance crite-
six hours. The average interview took 90 minutes ria could vary according to who one was working
and was conducted in the manager’s office. We for.
interviewed, on average, 5 managers from each Managers’ jobs were broadly and subtly defined.
firm, with as many as 10 managers interviewed in Managers were accountable for how they con-
one firm. The interviewee group included 5 chief ducted their interpersonal relationships, as well as
executive officers, 7 group-level executives, 5 line the consequences of their actions. Numbers (for
vice-presidents (manufacturing, production), 6 staff example, return on investment) did not tell the
vice-presidents, 25 division general managers, and whole story, and more subtle aspects of perfor-
27 director-level managers. mance were sometimes viewed as more important.
Initial interviews in each firm concentrated on Superiors played a critical role in career mobility
gathering objective data on the managerial re- and success with the firm. They were the source of
ward system. These focused on performance defi- training, socialization, feedback, and rewards and
nition and evaluation, feedback processes, and the were to be studied, emulated, and satisfied if sub-
administration of rewards (bonus, salary, stock, ordinates expected to succeed.
perquisites, and promotion). The first interviews Superiors interpreted the performance of subor-
were structured so that comparable data would dinates according to subjective criteria. Even in
be obtained. Subsequent interviews gathered quantified areas, superiors did not hesitate to in-
terpret numerical outcomes in the context of their
subjective data on the firm’s history, founders or
own knowledge of the situation. Factors such as
dominant leaders, traditions, values, and norms.
interdivisional cooperation, long-term relations
These interviews were necessarily open-ended
with customers, leadership style, and development
and exploratory.
of junior managers were evaluated, despite obvi-
In addition to interview data, company docu- ous difficulties in quantifying them. Such evalua-
ments such as annual reports, 10-K reports and tion communicated the importance of the hierarchy
company histories (when available) were also ex- and the subordinates’ dependence on superiors.
amined. Some firms provided documentation on The subjective nature of evaluation allowed for the
the reward system itself. The 10-K and annual re- inclusion of qualitative performance criteria and
ports gave an overview of the firm’s products, cor- reinforced the message that managers had to be
porate and business strategy, and past economic concerned with more than the numbers. Subjective
performance. The company histories provided in- evaluation permitted consideration of the long-
sight into the origins of the firm, which included term consequences of managerial action. This im-
their stated values and traditions. Data from these plied an ongoing commitment to the activity or
sources served as a check on the information gath- business in question.
ered through the interviews. In this system, formal performance appraisals
132 Academy of Management Executive November
took place once a year. Informal feedback, how- had always done so, being met at airports by local
ever, was quite frequent. A high level of interaction managers, attending specific executive develop-
existed between superiors and subordinates. ment programs, were all rituals symbolizing a
Feedback occurred on the job, in the dining room, unique and shared tradition and history. Even for
during executive retreats, or at the country club, those not eligible for such perquisites, the fact that
and was oriented more toward employee develop- they existed provided a feeling of belonging not
ment than toward evaluation. Since performance simply to an economic entity but to a social system.
definition and evaluation were subjective, the In contrast to perquisites, stock awards were not
quality of performance could be known only structured in any obvious way. Managers had little
through superiors. The high level of interaction knowledge about how and why awards were
coupled with a developmental approach commu- made. Awards were not directly related to individ-
nicated the organization’s commitment to the indi- ual or even corporate performance. Generally, the
vidual manager’s success and future. This was higher the managerial rank, the greater the eligi-
conducive to the development of mentoring rela- bility for stock awards. The lack of information
tionships and to extensive socialization of younger about stock awards meant that subordinates could
managers. The sense of dependency and vulnera- not influence their distribution in any way. This
bility was balanced by a message of concern for lack of clarity imparted a sense of mysterious rit-
the individual as a valued resource whose devel- ual to the reward. The message was that subordi-
opment was important to the organization. nates must trust superiors to do the right thing for
Bonuses were based on corporate performance. them. Receiving stock awards symbolized accep-
The system rewarded the team, not individuals. tance into the inner circle. Therefore, managers
This provided a basic rationale for cooperative had to be well aware of the total set of company
rather than competitive behavior. The fact that po- values and norms and how to conform to them. Any
tential bonus payouts increased by level empha- deviation might be serious enough to reduce or
sized the importance of long-term commitment to temporarily eliminate a manager’s stock awards.
the organization (tenure was a precondition for Promotion from within was the standard policy
promotion) and conformity to its norms. Bonus was in hierarchical firms. Promotions were relatively
a relatively small proportion of total compensa- frequent (every two to four years) and were often
tion, ranging from 20% to 30%, while salary was the motivated more by the individual’s need for devel-
largest part of compensation. By severely limiting opment (that is, exposure to new functional areas)
bonus for the individual star, the system removed than by the organization’s need to fill a slot. Many
the incentive for behaviors that benefited single promotions did not entail significant increases in
managers rather than the entire organization. The authority, responsibility, or salary. Commitment to
bonus system also reinforced the subordinate’s de- employee development and cross-fertilization of-
pendence on superiors’ judgment, because they ten resulted in lateral or diagonal movement
determined bonus amounts. rather than vertical movement. Managers were
Salary increases generally were determined transferred on a regular basis across divisions or
through a formal salary plan, such as the Hay functional boundaries, in keeping with the empha-
system. Two major factors in the size of a salary sis on developing general managers with strong
increase were tenure (time in grade) and perfor- internal networks throughout the company. Promo-
mance (subjective evaluation by superiors). The tion practices expressed concern for the lifetime
tenure component gave structure to salary deci- career of employees. They contributed to a tight,
sions. Policies specified the range of possible in- homogeneous organization with common lan-
creases within job classifications. guage, experience, and values. Lack of movement
Perquisites were even more constrained by pol- signaled a disinvestment in the individual and a
icy than were raises and were carefully monitored. loss of interest on the part of the organization.
Status symbols, such as locations of offices, furni- Clan Culture. We can characterize the kind of
ture, club memberships, first-class travel, and so culture that emerged from the hierarchy-based re-
forth, were considered important symbols of rank. ward system as a clan. William Ouchi has used the
Superiors sometimes insisted that managers use term clan to describe a control system based on
them, even if they did not want them. Perquisites socialization and internalized values and norms.
communicated the importance of rank, tenure, and Exhibit 1 summarizes the major features of the clan
commitment, as well as a sense of ritual and tra- culture. In this culture, individuals in the organi-
dition. Receiving a particular type of desk upon zation are like a fraternal group. Everyone recog-
promotion, being told (not asked) to join a presti- nizes an obligation that goes beyond the simple
gious men’s club because everyone of a given rank exchange of labor for salary. It is tacitly under-
2005 Kerr and Slocum 133
The low level of superior-subordinate interaction cated a sense of egalitarianism, it also lessened
and the evaluative, as opposed to developmental, the sense of community and singularity. If reward
approach to feedback served to emphasize auton- rituals (predicted on tenure and hierarchical posi-
omy. Concern was not expressed for subordinate tion) convey the existence of an in-group, then the
development or long-term career progress. The re- absence of such rituals weakens the feeling of
ward system was not conducive to a mentoring participation in a tradition and membership in a
relationship, nor was it likely to contribute to the special group.
transference of subtle norms and values. Socializa- Promoting from within was not a norm in this
tion was not an important function of this system. system. It was common to find high-ranking man-
Bonuses were a very significant part of compen- agers brought in from the outside. Many had been
sation. Bonus maximums ranged from 40% of sal- with their companies only a few years. Promotions
ary to “no limit.” In some firms, there was no cap on were generally motivated by the organization’s
what a manager could earn in bonus if the finan- need to fill a vacancy rather than the individual’s
cial criteria were met. Bonus was based almost need for exposure. Relative to the hierarchy-based
exclusively on the performance of the division system, promotion occurred infrequently and was
over which the manager had authority; the per- usually vertical (and within the same division or
formance of other divisions or the entire corpo- function).
ration, whether better or worse, had almost no ef- The practice of hiring from outside conveyed to
fect on the individual’s bonus. Each division was a members that the organization’s commitment to
profit center and generated its own bonus pool. them was not necessarily long-term. Individuals
Actual bonus payment was determined by for- repeatedly could be passed over for promotion
mula, and the resulting figure was rarely altered when more attractive candidates from other firms
by superiors. or industries were identified. These organizations
The bonus system communicated that the man- were indicating that they did not necessarily value
ager was an independent operator whose fate was tenure or the socialized individual and did not
somewhat independent of superiors and other di- expect a long-term commitment from members.
visions as well. No economic rationale for cooper- Under such conditions, we found a mutually ex-
ative behavior between or among divisions ex- ploitive relationship. The individual was utilized
isted. The potentially large size of bonuses to fill a role or perform a particular function until
communicated the value placed on the “star” per- he or she was needed elsewhere or was replaced
former rather than the team player. The bonus sys- by a more qualified person. This relationship en-
tem also deemphasized rank as an important gendered a similar response from individuals, who
source of rewards. exploited the organization until better rewards
Salary increases and stock rewards were indi- could be gotten elsewhere.
rectly based on managerial performance. Salary The performance-based system provided few
increases were affected by the external labor mar- mechanisms for integration between divisions.
ket, the cost of living, and the manager’s overall Vertical promotions rather than cross-divisional
performance. Stock arrangements were frequently movement tended to facilitate specialization. A
negotiated when a manager joined the firm. These wide network of managers who had worked to-
rewards were loosely related to performance, and gether, known each other, and understood each
actual amounts were subjectively determined by other’s responsibilities was not fostered, and pro-
superiors. This practice opposed the overall em- motional practices encouraged divisional inde-
phasis on objectivity, but stock awards and salary pendence and uniqueness. These organizations
increases had a relatively lower value in the re- did not seek an integrated system based on shared
ward systems of these organizations. Significant language, norms, and goals.
performance feedback was conveyed in a manag- Market Culture. William Ouchi has used the
er’s bonus. Perhaps superiors operating under this term market to describe a system of control in
system needed to have some mechanisms avail- which behaviors are constrained by negotiated
able to them to express subjective perceptions of terms of exchange. Exhibit 2 lists the major char-
subordinate performance. The flexibility of salary acteristics of the market culture. In this culture, the
increases and stock awards, relative to the bonus relationship between individual and organization
formula, may have satisfied that need. is contractual. Obligations of each party are spec-
Perquisites were almost nonexistent in the per- ified in advance. The individual is responsible for
formance-based system. Symbols of rank and sta- some level of performance, and the organization
tus were not emphasized, because the manager’s promises a given level of rewards in return. In-
level was not emphasized. While this communi- creased levels of performance are exchanged for
2005 Kerr and Slocum 135
divisions. Such cooperation is not critical when ture does not develop in a vacuum. It is an integral
divestment of divisions occurs with some regular- part of the company’s fabric. Even with little or no
ity. In short, the performance-based system re- attention paid to it, an organization’s culture is
wards independence and entrepreneurship, the likely to evolve in conjunction with the day-to-day
star performer versus the team player, and does activities of the company. Thus, except in unusual
not require extensive involvement from corporate- circumstances, the manager’s task usually is not to
level managers in the reward process. create a basic congruence among rewards, culture,
Exhibit 2 shows that the values of the market and business strategy, but to focus and fine-tune
culture fit closely with both the evolutionary strat- the natural interaction of these elements.
egy and the performance-based reward systems.
The relatively low level of commitment to busi-
nesses is reflected in the contractual relationship Acknowledgments
between organization and individual. The need for Portions of this article were presented at the American Institute
autonomous, entrepreneurial interaction between for Decision Sciences meeting in Toronto, November 1984. The
divisions is reflected in limited peer interaction, authors acknowledge contributions on earlier drafts of this
weak peer pressure, and a lean normative struc- manuscript made by Michael Beer, Bill Joyce, Lynn Isabella,
Ralph Kilmann, Edward Lawler, and Randy Schuler.
ture. We would not expect conformity to be highly
Support for this project was given through a research grant to
valued in an organization that pursued diversity. the authors from the Center for Enterprising, Cox School of
We would not expect loyalty and commitment to be Business, Southern Methodist University.
highly valued in an environment where divest-
ment of divisions and/or their managements was
a distinct possibility and part of overall corpo- Endnotes
rate strategy. The performance-based reward 1
Several major popular books about culture have been writ-
system clearly expresses and reinforces a mar- ten in the past five years. Some of the most recent include Edgar
ket culture. Clearly, corporate culture is the foun- Schein’s Organizational Culture and Leadership and Ralph Kil-
dation for normative behaviors that support the mann et al.’s Gaining Control of the Corporate Culture (both
overall corporate strategy. published by Jossey-Bass, San Francisco, 1985). Recent aca-
demic reviews of this literature include “Concepts of Culture
and Organizational Analysis,” by Linda Smircich, Administra-
Engineering Cultural Change tive Science Quarterly, 1983, 28, 339 –358; “The Uniqueness Par-
adox in Organizational Stories,” by Joann Martin et al., Admin-
Reward systems express and reinforce the val- istrative Science Quarterly, 1983, 28, 438 – 453; and “On Studying
ues and norms that comprise corporate culture. A Organizational Cultures,” by Andrew Pettigrew, Administrative
Science Quarterly, 1979, 24, 570 –581.
careful consideration of reward system design can 2
The difficulty of changing an organization’s culture so that
help decision makers successfully modify the or- it is more closely aligned with the firm’s strategy has been
ganization’s culture. Reward systems are, in effect, explored by Howard Schwartz and Stanley Davis in “Matching
powerful mechanisms that can be used by manag- Corporate Culture and Business Strategy,” Organizational Dy-
ers to communicate desired attitudes and behav- namics, Summer 1981, 30 – 48; by Paul Shrivastava in “Integrat-
ing Strategy Formulation with Organizational Culture,” Journal
iors to organization members. We believe that,
of Business Strategy, Winter 1984, 103–110; and by Jay Barney in
over time, cultures are amenable to change “Organizational Culture: Can It Be a Source of Sustained Com-
through the clear communication of performance petitive Advantage?” Academy of Management Review, 1986,
criteria and the consistent application of rewards. 11, 656 – 665.
3
At the same time, we hope some sense of the For examples of how culture either facilitated or impeded
change, see Thomas Moore’s “Culture Shock Rattles the TV
complexity of culture has come through, along
Networks,” Fortune, April 14, 1986; Harold Seneker’s “Why CEOs
with a healthy respect for the difficulty of the task Pop Pills (and Sometimes Quit),” Fortune, July 12, 1978; John
of changing a company’s values, norms, and atti- Main’s “Waking Up AT&T: There’s Life After Culture Shock,”
tudes. Large organizations are like societies; their Fortune, December 24, 1984; and John Solomon and J. Bussey’s
cultures are reinforced and modified over years. “Cultural Change: Pressed by Rivals, Procter & Gamble Com-
pany Is Altering Its Ways,” the Wall Street Journal, May 20, 1985.
Culture itself is rooted in the countless details of 4
Anthropologist Clyde Klukhohn’s work cited in the text is
organization life. How decisions are made, how titled “The Study of Culture,” in D. Lerner and H. Lasswell (eds.)
conflict is resolved, how careers are managed— The Policy Sciences, Stanford, Cal.: Stanford University Press,
each small incident serves to convey some aspect 1951.
5
of the organization’s culture to those involved. For an excellent description of how diversification strate-
gies affect managerial behavior, see Jeffrey Kerr’s “Diversifica-
Given the pervasiveness of culture, it is not sur-
tion Strategies and Managerial Rewards: An Empirical Study,”
prising that managers are frequently frustrated in Academy of Management Journal, 1985, 28, 155–179.
their attempts to change it. 6
See Milton Leontiades’s Strategies for Diversification and
There is some basis for optimism, however. Cul- Change, Boston, Mass.: Little, Brown, 1980.
138 Academy of Management Executive November
Jeffrey Kerr is assistant professor of organizational behavior president of the Academy of Management and had previously
and business policy at the Edwin L. Cox School of Business, served as editor of the Academy of Management Journal. Pro-
Southern Methodist University, where he teaches management, fessor Slocum is the author of several books and more than 80
organization change and development, and strategy. He has articles. In 1986 two of his books, Management and Organiza-
also participated in executive seminars at SMU and other uni- tional Behavior, were published in fourth editions—the first
versities. His current research interests include the implemen- with Addison-Wesley and the second with West Publishing
tation of strategy through human resource systems and organi- Company.
zation design. Professor Slocum has presented executive development pro-
Professor Kerr received his BA in psychology from the City grams to senior managers at Beatrice Foods, Westinghouse
University of New York and his MBA and Ph.D. from the Penn- Corporation, IBM, Price Waterhouse, and Celanese, and regu-
sylvania State University. Prior to assuming an academic ca- larly teaches in executive development programs sponsored by
reer, he held a number of positions in business. He has pub- Duke University, The University of Georgia, Pennsylvania State
lished articles on management selection and reward systems in
University, and Texas Christian University. He has served as a
the Academy of Management Journal, Personnel Psychology,
human resource consultant to Brooklyn Union Gas Company,
and the Journal of Business Strategy.
NASA, and Optigraphics, among others. His current research
John W. Slocum, Jr. holds the O. Paul Corley Professorship in focuses on how corporate strategy affects the development of a
organizational behavior at the Edwin L. Cox School of Business, corporation’s human resources and the career issues facing
Southern Methodist University. From 1983 to 1984, he served as employees.