A strong brand means attracting better executives and paying them less. It’s time organisations started paying attention to the impact a strong brand can have closer to home, say Nader Tavassoli, Alina Sorescu and Rajesh Chandy.
Companies dramatically underestimate the payoff from strong brands. Why? Because they tend to calculate the payoff from brands via a single source: customers and the revenues these generate. But strong brands pay off even more substantially through another source of value creation: their employees.
Managers recognise the value of strong brands in the battle for customers. Ask them how brands create better value (we have asked this question many times in classrooms and boardrooms), and they’ll reply that they do so by affecting how customers think and what they do, thereby generating price and volume premiums. WPP, the world’s largest marketing services company, argues that the financial contribution of brands to firms’ earnings is based on ‘the power of brand where it most counts – in the mind of the consumer.’
A focus on customer-based outcomes is undoubtedly important. But it offers an incomplete accounting of brand value, and underplays brands’ true contributions to the firm. Firms battle not only for customers but for employees. And just as strong brands can help attract more customers at higher prices, they help attract better employees at lower pay. This is not a trivial matter. Pay represents the biggest cost in many organisations, with salaries alone accounting for between 20 and 50 per cent of operating expenses.
A failure to recognise the strength brand plays in recruitment can have a dramatic impact. It can result in biased benchmarks for setting executive and CEO pay and a failure to leverage a strong brand in salary negotiation. Under-appreciation of brand strength in relation to employees also has the knock on effect of under-investment in brand, a crucial oversight on the part of many organisations.
Our research draws on 11 years of data on 393 US companies in the S&P index. The results demonstrate that companies with strong brands are able to:
Our central idea is that identity-enhancing benefits that employees gain from being associated with strong brands are a substitute for pay.
We have a fundamental human need to define our identity – both in how we view and understand our own selves and in how others perceive us. The effects of brands on the identity of consumers are well understood; Sid Levy’s classic article Symbols for Sale (HBR 1959) offers an enduring view of the social and psychological benefits that consumers accrue from associating with powerful brands.
But the effects of brands on consumers pale in comparison to their effects on the employees who live and breathe (and create and nurture) them. The highs and lows, the pride and despair, the public and private victories and defeats that are part of working at Blackberry or Apple contribute more to one’s identity than simply owning a Blackberry or an Apple product. Moreover, individuals consume numerous products but typically hold only one job at a time. And while a consumer chooses a product, a job entails choice by both the employee and the firm. The effect holds for strong as well as weak brands. Just consider the psychological devastation of the employees at Enron or Lehmann who had little to do with the causes of these companies’ demise. Customers may have felt the financial pain, but unlike for employees, their identities remained largely unaffected.
Our analysis shows that the most significant impact of strong brands are on those at the very top echelons of companies. For example, strong brands are particularly powerful in driving down pay for a group of executives whose pay often appears to defy gravity: CEOs.
Strikingly, despite paying less than their peers on average companies with strong brands are able to attract better quality CEOs (as measured in terms of experience and board appointments at the time of appointment). They also need to offer their CEOs fewer performance-based incentives to motivate them.
Our research finds that executives at the helm of strong brands accept lower pay than those at weak brands. We reason that this is based on self-enhancement. Executives’ leadership positions, in particular, allow them to credibly position the brands that they are charged to manage as a central part of their identity, and to rely on equity transfer from these brands as a potent source if self-definition. Being at the helm of strong brands is a powerful source of psychic benefits, whether in interactions with family (‘look Ma, I’m in charge of the brands your friends love’), at class reunions and dinner parties, or at interviews with future employers.
Identity-based effects are strongest the more visible the executive and the younger the executive. The former implies that CEOs are most affected by brand strength as they are visibly and prominently associated with the company and its brands. Conversely, identity effects are stronger for younger executives and CEOs because their identity is yet to be fully shaped and brand associations through their employers do more to fill in the blanks. They also have longer careers ahead during which they can yield the résumé power strong employer brands provide.
The effects of strong brands go beyond a willingness among employees to accept lower pay. For employees, they can offer a path to greater fulfilment. For employers, they can offer a path to greater productivity.
The findings translate into a three-pronged return for strong brands:
Too often, brands are seen as the domain of marketing departments. Firms should recognise the powerful spillover effects of brand on their employees – your employees live your brands more than your customers do and they have much less choice in the matter. Strong brands are sources of pride not only in the workplace, but also on virtually all other aspects of employees’ lives.
These insights imply that brands are too valuable an asset to be left to the marketing department alone. Boards of directors, HR departments and investors all have a solemn responsibility to do more to gain value from strong brands.
HR departments should use brand strength when setting salary benchmarks and recognise the resume appeal of your brand. This may result in high turnover, but some firms factor this into their HR strategies, actively nurturing links with their ‘alumni’.
Returns to brands are one of the key performance measure of CMOs. Several studies suggests CEOs have are increasingly frustrated by what they see as an inability to prove ROI. By ignoring employee-based returns, CMOs contribute to a continued under-appreciation of brand investments. Today, their overwhelming focus is on measuring things right. They should also measure the right things.