Brand strength translates into millions less in CEOs pay, as bosses are prepared to take a substantial pay cut to captain strong brands, according to research from a London Business School academic.
A team led by Nader Tavassoli, Professor of Marketing, London Business School, compared compensation figures of 2,717 US senior executives, with the brand strength of their firms’ leading products over a 10 year period (from 2000 to 2010).The sample used combined executive pay data from Compustat’s ExecuComp and brand strength figures from BAV Consulting’s Brand Asset Valuator (BAV) as well as other sources. Controlling for other factors, CEOs were prepared to take home 12 percent less, on average – equivalent to around $1.3million per year — at brands that were 25 percent stronger than the average brand, and yet less at even stronger brands. Tavassoli and colleagues argue that the higher the perceived strength of identification between the brand and executive, the greater the executive’s willingness to accept lower pay.
As CEOs are the most prominent members of an organisation, the academics found the negative effect of brand strength on executive pay is strongest for the CEO compared with other executives. While past research has largely focused on how brands win customers and gain price premiums, this research instead argues that looking purely at customer-based outcomes underestimates brands’ true contributions to the firm. This is because firms not only compete for customers but also for employees.
Nader Tavassoli said: “Strong brands can provide a competitive edge when negotiating with prospective employees. A well regarded brand can do more than just help recruit the best leadership talent, it can also benefit the bottom-line by lowering payroll. HR teams should therefore leverage brand equity as much as they would more-traditional benefits. “With pay accounting for the largest cost in many organisations, brands might even have a larger effect on the bottom line via lowering costs, than via increasing revenues!” The research also contributes to the highly charged debate around the ever-rising levels of executive pay by highlighting that an inherently marketing-based approach that enables firms to self-regulate executive pay by investing in strong brands. “We believe that if CEOs are prepared to take a salary cut for the privilege of leading a top brand, pay levels can be grounded, to some extent”, Tavassoli added.
The research also found that younger executives were more likely than older executives to take a salary-hit in order to work for a strong brand. This is because brands serve as a signal about an executive’s unobserved qualities and can boost résumé power. Firstly, younger executives have fewer building blocks to define their identity which makes their equity transfer from their current employer particularly valuable. They are therefore willing to invest in their identity because future employers may rely on the brand association as a credible indicator of human capital. As younger executives have long careers ahead of them, they are likely to have greater opportunities to leverage this equity for social or economic gains.
“Younger executives should value brand equity transfers more than older executives when looking at their careers and negotiate their salaries accordingly”, Tavassoli concludes. Professor Nader Tavassoli will be leading Coursera’s first branding MOOC (Massive Open Online Course) on 7 October 2015 and will be giving an innovative take on brands and branding, where brands are built by people and not advertisements. This course is designed for a broad audience of marketing and non-marketing professionals, in particular human resources and finance but extending to all employees who need to understand their critical role in delivering on the brand promise.
