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From Dr. Scott Sampson's Understanding Services Businesses Book (click for table of contents)
SBP 8a: The Choice of Employees⇐Prior —[in Unit 8: Human Resources Management]— Next⇒SBP 8c: Who is in Control

SBP 8b: Culture Compensation

With services, a significant part of employee compensation can be the organization's culture.

Why it occurs

This principle occurs because employees often interact with a large number of people in the course of their work. Labor intensity implies that employees are likely to interact with other employees, not just machines, and customer input implies that employees are likely to interact with customers. (see Labor Intensity and The Unified Services Theory SBPs) Nonstandard production and process divergence implies that the interactions can take many forms. (see Heterogeneous Production and The Choice of Employees SBPs) The interactions can be pleasant or unpleasant, largely depending on the culture of the organization.

Question it addresses

How can a company establish a culture that promotes employee retention and productivity?


What is culture? Culture is the values (noun) of the organization, or things the organization values (verb). Organizations are composed of people, therefore culture is the general belief about what the organization considers to be important.

How Culture is Perpetuated

Sometimes cultures evolve of their own accord. Culture is influenced by internal factors, such as the combination of dominant personalities in the organization, and by external factors, such as industry practices and the state of the economy.

The best cultures are perpetuated by the actions of upper management. Management sends signals about what is valued in the organization, both in words and in policies. Policies dictate such things as measurement, programs, and reward systems.

If management's words about what is valued are inconsistent with policies, the words will be of little effect. For example, if a management says “quality is our most important priority” then bases the reward system purely on number of units produced, then employees will believe that “quantity is the most important priority.”

Cultures Which Are Attractive to Employees

Cultures which can contribute to the compensation of employees are those which the employees also value, independent of the organization. It is a great thing when the organization values the same things the employee values. The following are some of the things that often fit in that category:

  • Employee security. Some companies have a no-layoff policy, which promotes this culture. For example, the difficulty of losing a government job is one attractive feature of working for the government. However, the value of employee security can be demonstrated by other means as well, such as benefits packages that include good life, health, and disability insurance.
  • Employee development. Some companies have a culture of building the skills and opportunities of employees. A former executive of a large hotel company said that it is easy to maintain a good culture when the company is growing at 20 to 30 percent a year, since there are opportunities for advancement. Even companies that are not growing can have a culture of advancement, by encouraging employees to develop skills. The company might offer training or it might assist employees with tuition expenses for continuing education.
  • Employee ideas. Some organizations encourage employees to share ideas of how to advance the company. One way to do this is to actually let employees implement their own ideas (subject to supervisor approval). This will only work if it is recognized that with new ideas comes risk which implies the possibility of failure. If the reprimand for failure is great, employees will be discouraged from taking risk by presenting new ideas.
  • Excellence. Employees generally prefer to be part of an organization they can be proud of. Companies with a reputation for being “best in class” usually have the best chance of recruiting graduates who are “best in class.” However, companies should have the same excellence on the inside (how they are run) as they have on the outside (their reputation) or the best employees will soon leave for other opportunities.

Now, of course, such culture advantages are not free, nor will they continue without ongoing management attention. The cost of maintaining a particular culture by a particular means should be considered carefully. There is a tendency to underestimate the profit potential of an attractive culture.

Command and Control

What if the decision makers of a company make no attempt to promote a culture that would be attractive to employees? Such companies still compensate employees by monetary means. Organizations that only compensate employees by monetary means often have a culture known as “command and control.”

Command and control is a system in which the prosperity of the owners and leaders of the organization is valued at the expense of “labor.” Labor is considered a machine by which work is accomplished. Labor is retained simply because there is no less-expensive technology which could adequately be substituted.

Companies employing a command and control culture often make superficial attempts to convince employees that they are valued, such as through financial rewards for productivity. However, such programs have short-term effect; if the rewards are discontinued the effect is lost. Another problem is that if the monetary rewards are given too frequently they may be considered part of “base pay,” causing them to lose motivational value.

This Service Business Principle states that culture can be a significant source of compensation in service organizations. If the culture is not attractive to employees, or is unattractive, then the compensation becomes purely monetary. Such companies can retain employees by providing sufficient salaries relative to job opportunities elsewhere.


Changing a Company's Culture

It is not an easy thing to change a company's culture, since it requires convincing everyone that things are valued that were previously perceived as not valued. Culture possesses a lot of inertia, or resistance to change in speed and direction. For large organizations, changing culture is like trying to turn a seventy-five-ton ship, a slow process which consumes a lot of energy.

An ineffective way to change culture is to implement an internal P.R. (public relations) campaign. The nice thing about this is talk is cheap, at least relative to action.

A more effective way to change culture is to replace policies that signal one set of values with policies that signal the desired set of values. This is a difficult process.

How it effects decisions

The labor intensity of service businesses implies that companies need to pay careful attention to recruiting and motivating employees. Experts have established that external service value-the value of the service seen by customers-is primarily a function of employee retention and employee productivity.1) Further, those experts indicate that employee retention and productivity are driven by employee satisfaction, which is driven by so-called “internal quality.” This “internal quality” is the environment in which the employees work.

We can extend this logic by observing that the work environment is largely a function of the shared values, or culture, of the organization. Therefore, if a company has a culture that leads to employee satisfaction, then employee retention and productivity will be high and the company will be able to provide good service value to customers.

Hence, a critical decision leaders must make is what culture to perpetuate within their organizations. They must decide how to signal the culture (value system) to employees, such as through appropriate policies. Organizations that do not pay any attention to culture are by default deciding to be subject to cultural drift-a tendency to go wherever things happen to go.

What to do about it

Cultures drift so gradually that it is often difficult to see the change until problems occur. This is particularly a problem when organizations are growing rapidly. When a company is small it is quite easy to maintain a positive culture. When a company becomes or is large, it can be quite difficult to communicate the shared values throughout the organization. The numerous policies that often come with being a large organization can be seen by employees as existing for the sole purpose of controlling employees and limiting their discretion.

What should organization leaders do to assure a positive culture? First, pay close attention to culture. There are fewer more important internal functions of managers and leaders than perpetuating a positive culture.

Second, seek to understand the importance of employee satisfaction, retention, and productivity to the organization's success. It will be much easier to invest in culturally compensating employees if you understand the potentially high returns on that compensation.

Third, choose company policies carefully. Policies can both build a positive culture or can destroy it. Remember that company policies are signals to employees that speak much louder than mere words.

For example

Companies who are known for their culture have opportunities to hire the best employees, even though they pay nothing more than the going wage. One example is Marriott Hotels and Resorts. The founder of the company, J. Willard Marriott, continually espoused the idea that if you take good care of your employees, they will take good care of your guests. Throughout the years, Marriott has built a culture which values the development of employees.2) Company policy provides for training and development seminars and career progression. The company also values employee opinions and ideas, and has administered annual opinion surveys of employees. They also value the fair treatment of employees, and have had an ombudsperson to assure employees' complaints will be heard. These policies, programs, and values have formed a culture that gives Marriott an advantage in the labor market while paying wages that are not unusual.


The service divisions of IBM have had a major change in culture in recent years. For many years IBM had a culture of professionalism, which was perpetuated by a dress policy of white shirts and ties. This culture was likely valued by employees who wanted to work for a world-class company. In the 1980s the computer industry turned upside down. The prevailing culture in the new industry was one of hardworking, creative mavericks, not stodgy white-shirt professionals. IBM went from being an employer of choice to being a company that provided little in the way of cultural compensation. The company's leaders made a major decision to change the culture in order to remain competitive in the labor market and attract the best employees. Part of this was eliminating the strict dress policy. There was also a big shift to allowing employees to work out of their homes, which emphasized employee independence and empowerment. The ability to change policies in order to update the culture has allowed IBM to survive in what is an increasingly competitive industry.

My airline example

Southwest Airlines is known for a “fun” culture. Their employee dress code is fun: casual attire, often including shorts, for many employees. Their boarding process is relatively low-pressure, allowing for pleasant customer interaction. Their cabin service is simple, and sometime comical. Stewards hide in overhead bins to surprise passengers. On-board activities like passenger games or sing-alongs can keep things light. Employees seem to value that culture, since Southwest is known as a preferred employer, despite quite ordinary wages. Who could not value having fun at work?

How manufacturing differs

With manufacturing, most employees deal with a finite (and small) number of individuals on a regular basis. Manufacturing organizations' culture is important, but less influential than in service organizations, due to the differences in day-to-day interactions.

Analysis questions

  1. What things are valued by the organization that are also particularly valued by the individual employees within the organization? Employee security? development? ideas? service excellence? others?
  2. How are those values communicated to employees? What policies demonstrate the values?
  3. To what degree do those values compensate employees for their work? Are they a factor in people wanting to work for the company or being motivated to be more productive?

Application exercise

What company is the preferred employer in your target service industry? In other words, of all the companies in the industry, which is most likely to hire the best employees? Identify what you would imagine the top three characteristics of that company are which makes them a premier employer? Note which of the three, if any, represent superior monetary compensation (i.e. the company pays more than other companies). For each of the three, write down what values the company portrays which are valued by employees. Examples might include employee security, development, ideas, service excellence, or other things. Write down a fourth company value that would be appealing to employees, and a policy that would promote that value in the organization.

1) see Heskett, J. L., Jones, T. O., Loveman, G. W., Sasser, W. E. J., and Schlesinger, L. A. (1994). “Putting the Service-Profit Chain to Work.” Harvard Business Review, 72(2), pp. 164-174.
2) see, e.g., Hostage, G. M., “Quality Control in a Service Business,” Harvard Business Review, Vol. 53, No. 4, July-August 1975, pp. 98-106.

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