Financial success, of course, provides an answer to this question. A thriving company can afford to roll out the red carpet for its employees without worrying about tradeoffs. But for everyone else, investing in employment-related Corporate Social Responsibility (CSR)—that is, efforts aimed at creating a welcoming workplace, such as flexible hours, wellness programs, and labor standards in the supply chain—means a sacrifice somewhere else . So what determines whether a company will take the CSR plunge?
New research from Kellogg’s Brayden KingNew York University’s Tanya Y. Tian and the late Edward B. Smith find that an important factor in the decision is the company’s perceived prestige, which they measure using Fortune 500 inclusion.
Not surprisingly, the extremely high-revenue companies at the top of this list have the most ambitious employment-related CSR offerings. But then things get more interesting.
“We find that low-end companies just outside the Fortune 500 tend to invest more in employment-based CSR than companies just inside,” says King, a professor of management and organizations. This suggests that these firms use non-monetary benefits to compete with their high-end peers for the best workers.
When your workplace is a status symbol
Scholars have long known that status plays an important role in the labor market. Being hired by a big-name company “feels like a validation of your quality as an employee,” says King. “Status creates a warm glow that people crave and signals to other people in the job market, but also in your social life, that you are of high quality.” In fact, studies show it some workers will take a lower salary to work for a more prestigious company.
This leaves lower ranked companies in a difficult position. If compensation doesn’t reliably beat the cream, what does?
There is strong evidence that employment-related CSR can succeed where wages fail. Previous research suggests that workers may be willing to trade status for such benefits. And unlike other, more controversial types of CSR, employment-related CSR enjoys very broad support. After all, who doesn’t want to work for a company that treats them well?
For all these reasons, the researchers suspected that they could see lower level companies go all out with employment-related CSR. So, they decided to test their theory.
Luck favors high status
A challenge facing scholars of corporate status is that the concept of status itself is difficult to measure precisely—and to separate from a firm’s financial performance. But researchers have found a simple and elegant solution to this Fortune 1000 problem.
Since the 1990s, Luck The magazine has ranked the top 1,000 US companies by revenue. However, being in the top half of that list—the famous Fortune 500—has its own, independent benefits. “Fortune 500 companies get a lot more [media] attention than those that aren’t, even if you compare those that are just on the fringes,” says King. Plus, “it’s nice to call your grandparents and tell them you work for a Fortune 500 company.”
In other words, while company 499 and company 501 are close in revenue (and probably in quality), they are different in prestige—almost as if they had been randomly assigned to high- and low-status groups for the purposes of the experiment. With this fortunate fact in mind, the researchers focused their analysis on companies above and below the divide each year from 1995 to 2015.
They then collected information on companies’ employment-related CSR efforts for the same years from two prominent data sources, the MSCI ESG STATS and Thomson Reuters ASSET 4 databases. While it’s impossible to know exactly how much a particular company spends company for its employees each year, the data allowed the researchers to infer the extent of each company’s investment in the relevant types of programs.
When they put it all together, the researchers observed a marked difference in employment-related CSR activity between high- and low-level firms near the Fortune 500 cutoff. Specifically, just below the cutoff, the degree of investment jumped significantly.
The researchers reinterpreted their results in several ways. For example, they tried to treat ranking positions other than 500 as the threshold for status, but they did not follow the same trend, suggesting the critical importance of the Fortune 500 list itself as an indicator of prestige.
Override status privileges
King says the research highlights the sometimes under-discussed phenomenon of labor market competition. While companies are generally laser-focused on winning over consumers or investors, “we tend to underestimate the importance of buying human capital,” he notes. Thinking about how to attract the best employees can be just as important to creating success, but it doesn’t tend to receive the same level of attention.
The study also sheds light on how lower-end companies can stand out in a market that heavily favors big names.
When you’re competing with higher-level colleagues, “you have to be able to tell your potential employees something that’s compelling,” King explains. “Saying, ‘Hey, don’t go work for the fanciest company — come work for us, because we’re actually committed to the well-being of our employees, and here’s how I can prove it’ … isn’t going to win every battle, but you’re more likely to get the high-quality workers you want.”
