[MUSIC] In the last video, we talked about customer base brand equity. In this video, I'll introduce the concept of employee based brand equity. Now this idea of employee-based brand equity occurred to me back in 1993. I was interviewing for a job at the MIT Sloan School of Management. Not only was I interviewing, I actually received a job offer. And I was sitting in front of the Dean of Faculty at that time, Dick Schmallinsay, who later became dean of the school. And being half-Iranian, and half-German, the Iranian side in me demanded that I negotiate for my salary. I was literally incapable of accepting the salary they offered, even though it was a very good one. I was armed with the Economists' cost-of-living index and I tried to convince them that, compared to my other options, I would be taking a massive salary cut to come and join the MIT Sloan School of Management. Now, what you have to know is that at that point in time, U.S. News & World Report had ranked MIT Sloan as the number one business school in the country. As I presented my case to Dick Schmallinsay, he simply looked at me and after a painful pause, he simply asked me, I'm sorry, was there a question? I quickly responded, yes, do you have a pen so I can sign the contract? And I did. Some years later, after I joined London Business School, I found myself here in these gardens. And it was a Thursday afternoon when the MBA students had a happy hour and I joined them, and my colleague from the accounting department, Dennis Oswald, had joined as well. There was a group of students, and one student walked over with his arms spread out, a huge grin on his face. He ensued to hug the other students. I turned to Dennis and I said 20 Pounds says it's Goldman Sachs or McKinsey. Dennis looked at me surprisingly and said, how do you even know it's a job offer? I said, come on, 20 bucks, and he bet me. It turned out in this case it was McKinsey. How did I know it was McKinsey? I knew that kind of pride and behavior from an MBA student right around the time they got job offers, could only be one of these firms. If you're into consulting, McKinsey still has the number one brand, and in financial services, Goldman Sachs. But the story continued. As we are watching these MBA students, one of the students asked the person who had an offer for McKinsey. I wonder how big your signing bonus is. It turns out he got none. McKinsey doesn't have to pay signing bonuses. So when I talk about employee base brand equity, I'm not thinking about how the brand affects the behavior of customers. This is about the brand affects the behavior of employees. And the thesis is, one that I've researched academically and I've seen in action in firms across sectors, is strong brands attract better people and they pay them less. Not little, they just don't have to bribe you to work for them. Let me explain to you the logic behind the story in a little bit more detail. Think about the discussion we had about customer based brand equity where brand was a signal and a symbol. Now, what kind of a signal is a brand about me? Well, if you look at somebody's resume, we can think of this as resume power. We look at which schools did they graduate from. What were their previous jobs? And especially when you're younger, this fills in unknown information about you as a person. So the brand is a signal about you. Why is it a credible signal? Well, unlike with consumer products, I can go out and buy a well known brand and I select the brand. But if I get a job, it's not just me who selects the company, it's also them who select me. And I typically only have one job at a time, whereas I might own many different kinds of brands. More importantly even, if I'm part of an organization, I also help build that brand. And that role should be more prominent the more senior I am in the organization. So a research paper that was just published in 2014 with Rajesh Chandy and Alina Sorescu, we examined this idea and this is when Rajesh, who does research on CEOs, said, well, this idea of employee based brand equity, it might work for just regular employees. But surely, it won't work for CEOs. Because strong brands, they have to hire great CEOs because the CEOs are part of the brand. They're the visible part of the company and maybe even paying them a lot is a sign that you're a strong brand. Well, we took a look at this data. What we found in the study when using the brand as an evaluator as an indicator of brand strength is that stronger brands attracted executives, for less. Strong brands didn't pay as much to their top five executives as weaker brands did. What's interesting as part of this dataset we found that the executives they did hire, and we were able to look at the CEOs in this set, is they were actually of higher quality. So why is it that executives would take lesser pay at these strong brands? What we found that younger executives were wiling to take a larger pay cut than older executives for the privilege of working at strong brands. Why might that be the case? Well, less is known about them, and the brand as a signal provided more information about their quality that they could then leverage with their future employer. And we found that CEOs worked for less at strong brands, but their next job, they were paid more the stronger the brand they came from. Also, we found that CEOs were actually the most likely to take a large pay cut to work at strong brands. Why is that? Well, as the senior leaders of the organization, they were the most visible. The brand was literally part of their identity. So in the symbolic sense of the word, when they're the face of the company, okay, the brand was tied up with their identity and their identity was tied up with the brand. So what this tells us, if we look back at the history of branding and returns to brands, we only thought of customers. Strong brands commanded higher prices, they got you greater volumes, and that was all good. But think of salaries and compensation. For most firms, or for many firms, this is the biggest part of their operating expenses. They command about 30% of the revenues of the top companies. So if you can make a dent into those costs with strong brands, what that tells you is that brands don't just drive the top line. The revenues of the income statement in terms of sales, which is price times volume, it drives the bottom line by lowering your costs. And that's a radically different way to look at branding. It also means that branding and returns of branding is not just about measuring things right, which is very difficult to do, to match brand strength with returns, but it's measuring the right things. And for the past hundred years of branding, people have not considered the returns with employees. Yet, it might well be the biggest returns you get for brands, even compared to customer-based returns. [MUSIC]
