Ideas for Leaders #440

Why High-Status Companies that Attract the Best Fail to Keep Them

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Key Concept

In the labour market, ‘high-status’ companies (the marquee names for people who want to work in that industry, such as Apple for high technology or Goldman Sachs for investment banking) will attract the best and the brightest employees — at least in the beginning of their careers. Once the résumé is burnished with the high-status employer, these employees are even more marketable, and often seek their fortunes elsewhere.

Idea Summary

The best students from the best universities and graduate schools will be attracted to the most desirable companies to work for in their industries. At first glance, it would seem that these ‘high-status’ companies would be able to unequivocally benefit from the influx of only the best and the brightest into their workforce. A best-in-class workforce should lead to a sustainable competitive edge.

While the competitive advantage of high-status firms does exist, the truth is a bit more complex.

It starts well. High-status companies are not only able to attract the highest calibre employees, but also do not have to pay them high wages.

The reason: companies are wary of hiring people who change jobs frequently, assuming that they left the previous jobs because of poor performance issues; thus, an employee hired by a high-status organization cannot quickly threaten to leave the company for higher wages as this would be viewed suspiciously in the marketplace.

This lack of mobility in the early stages of an employment also means that employers can train their employees without fear of losing those newly trained employees to other firms. Instead, employees who will want to move to higher paying jobs must first establish a track record in the high-status organization, including a record of promotions.

In short, high-status employers can attract the best and the brightest without having to pay high wages; the employees are happy to build a reputation in their first jobs, which can then be leveraged for higher compensation later.

Once this record is built, however, high-status firms lose their advantage in the labour market. With résumés sufficiently burnished, employees can now seek the highest bidder for their services. Thus, high-status companies, just like everyone else, will have to offer high wages to keep competitors from poaching their best employees. The original advantage, in fact, becomes a disadvantage. By working in the firm, employees have gained a high market value in the labour market; now, the very same firms that built their marketability have to pay high wages to keep them.

Lower-status companies, in contrast, don’t have to pay the same wages to keep their experienced employees, since these employees don’t have the same value in the marketplace. In sum, pay increases more with rank and experience at high-status firms than at lower-status firms.

High-status organizations are holding a double-edge sword. They are able to attract the best employees because working at their company enhances the future value of those employees. Enhancing the future employability of their employees, however, also means that those employees become more attractive to competitors. 

Business Application

There are five lessons from the research into high-status firms that apply to both high-status and lower-status firms.

To attract the best employees, you must enhance their future employability. To be competitive in the labour market, you must convince potential employees that working at your organization will advance their careers. For companies with marquee names, the pitch is simple: our company will be on your résumé. For other companies, more effort must be made to highlight the state-of-the-art training or other career-building opportunities available at the company.

Rewards have to be adapted to experience. For high-status firms, compensation for employees early in their careers is a minor factor, since the true value of working at the firm comes with the enhanced employability in the future. On the other hand, competitive compensation for employees with experience and a track record of success is vital, as these employees can quickly find better offers elsewhere if required.

The field is level for experienced employees. High-status companies have an advantage in attracting top-notch employees at the beginning of their careers. However, once employees have developed track records in high-status companies, they will be ready to look for new opportunities. This is the time for lower-status companies to capture the best and the brightest who were once beyond their reach.

Don’t underpay your workers, even if you’re a high-status company. As a high-status company, you can pay market wages to attract top-level employees early in their careers, as noted above. It would be a mistake, however, to offer lower wages well below market: even the chance to work for a marquee company will not entice high-calibre employees to work at below-market wages.

It only takes just one product for long-lasting advantage. How do you become the high-status company for whom the young and ambitious in your industry want to work? Often, a breakthrough such as a revolutionary product or business model that transforms an industry is all it takes. Over time, with emulation and imitation from your competitors, the breakthrough product may lose its uniqueness and market dominance; status, however, has proven to be a persistent attribute: the labour market advantage created by your status could be more enduring than the product or other breakthrough that first put your company in the high-status category.

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Idea conceived

  • September 2014

Idea posted

  • September 2014

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