Aligning Compensation with Strategy: Is this Even Possible?

November 14, 2018
Every year as we gear up for compensation season, we start off with big picture questions like – What are we trying to accomplish this year? Is our compensation system well aligned with our strategy? Are there changes we should communicate now to better meet our goals and be more transparent? My advice – even if “strategic alignment” is the holy grail of compensation design, it’s almost impossible to achieve. So do your best but keep your powder dry.

You’re wrong if you think your compensation structure - with all its carrots and sticks - is your most effective strategic tool. Compensation is a blunt and rudimentary tool, like the wheel. It’s a vitally important part of the machinery and your organization will go off the rails if it’s not working properly, but it’s not a mechanism you can use to inspire your legal team to greater heights or to achieve new strategic things.

Here are 7 reasons why not:

  • Market pressures. By far the biggest obstacle to aligning compensation around internal strategic goals is the existence of the external market. In good economic times and bad, the war for talent continues unabated. If your internal compensation scheme means you will pay any of your strong performers less than they could command in the market, you will likely lose them. This is a risk few of us are willing to take with our otherwise strong performers, even if they haven’t met all the organization’s strategic goals. So practically speaking, the imperative of paying market compensation always trumps the aspiration of compensating for internal strategic goals.

  • Motivational research. Decades of research show that, beyond a certain "pay fairness" threshold, more money does not motivate people to do more of their best work. Knowledge workers in particular are motivated by intangible rewards. Best-selling author Dan Pink reviews the research in “Drive[1], and identifies the primary intangible drivers as "autonomy, mastery, purpose", while pioneering workplace motivation psychologist Frederick Herzberg singled out "job enrichment" as the primary motivator in the workplace.[2]

  • Money as a disincentive. Much of the same research also shows that while money does not provide much of a positive incentive, it does create a disproportionately large disincentive if people perceive themselves to be under-compensated relative to colleagues or market. So, if you have two strong performers who view themselves as peers in the internal market but your incentive scheme rewards one more highly, you risk demotivating and losing the lower paid person – a risk that far outweighs the increased motivation and performance you might get from the higher paid colleague.

  • Annual cycle. To the extent compensation is a carrot or stick, you can only use it once a year. Meanwhile, for top performers to be successful, they must engage in a complex series of different behaviours using balanced judgments in widely different circumstances throughout the year. The annual compensation reward or punishment cannot possibly generate all the “right” finely-tuned behaviours in all circumstances all year.

  • Individuals are different. Your colleagues aren't Pavlov's dogs with essentially the same hunger impulses and salivary glands. They're different people bringing their own unique baggage to the emotionally-charged compensation arena, so there is no one-size-fits-all trigger that will generate the same response with all.

  • The law of unintended consequences. Many behaviours go into determining strong performance that supports the organization’s strategy. Unless there's a formula, it's hard to say which aspects of a person's compensation reward which behaviours, so the incentive is not clear. But you have only to look at press stories of executive compensation gone awry to conclude that formulas are dangerous also. Formulas often end up motivating people to make the statistics look good, rather than motivating the underlying behaviour the statistics were meant to measure. By aligning compensation with a few strategic goals, you risk overemphasizing some aspects of performance to the exclusion of others which are also key elements of a firm's culture or success.

  • Changing compensation is hard. In our rapidly changing industry and legal environment, it’s critical to stay nimble, to course-correct, and to adjust strategic goals to achieve new results. But compensation models are not easily changed, and can’t be quickly adapted to new strategies. Any compensation re-design requires a huge time investment by leaders and others. Compensation is at the very top of the list of hot button change-management exercises you could undertake - it is the most likely to generate strong negative emotions, widely diverging views and distractions in the workplace. These risks have to be carefully weighed in light of the uncertain benefits to be achieved.

Conventional wisdom continues to promote the idea that compensation is our primary strategic tool. Legal industry consultants say we need to "re-align compensation with strategy" in our changing world. "You get what you pay for", "You can't achieve strategic goals without re-aligning compensation", and "People don't change until they feel it in the pocketbook" are common refrains. And certainly a wide body of research suggests that financial incentives can be effective (sometimes too effective) to drive specific behaviours.[3] This seems to be the case where the cause-and-effect connection between the behaviour and the desired result is unambiguous, where the behaviours which will achieve the desired results are easily defined, and where the measurement can be made "complete, objective and influenceable".[4] It is, however, difficult to extrapolate from these studies to devise a practical scheme suited to the complexities of lawyer performance and compensation.

In my world, communication is a far more effective tool than compensation. It’s infinitely flexible, can cover any nuance and can be used any time. If a person’s results are lagging or the person is engaging in unwanted behaviours, I have never found it effective to wait until compensation is set at the end of the year and then say, "You're not getting a raise, or you're getting a reduction this year because…" Never does the person respond, "You raise a good point, I will mend my ways and hope to get a raise next year". A far more effective means of motivating better behaviour is a simple conversation that occurs in the moment, without reference to compensation, where you’re able to engage the person with intrinsic motivators like “autonomy, mastery, purpose” and “job enrichment.” The same goes for positive behaviour and results you want to encourage. 

The key to achieving consistent strategic results in my experience is to reach for motivational tools outside the limited compensation tool box, and not to get distracted by trying to build a better compensation mousetrap. I’m curious to know whether my experience is shared by others and whether this is an area where the law firm and legal department experiences diverge. Let me know your thoughts!

[1] Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us (New York: Riverhead Books, 2009)

[2] Frederick I. Herzberg, “One More Time: How Do You Motivate Employees”, Harvard Business Review 46(1): 53-62 (1968).

[3] Shaw, Jason D. and Nina Gupta, Let the Evidence Speak Again! Financial Incentives are More Effective Than We Thought (Human Resource Management Journal, 2015)

[4] Lawler, Edward E. and John G. Rhode, Information and Control in Organizations (Pacific Palisades, CA: Goodyear Publishing Co., 1976).

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