Research Insight | How Your Brand's Reputation Should—and Shouldn’t—Affect Employee Pay
High-prestige brands may be tempted to leverage their reputation to pay employees less. But a Journal of Marketing Research study suggests this strategy backfires in the long run, showing that lower wages can lead to decreased productivity, higher employee turnover, and ultimately, lower profits.
The study distinguishes between two types of brand differentiation: vertical differentiation, where brands are perceived as high-quality (e.g., Mercedes), and horizontal differentiation, where brands are valued for their uniqueness (e.g., Jeep). While high-quality brands often use their prestige to justify lower salaries, unique brands tend to pay more to attract employees who align with their distinct identity. The study shows that although high-prestige brands’ cost-saving approach to wages may initially lead to payroll savings, they suffer from reduced employee motivation and retention.
Conversely, unique brands that pay higher wages see stronger employee commitment and better financial performance. Because employees of such brands can’t easily transfer their experience to higher-paying jobs elsewhere, offering competitive pay ensures loyalty and effort. These findings suggest that managers should adjust their competitive pay benchmarking according to the relative levels of both vertical and horizontal brand differentiation.
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What You Need to Know
- Consider your brand image when constructing pay benchmarks, as your brand’s perceived quality and uniqueness have opposing pressures on employee pay.
- Do not leverage your brand’s perceived quality to pay less, as this results in a net profit loss due to negative effects on employee productivity and retention.
- Paying employees more based on your brand’s perceived uniqueness can result in a net profit gain due to positive effects on employee productivity and retention.
Abstract
The primary focus of brand equity research has been on how brand knowledge creates value for firms through customer behavior in product markets. Using archival data and five experiments, this article tests a framework that outlines the unique role brands play in the labor market. The framework distinguishes between vertical and horizontal differentiation and shows that vertical brand differentiation is associated with lower pay, whereas horizontal brand differentiation is associated with higher pay. Employees are also vertically and horizontally differentiated, and firms high in horizontal brand differentiation pay more for employees who match their brands’ differentiating characteristics (i.e., brand-relevant complementarities). Results show that these brand–pay relationships have important downstream effects on employee behavior and, consequently, on firm profits. Specifically, leveraging vertical brand differentiation to lower pay represents a false economy because profits are attenuated by negative effects on employee productivity and retention. In contrast, when managers at firms high on horizontal brand differentiation pay more, profits increase via the same mediating employee behaviors. Six firm strategies and investments that influence firm bargaining power in the employee–brand matching process are found to moderate the brand–pay relationship and downstream effects on profits.
Christine Moorman, Alina Sorescu, and Nader T. Tavassoli, “Brands in the Labor Market: How Vertical and Horizontal Brand Differentiation Impact Pay and Profits Through Employee–Brand Matching,” Journal of Marketing Research. doi:10.1177/00222437231184429.