Insights: How ‘brand’ impacts pay, employee behaviour and profits

A human resources (HR) director of a famous luxury brand once bragged, “Not only do customers pay more for our products, but we also pay less for talent!”

While this may well be true, is paying lower wages based on brand power such a good idea?

A school of thought known as “efficiency wages” challenges the seemingly straightforward notion that paying less results in higher profits.

In reality, higher pay can lead to greater profits because employees work harder and stay longer, with productivity gains and employee turnover savings outweighing the increase in compensation costs.

Our research across industries builds on this and shows that “how” a brand is viewed adds a surprising twist to the story.

Specifically, we find that brands seen as “better” in terms of brand quality approach pay very differently to brands seen as “different” in terms of brand uniqueness.

We further find that managers are myopic about the consequences of paying more or less based on brand perceptions – profits suffer when brands viewed as “better” pay less, whereas paying more boosts the profits of “different” brands.

Why do brand perceptions of being “better” or “different” affect pay?

Brands vary along two fundamental dimensions: the degree to which they are perceived as better and different. For example, Lexus is seen as high quality, but not particularly unique. In contrast, Jeep is viewed as unreliable and therefore lower in quality, but is uniquely perceived as rugged.

Of course, brands can be perceived as low or high on both dimensions. Take, for example, Dior and Gucci. They are both universally valued for the quality of their craftsmanship and heritage of excellence. They are also different, with Dior renowned for its classic femininity and Gucci for its fashion-forward androgyny. Consumer preferences come down to a matter of taste.

So why would high-quality brands extend job offers with lower pay, and why would employees accept them? The answer is that well-regarded brands receive a greater number of qualified applicants, and being employed by them provides résumé power.

The brands’ perceived quality rubs off on the employee and, knowing this, employees are willing to substitute lower current pay for more lucrative future job opportunities elsewhere. These dynamics provide high-quality brands with significant bargaining power – something many of them leverage to attract talent for less.

Brand uniqueness doesn’t offer the same advantage, because HR is tasked with finding a particular type of employee whose idiosyncratic characteristics help build and deliver the brand – be it in a customer-facing position or behind the scenes. For example, Dior’s femininity, Gucci’s androgyny, or Wildfang’s “tomboy chic” are each best suited by a different type of employee.

Similarly, being a travel aficionado – whether in a client-facing role, marketing, product development, or even finance – complements Louis Vuitton’s travel-anchored brand DNA and strategic investments.

These dynamics are found across industries, whether it is McKinsey looking for a particular attitudinal and cultural fit, Pampers selecting people who are passionate about infant care, or Red Bull favouring people active in the cultural and sports domains they sponsor.

The nub is that HR needs to work harder to identify and attract matching talent when brand uniqueness is at play. And, when they find a match, they will not skimp on pay, especially as these candidates know their brand fit offers extra value.

HR is myopic about the consequences of these brand-based pay dynamics

Importantly, our research reveals that these pay decisions affect profits in unexpected ways.

Specifically, we find that employees who might have been glad to accept less pay at high-quality brands end up putting in less extra effort and exhibit higher voluntary turnover – no doubt, in part, because they now have a stronger résumé. We find that these negative employee behaviours cost brands more than they save by offering lower pay, resulting in lower profits.

In contrast, firms that offer higher pay to employees who match their brand’s uniqueness tend to see this higher pay more than made up for in productivity and retention gains.

The higher pay motivates employees to go the extra mile and their better fit creates complementary value.

Association with a unique brand will also not provide universally valued résumé power at other firms, meaning employees are less likely to achieve the same higher pay elsewhere.

Employees therefore tend to stick around longer, thereby saving brands hiring and on-boarding costs.

Unfortunately, unlike compensation, these productivity and retention dynamics and their financial consequences are difficult to observe, which leads firms to make suboptimal pay decisions for both brand dimensions.

A call for marketing, HR and finance to better align their efforts

The bottom line is that HR managers at high-quality brands should use this brand power to attract talent, but not to suppress pay, as doing so will ultimately hurt profits due to lower productivity and higher employee churn.

Conversely, brands should seek out and be willing to pay more for talent that matches their brand’s uniqueness, trusting that this will eventually pay off in terms of productivity and retention gains.

These brands benefit from hiring people who possess an excellent cultural fit and who authentically and naturally bring unique brand differentiation to life.

This is easier said than done, of course, and there are structural impediments to getting it right.

Specifically, a CMO Survey* from last year found that marketing’s cross-functional cooperation with HR and finance is significantly lower than with IT, operations, and sales. In fact, marketing’s cooperation with HR and finance is the lowest overall.

Our research should encourage marketing and HR, in particular, to bridge this gap and work together closely to build and leverage the brand in attracting, rewarding, developing, and retaining the “right” talent.

Nader Tavassoli is a professor of marketing and the co-academic director of the Leadership Institute at London Business School. *He is also the UK director of The CMO Survey.

Christine Moorman is the T. Austin Finch, senior professor of Business Administration, Fuqua School of Business, Duke University. She is the founder and director of The CMO Survey.

Alina Sorescu is the Paula and Steve Letbetter `70 professor of Marketing, Mays Business School, Texas A&M University.

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