Brand Equity and Employee Pay

By: Ashleigh Sargent

In the battle for customers, companies typically focus on branding to promote and build trust in their products and services. While brand equity often allows firms to increase their consumer base and pricing, establishing a strong brand presence can negatively impact employee salaries. Research by Nader Tavassoli, Alina Sorescu, and Rajesh Chandy shows that strong brands actually reduce total payroll costs because employees at the executive and entry levels are willing to accept lower pay (2014). Their study, titled “Employee-Based Brand Equity: Why Firms with Strong Brands Pay Their Executives Less,” proposes new ideas about the scope of marketing campaigns and raises ethical questions about pay grades.

Tavassoli, Sorescu, and Chandy’s article focuses on the ideas of self-identity and self-enhancement. Past research shows that humans feel the need to define their identities both by how they view themselves and how others perceive them. Therefore, individuals will identify more strongly with products, services, and companies associated with success and social status. Research shows that the majority of people use brand affiliations to express and enhance their public and private identities. Consumers select particular brands of goods and services, while employees seek to work for firms with highly recognizable brands. Company executives, many of whom hold positions in the public realm, often identify more with their brands than lower level employees because they strongly define themselves through brand equity transfer. Both CEOs and company executives perceive opportunities for self-enhancement by associating with strong brands because they may accrue social and psychological benefits from the brand equity.

After compiling data from 1,200 consumers as well as compensation data, Tavossoli, Sorescu, and Chandy closely examined interactions between total pay, salary, and brand strength (2014). After controlling for factors such as firm size, external social capital, and corporate reputation, they found statistically significant support for their hypothesis that brand equity impacts employees and consumers in the same way. Brand strength, defined as brand familiarity, quality, distinctiveness, and relevance, negatively affects and lowers total pay for CEOs and younger executives, regardless of the quality of the employees. The researchers also found that the difference in pay between CEOs and non-CEOs decreases as brand strength increases.

These findings have significant implications for the ways marketing teams approach branding because of the financial gains that firms can accrue by reducing payroll costs. The research suggests that strong brand equity allows firms to increase profits by decreasing hiring costs. If firms can better leverage their brand to decrease costs, they can increase profits and potentially improve their market positions. With strong brand equity, companies can also attract and employ outstanding candidates more cheaply. The potential savings are significant, especially when CEOs and executives, who on average receive $5 million in total compensation each year, are willing to receive lower wages. This research calls for deeper thinking about how brands create value, measure marketing returns, and engage marketers with human resource and finance departments.

At the other end of the spectrum, firms may also be able to recruit top talent for entry-level positions at a lower price. New recruits may sacrifice higher salaries to work for firms with strong brands because they may think that working for such companies will improve the strength of their resumes for future opportunities. HR departments and recruiters can strategically use brand equity to show the advantages of accepting positions within their companies. HR departments and hiring committees can also use this leverage in negotiations for executive pay. Perceptions of CEOs usually focus on power, influence, and wealth, which can make salary negotiations challenging. Hiring teams who emphasize the equity benefits of strong brands can adjust salary benchmarks and expectations to reduce payroll costs.

Tavassoli, Sorescu, and Chandy’s findings are positive for companies with strong brand equity, but may have negative ethical implications tied to decreasing salaries, particularly for entry-level employees and recent college graduates. Younger employees often face expenses such as student loans and costs associated with relocating to new cities. Firms with strong brand equity can use resume building to potentially hurt the financial standing of individuals who are just starting their careers. Similar to educational access, certain people who cannot afford lower salaries may not have the opportunity to work for a well-known company and gain the potential future opportunities associated with working for well-known organizations. Smaller firms may also suffer as larger firms convince individuals of the value of their brands, despite offering lower salaries. Marketing departments in small and large companies may need to adjust their branding strategies to focus on a new segment of the market: potential employees. Strategists need to build brand reputation and find ways of quantifying the value of their brand for certain segments of the population when setting salaries or recruiting employees. As more research builds on the findings from this study, companies with varying levels of brand equity will need to evaluate their marketing strategies and goals to best align themselves to an ever-changing, competitive marketplace.

References

Tavassoli, N.T., Sorescu, A., & Chandy, R. (2014). “Employee-based brand equity: Why firms with strong brands pay their employees less.” Journal of Marketing Research, 51.