Brands in the Labor Market: How Vertical and Horizontal Brand Differentiation Impact Pay and Profits Through Employee–Brand Matching

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.