Strong Brands, Weak Pay

It’s a fundamental tenet of marketing: Consumers believe, on some level, that using a prestigious brand enhances their own image, so they’re willing to pay more for one. Similarly, executives like to be linked with employers that have well-known brands—and it turns out that they’re willing to “pay” for the association by accepting substantially lower compensation. A team led by Nader T. Tavassoli, of London Business School, reached this conclusion after mapping the compensation of 2,717 U.S. senior executives against the brand strength of their firms’ leading products. For pay figures, the researchers used Standard & Poor’s ExecuComp database; for brand strength, BAV Consulting’s consumer surveys. They examined the data for 2000 to 2010, making more than 10,000 compensation-brand observations in all. With each standard-deviation increase above the mean for brand strength, non-CEO executives earned, on average, 2% (about $90,000) less a year. The effect was far larger for CEOs: Their pay dropped by 12% for each standard-deviation increase, saving their companies an average of $1.3 million a year. The larger effect, the researchers say, can be explained by what psychologists call “identity theory”: CEOs are typically the most prominent members of their organizations, so for them the self-enhancement from brand association is particularly robust. The effect on pay was also more pronounced among another subgroup: younger executives. The researchers theorize that younger people have had fewer chances to define themselves professionally, so they see an immediate benefit to being identified with a respected brand. Also, experiments indicate that working for a firm with a powerful brand signals competence to future employers—and with longer careers ahead of them, younger executives especially value this boost. CEOs’ pay dropped by $1.3M a year, on average, for each standard-deviation increase in brand strength. Companies often spend a lot of time and money trying to become “employers of choice” by landing on Best Places to Work lists and the like. This study approaches employer attractiveness from a different angle, showing that strong brands can provide a competitive edge when negotiating with potential employees. A well-regarded brand can do more than help recruit top-quality executives; it can bolster the bottom line by significantly lowering payroll expenses. HR departments should leverage brand strength just as they leverage more-traditional benefits. And at a time when many are calling for increased governmental regulation of executive compensation, these findings suggest an additional, market-based approach. “If top executives are prepared to accept lower pay for the privilege of running firms with strong brands, pay levels can be grounded, at least to some extent,” the researchers say. About the Research: “Employee-Based Brand Equity: Why Firms with Strong Brands Pay Their Executives Less,” by Nader T. Tavassoli, Alina Sorescu, and Rajesh Chandy

Strong Brands, Weak Pay

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