Organizational Culture and Performance-Based Compensation in Family Firms: Does Family Involvement in Management Matter?
| Autor | Pelaez-Leon, Juan David |
1 Introduction
Performance-based compensation is a type of formal pay adopted by organizations to reward employees for outcomes or, more closely, for behavioral performance measures (Gomez-Mejia et al., 2014). Practices such as performance appraisals that assess individual or group performance and link these appraisals with rewards usually form an organization's motivation-enhancing efforts and business performance (Appelbaum et al., 2000). Thus, as part of compensation policies studied in the literature, performance-based compensation has been a prominent HR policy analyzed in emerging countries and the family business field.
In emerging countries, specifically in low-income countries and fragile states, performance-based compensation has attracted much attention to improve effectiveness in achieving specific industry targets (Eldridge & Palmer, 2009). These policies help to solve poor performance and increase employee productivity (Eldridge & Palmer, 2009; Ireland et al., 2011). Similarly, in the family business field, this kind of policy has helped to explain how to achieve the desired firm performance by improving employee results (Lozano-Reina & Sanchez-Marin, 2020; Samara et al., 2021). However, in that field, the results obtained so far are contradictory when explaining the decision to use this type of compensation in family firms.
Several studies have suggested that family firms offer higher performance-based compensation than nonfamily firms (Carrasco-Hernandez & Sanchez-Marin, 2007; Chen & Chen, 2015), but others have noted the opposite (Chen et al., 2014; Chrisman et al., 2017; Speckbacher & Wentges, 2012). One possible explanation for these findings is that the owning family's involvement in the business may create a family-specific logic that substitutes formal human resource management (HRM) practices (Alves & Gama, 2020; Daspit et al., 2018). Thus, the values of the owning family, such as entitlement, preferential treatment, and parental altruism, can be positive within the family dynamic (Alves & Gama, 2020). However, these values can be harmful in the use of formal HRM policies (Kidwell et al., 2018).
As the compensation systems in organizations vary a lot depending on the frame of reference that the firm is using (Cruz et al., 2011), several researchers have shown interest in understanding the factors that limit the decision to implement performance-based compensation policies (Carrasco-Hernandez & Sanchez-Marin, 2007; Chrisman et al., 2017; Michiels, 2017). Therefore, different studies have been driven to understand the factors that determine the use of performance-based compensation policies in family firms.
Among the determinants of compensation, organizational culture has been widely studied in the HRM literature, but little is known in the family business context. Although some scholars suggest that the success of performance-based compensation policies is more likely to be influenced by the culture (Du & Choi, 2010), and the distinctiveness of the family business culture has important implications for the design and implementation of HRM policies (Cruz et al., 2011), there are few published studies on performance-based compensation in family businesses in emerging countries that incorporate organizational culture in their analysis. Those that have analyzed organizational culture are approached from a conceptual standpoint, with little empirical evidence and being mostly focused on the eastern context and developed countries (Chang, 2012; Dyer, 1989; Gatfield & Youseff, 2001; Kidwell et al., 2018).
In general, a focus on performance to distribute rewards is most appropriate when the organization's culture emphasizes a performance ethos (Gomez-Mejia et al., 2014). However, different types of organizational cultures can be identified that mark the actions of individuals in the company (Cameron & Quinn, 2011), to the point of influencing the implementation of specific organizational policies (Li & Roloff, 2008; Tosi & Greckhamer, 2004). In the case of compensation policies, the type of cultural orientation drives the decision to implement performance-based compensation (Madhani, 2014; Triguero-Sanchez et al., 2018; Wei et al., 2008; Yeganeh & Su, 2011).
Taking the above into account and utilizing Cameron and Quinn's (2011) typology of organizational culture, this research aims to analyze how different types of organizational culture--clan, adhocracy, market, and hierarchy--influence the implementation of performance-based compensation policies in family firms. Furthermore, we analyze whether the presence of the owning family in the management of the firm moderates this relationship. The existing explanations of how different cultural orientations affect compensation policies do not delve deeper into the participation of the owning family in the management of the company. This participation is critical because the owning family members exert the most significant influence on strategic decisions when they engage more in managerial positions (Chua et al., 1999).
On this basis, we test our hypotheses using a multiple hierarchical regression analysis with a cross-sectional sample of 315 family MSMEs in Colombia. We focus on family MSMEs in Colombia for several reasons. First, Colombia offers an appropriate empirical setting for validating our hypotheses since the country presents a lower compensation level in the business field. Furthermore, the country has similar characteristics to other Latin American countries (Ciaschi et al., 2021) and ranks fourth among the most competitive countries in the region (Portafolio, 2022). Second, family firms are the most common form of organization, particularly among MSMEs, throughout the world (Tipu, 2018). In Colombia, family businesses represent 72% of all companies (Galvez et al., 2017). In this vein, family MSMEs are an important part of the country's progress due to their ability to generate productive opportunities and they provide approximately 85% of employment in Colombia (2021). Third, although most family firms are MSMEs, the compensation levels of MSMEs are still not the best. The average compensation of these types of organizations is 60% less than that of large companies, an aspect related to their organizational performance levels (Gonzalez-Diaz & Becerra-Perez, 2021).
This paper offers various contributions to the literature. First, we theoretically and empirically respond to calls regarding the need for additional contributions to better understand organizational culture as a determining factor of compensation policies in family MSMEs. Second, this paper helps to understand how the presence of family members in managerial positions influences the relationship between organizational culture and the implementation of performance-based compensation policies. At this point, this paper responds to the call to analyze the heterogeneity of the family business to move beyond the comparison between family and nonfamily businesses (Chua et al., 2012). Third, it offers empirical evidence in the Latin American context of a relationship treated mainly from a conceptual approach and in the eastern context and developed countries (Tipu, 2018). Finally, from a practical point of view, this work contributes to understanding organizational culture before implementing performance-based compensation policies in the family business context. Understanding how the culture facilitates or inhibits their implementation will allow professionals and consultants to assess whether it is necessary to transform the organizational culture or adjust the compensation policy before implementing performance-based practices.
This document is structured as follows. The first part defines organizational culture and its relationship with family businesses. Moreover, it offers a brief literature review to support the study hypotheses on the relationship between organizational culture in family firms and performance-based compensation policies. The second part of the document presents the methodology used, detailing the sample and the variables analyzed. The third part shows the results to contrast them against the hypotheses. Finally, the fourth part presents the discussion of the results, followed by the conclusions.
2 Theoretical framework and hypotheses
2.1 Organizational culture and family firms
The organizational culture includes the system of values, beliefs, and principles internalized and shared by members of the organization (Schein, 1992) to the extent that it influences their behaviors (Cameron & Quinn, 2011). In this vein, culture is construed as a source of differentiation between organizations and a key driver of the decisions conducive to attaining competitive advantages (Barney, 1986).
Among the existing proposals to understand organizational culture and its contribution to organizational competitiveness, Cameron and Quinn (2011) propose a general organizational culture model called the Competing Values Framework (CVF). This model, widely used in the literature (e.g., De-La-Garza-Carranza et al., 2011; Sanchez-Marin et al., 2016), distinguishes between four types of cultures (see Table 1) based on the organization's approach (internal or external) and its structure (stability or flexibility).
According to this model, any company can reflect values from the four types of culture, but only one can prevail and be the one that drives the management of the organization (Cameron & Quinn, 2011). For example, in family businesses, where a family or group of families exert substantial influence on the strategic and operational decisions of the company (Chua et al., 1999), the clan culture is often the most common in such organizations (Dyer, 1988, 2003; Sanchez-Marin et al., 2016). This attribution is mainly due to the power and authority concentrated in the owning family, whose culture is rooted in the traditions of the founding family, and its charismatic...
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