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Compensation and Organizational Culture Essay

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Updated: Jan 14th, 2020


This is a research paper that is based on a case study. The paper seeks to explain the compensation strategies in a company and how they impact on the culture of the organization. Microsoft Corporation is used in this case. The paper establishes the link between organizational culture and compensation policies.

It justifies in the explanation how these components of organizational health impact on each other. The compensation and reward system of Microsoft has been identified and analyzed. Each side of this component has been included in the analysis. In the final analysis, the paper links the compensation and reward system to the prevalent organization culture of Microsoft.


Organizational culture is built on a number of things, one of them being the reward system. This is a crucial exercise because it improves the performance of employees in an organization (Heneman, 2002). Research has revealed that many companies have been working on setting up compensation systems. Compensation is one of the prevailing demands of the business environment in the modern business scenario.

However, many firms keep failing in implementing the compensation systems because there are problems in the payment systems (Driskill & Brenton, 2010). Compensation systems and organizational cultures are inter-linked. The ways in which compensation programs are structured and implemented have a direct impact on the culture of an organization.

On the other hand, the already established organizational culture determines how the compensation programs or systems will be enforced in the organization (Gómez-Mejía, Berrone & Franco-Santos, 2010).

With highly skilled workforce, Microsoft has a compensation system, which has experienced sharp criticism in the recent times. In this article, the author looks into the compensation system of Microsoft Corporation. The author discusses the benefits and shortfalls of the compensation system, and how it affects the development strategy of the company (Zobal, 1999).


The information used in the analysis has been sourced from academic sources, like books and journals. Non-academic sources, like company websites, have been used to supply pertinent information. Analysis has been based on knowledge and concepts from academic sources.

Linking compensation to organizational culture

Many people have the assumption that true culture of an organization is portrayed in its reward and compensation system. Indeed, compensation has been termed as a core function of human resource management. When it is implemented in its true sense and meaning, compensation can reinforce the key values and culture of an organization. It can also gear the organization in achieving its strategic business objectives.

The major objective of compensation is to attract and maintain the desired mix and quality of workers (Kuhn, 2009). Compensation has a direct impact on prevailing conditions employees in an organization. Compensation systems convey powerful messages concerning the practices and values of an organization towards its employees. The execution of organizational functions determines the culture of the organization.

Employees programs are key to a functional organization. The benefits obtained from the output determine how the employees respond to strategies developed by an organization. This is codded in the compensation system of the organization (Cable & Judge, 1993).

Microsoft Corporation is a large company that has been a leader in the computing industry. The company plans on a long-term basis, depending on the long-term strategies. Compensation is based on the long-term goals of the organization; for instance, the long term survival of Microsoft Inc. is founded on the perfect compensation system applied. Compensation, incentives and related programs are aligned to the general strategy of the company.

The top executive team implements and oversees successful implementation of the strategies of the company. In such a large company, compensation systems are extremely wide. They extend to even the investors of the company. Therefore, the compensation policies of Microsoft are comprehensive so that it can cover all those who ought to be covered with the program (Society for Human Resource Management, 2012).

Compensation policies are related to performance measures, and top executives emphasize on the creation of value for a long-term basis. The top management is also ensuring that progress in the compensation system is communicated to the wider audience. This is in line with the goals of management of creating a strong image of the company to the publics.

Compensation systems are reflectors of corporate governance by organization. Corporate governance is used in creating a corporate culture for the organization. Effective compensation programs bring about a robust corporate governance picture of the organization. Therefore, managers strive to improve the compensation system with the knowledge that these systems are crucial in corporate performance of the organization (Deloitte, 2009).

Microsoft Corporation has a compensation committee, which is one of the pointers of commitment to compensation. The company has realized the significance of compensation in strategic planning and the realization of the strategic objectives of the organization. The role of the compensation committee is discharging the responsibilities of the board as it relates to the compensation policy of the company.

The committee is bestowed with the mandate of ensuring that the company adopts policies that govern the benefits and compensation programs in the company. The committee oversees the evaluation of the compensation system of the company. It comes up with compensation policies and oversees their implementation.

The committee has been given room to seek external counsel before coming up with recommendations on improving compensation programs. The recommendations made by the committee are taken to the board of the company, where they are deliberated. The Board is the chief decision maker. The committee reviews compensation at various levels of the organization and proposes recommendations to the board (Microsoft Corporation Website, 2011).

Reward and Compensation system in Microsoft Corporation

Microsoft is in the list of the top companies in the world in terms of wealth and success. Microsoft is a widely respected company because it has been leading in the computer industry. Microsoft is a company that is entirely driven by the employees because of its nature of products.

The success of the company depends on the effectiveness of the workforce. This shows that short term goals and long term goals can be achieved by developing effective workforce in an organization. This means that the employees of Microsoft form part of the most essential assets for the company.

In the early stages of its operation, the company used to source its workforce from Universities. It believed that the young people from the universities were highly motivated and talented to take up the tasks in the company. However, as the company continued to grow, it realized the need to hire more experienced people. Therefore, it launched a head hunting campaign, from which it recruited experienced staffs from other companies.

The experienced employees have been hugely resourceful during the growth of the organization. The company valued individual performance and encouraged performance through rewards. Semiannual performance reviews were done, to determine the effectiveness of all employees. The effectiveness of employees at the workplace was closely linked to bonus awards, pay increments among many other benefits.

This formed part of the company performance strategies. It is quite clear that performance goals were reached when the reward and compensation system was intact and of benefit to all employees. The formal review of the company was highly respected by everybody in the company, from management to all ranks of employees.

The management held meetings with the employees and discussed the review. Common evaluations were included in the formal reviews. This was done to eliminate the unexpected deviations in the reward system. The system even gave a room for self-evaluation by the employees (Bohlander, 2010).

Compensation programs have to benefit all employees of the company because all employees are players in the strategic plans of the organization. Whether the compensation committee is helping Microsoft to reach its objectives, is a question which cannot be fully answered.

While Microsoft has a compensation and review system, an internal in-look of the organization reveals that there are serious flaws within the system which have serious effects on the strategic performance of the organization. One of the effects of the flawed system of compensation in Microsoft is the high rate of employee turnover. The company is losing highly skilled employees to younger companies like Google and Yahoo (Smite, Palmer & Van, 2000).

Problems in Compensation and Reward System

There has been a reported growth in frustration amongst the employees of Microsoft due to stagnant salaries. The company takes too long to review the performance of its employees. Microsoft has 21 salary categories for its workers. Statistics from the company shows that, between the year 2004 and 2006, the minimum, midpoint and maximum compensation guidelines remained unchanged for eight salary categories.

The other salary categories recorded unusually low increment, less than three percent. The compensation and reward system of the company favors the top management employees of the company. The review system is not helping to improve the compensation programs and the reward of employees. Therefore, many critics point out that the system is inefficient (Nachtigal, 2006).

The lapses in compensation and rewarding system have many negative effects to a company especially to a technological company. As it was noted earlier, organization reward and compensation system has a direct impact on the corporate culture of the firm. The corporate culture of a firm is the enticing factor of many organizations.

It determines which staffs they will be able to attract from the labor market. Microsoft has been losing staffs to other competitor companies in the information technology industry because of the poor reward and compensation system witnessed in the recent year. The loss of experienced skilled workers in such an industry brings a sizeable gap. This is because the cost of hiring and training these employees is exceptionally high.

In cases where the entire market is aware of the culture of the organization, it becomes extremely hard for a company to acquire the right employees. This has an adverse impact on the performance of the company as competition mounts from other companies that have a magnificent reward programs for their workers. Also, the overall reputation of the company is lost as the company loses creativity to continue inventing newer products for its customers in the market (Ferris, 1999).

Microsoft has to copy examples from other high tech companies like Boeing. Boeing has a highly elaborate and open compensation and reward programs for its employees. Both firms employ highly skilled laborers. However, the employees of Boeing enjoy transparency on pay levels and the review system. Boeing encourages collective bargaining system. This results into collective agreements that are satisfying to all employees.

The information about the salary grade levels is availed to all employees of Boeing. The rate of retention, salary adjustments and the number, layoff information and all other kinds of information which is considered sensitive is also availed to Boeing employees. The review scores and annual bonuses in Microsoft are done by the management behind closed doors. The systems are so closed in Microsoft such that the employees rarely understand how the reward system is structured.

Boeing has motivated employees because they understand the benefits that they get from the organization in exchange for their services. They understand the system of compensation and reward because they fully participate in it. The rate of employee retention in the company is unusually high (Griffin, 2012).

The only way through which Microsoft can regain its performance is through aping the examples such as the one in Boeing. The employees of Microsoft have to be more involved in the reward and compensation programs. The company has to stop sidelining employees when making decisions or formulating policies on reward and compensation. Organizational performance advocates note that rewards are effective when they are designed or chosen by the recipients themselves (Griffin, 2012).


Compensation and reward is a component of organizational performance management that focuses on employees. Compensation and reward systems play a crucial role in motivating the employees in organizations. Despite its popular name and presence in the market, Microsoft Corporation has been accused of having ineffective compensation system.

This is affecting their performance as it is causing unrest and high turnover in its workforce. This is affecting its performance in the global markets. The company can salvage itself by reviving its reward and compensation system by copying examples from companies like Boeing.


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Deloitte Website (2009). Earnings Guidance: The Current State of Play – A Follow-up Discussion of Earnings Guidance and Other Forward-looking Information Provided to Investors. Web.

Driskill, G. W., & Brenton, A. L. (2010). Organizational culture in action: A cultural analysis workbook. London: SAGE.

Ferris, G. R. (1999). Research in personnel and human resources management. Amsterdam: JAI Press.

Gómez-Mejía, L. R., Berrone, P., & Franco-Santos, M. (2010). Compensation and organizational performance: Theory, research, and practice. Armonk, NY: M. E. Sharpe.

Griffin, R. W. (2012). Fundamentals of management. Mason, OH: South-Western Cengage Learning.

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Kuhn, K. M. (2009). “Compensation as a signal of organizational culture: the effects of advertising individual or collective incentives”. The International Journal of Human Resource Management, 20(7).

Microsoft Corporation Website. (2011). Microsoft Corporation Compensation Committee Charter. Web.

Nachtigal, J. (2006). Rising Frustration with Microsoft’s Compensation and Review System. Web.

Smite, P. J., Palmer, P. N., & Van,. M. M. A. (2000). Strategy implementation: Readings. Kenwyn: Juta.

Society For Human Resource Management. (2012). . Web.

Zobal, C. (1999) “The “ideal” team compensation system – an overview, part II”, Team Performance Management, 5(1), 23 – 45.

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