Mays Business School, March 16th, 2014
Many research studies have analyzed customer-based brand equity and how it relates to consumers’ willingness to pay for a branded product, but researchers have not yet questioned whether the same brand equity can impact executive pay. Alina Sorescu, associate professor of marketing at Mays Business School, saw a correlation between brand equity and top management of well-known brands’ willingness to work for less compensation.
Sorescu first saw patterns forming within academia when PhD candidates chose to study at more prestigious schools who offered them less scholarship money over lower-tier schools offering a much larger amount of scholarship money. She theorized the PhD candidates’ decisions were based on the opportunities created by attending a more prestigious school. In the long run, the benefits of taking the option that provided less funding would pay off because of the brand equity that accompanies a prestigious degree. As she repeatedly observed this pattern in academia, she began applying this theory to other scenarios.
Sorescu and her colleagues, Nader Tavassoli and Rajesh Chandy – both from the London Business School – began looking for connections between brand equity and the salary of top five executives across a large sample of firms. Sorescu wanted to know if top executives of companies with well-known brands received lower compensation.
She began her data collection with U.S. Young & Rubicam BAV metrics survey to obtain brand strength, executive level compensation data from ExecuComp, a Standard & Poor’s database and firm level data which yielded a sample of 10,107 observations for all top executives and 1,869 observations for CEOs, across 393 firms.
Her findings were in line with the proposed theory. Moving from a brand with average brand equity to one whose equity is in the 80th percentile yields a 12.13 percent decrease in CEO pay, or $1,268,130 in savings for the average CEO compensation, and a 2.42 percent decrease in pay, or $89,978 in savings for the average non-CEO executive
In an effort to explain why strong brands should attract executives at lower levels of pay, Sorescu explains the definition of employee-based brand equity as “the value that a brand provides to a firm through its effects on the attitudes and behaviors of its employees.” This concept offers a new look at the returns on branding, by highlighting a brand’s ability to cut costs instead of increasing revenue. “The payoff to brand investments largely exists in the revenue gains that they can yield. Our approach flips this notion by looking at the cost side of profits, an area rarely examined in marketing,” she explains. “We suggest that a significant part of the returns to marketing investments in brands may be in reducing payroll costs.”
Taking a look at the psychological effects strong brands have on executive pay Alina offers an identity-based framework. “The overarching theme underlying this effect is self-enhancement,” says Sorescu. “Strong brands offer greater possibilities for self-enhancement to the executives associated with them than do weak brands.” People choose to work for companies with strong brands because brands build reputation and those connections create future opportunities, “Self enhancement is seen as a substitute for pay.” Brands are seen as a signaling tool, being associated with a strong brand says something about you; the long-term benefits outweigh the immediate salary cut one may be willing to take.
“Our results imply that researchers should take a broader view of the contributions that brands make to firms and the effect they have on the balance sheet,” Sorescu says of employee-based brand equity. “Moreover, they should make use of strong brands in executive pay negotiations that are typically viewed as being outside the realm of marketing.”
– “Employee-Based Brand Equity: The Impact of Customer Perceptions on Executive Pay” by Sorescu, Nader Tavassoli and Rajesh Chandy (both of the London Business School) is forthcoming in the Journal of Marketing Research. Sorescu is holder of the Rebecca U. ’74 and William S. Nichols III ’74 Professorship at Mays.