Lower wages come back to bite prestige brands

"High-quality brands are tempted to leverage that higher quality perception to hire people at lower salaries," Christine Moorman says. "But it's myopic, because they don't anticipate the turnover and productivity losses that will follow." (Credit: Getty Images)

Prestige brands that leverage their “resume power’ to pay lower wages ultimately hurt their own profits, research finds.

High-prestige brands sometimes pay their employees less, with negative effects on productivity, employee retention, and profits, according to the study coauthored by Christine Moorman, professor at Duke University’s Fuqua School of Business.

However, brands that differentiate themselves for their uniqueness may be willing to pay employees more, especially for those who embody that difference, a strategy that ultimately may yield better business outcomes, write the researchers in the Journal of Marketing Research.

The research, says Moorman, sheds new light on the impact of brands on a company’s labor market strategies.

“We used to think that brands only contribute value to firms through the brand’s effects on customers’ willingness to pay for the firms’ products,” Moorman says. “But we show that brands also affect the behavior and attitudes of their employees, another potent determinant of firms’ performance and value.”

Brands differentiate themselves for quality (vertically differentiated) or for uniqueness (horizontally differentiated), says Moorman. Firms high in vertical differentiation are those that most customers perceive as “high-quality,” Moorman says. The horizontally differentiated ones attract some customers for their “distinctive” and “unique” qualities, she says.

“Think about Mercedes versus Jeep,” Moorman says. “Mercedes is universally known to be high quality, while Jeep—regardless of its quality—targets consumers who identify with its unique rugged characteristics.”

The team of researchers, which includes faculty from London Business School and Texas A&M University, used data from applications to Fortune’s “100 Best Companies to Work For” and measures of brand equity from the BAV Group to extract data on pay and retention. They also ran five experiments with human resource managers and consumers to test their predictions about brand differentiation and willingness to offer and accept pay.

The studies show that vertically differentiated firms leverage the perception of “high-quality” to pay their employees less. Conversely, horizontally differentiated firms pursue job seekers that reflect the distinctiveness of the brand and, for them, are willing to pay more.

“It’s as if high-quality firms bargain on their prestige, and on the value that working for them adds to their employees’ resume power,” Moorman says.

She says that up until now, this bargaining power—and the lower average pay it generated—was considered optimal for firms’ profits.

“But paying less is a false economy,” Moorman says. “Because paying less has consequences on employee behavior, motivation, and loyalty to the firm.” The research found that paying workers less leads to negative effects on productivity, employee turnover, and, eventually, lowers the firms’ profits.

“High-quality brands are tempted to leverage that higher quality perception to hire people at lower salaries,” Moorman says. “But it’s myopic, because they don’t anticipate the turnover and productivity losses that will follow.”

Importantly, the research finds unique brands (the horizontally differentiated ones) pay higher salaries to attract like-minded employees, with positive effects for their profits.

Moorman says these employees are not only getting what they call a “psychic income”—the pleasure of working for a brand that reflects their personality—but also higher salaries. “So they’ll work harder and stick around longer,” she says. The research points out that these higher salaries are important because employees working for unique brands cannot leverage this experience to secure better and higher-paying jobs in the future.

Moorman says human resource managers of prestige brands should think about the negative consequences of lower wages and leverage their quality in different ways.

“They should consider the returns of attracting a larger pool of applicants, drawn by the brand’s reputation and, rather than using resume power to determine pay, they could highlight it to convert more job offers,” Moorman says.

This is an area, she says, where marketing and HR departments should work together, given how brands affect HR outcomes.

Source: Duke University