Organizations Dec 1, 2023
Yoga Classes? On-Site Childcare? Firms Just Outside the Fortune 500 Work Hard to Attract Talent.
To compete with their prestigious peers, these organizations invest more in employees, research shows.
Summary What determines whether companies will invest in employment-related corporate social responsibility (CSR)—that is, efforts aimed at creating a hospitable workplace, like flextime, wellness programs, and supply-chain labor standards? New research finds that firm status, measured by inclusion in the Fortune 500, is one important factor. Firms just outside the Fortune 500 invest more in employment-related CSR than those just inside, suggesting lower-status companies use nonmonetary benefits to compete with their high-status peers for the best workers.
Why do some companies lavish their employees with perks like free yoga classes, on-site childcare, and ample professional-development opportunities, while others are more spartan?
Financial success, of course, provides one answer to that question; a thriving company can afford to roll out the red carpet for their employees without worrying about the trade-offs. But for everyone else, investing in employment-related corporate social responsibility (CSR)—that is, efforts aimed at creating a hospitable workplace, like flextime, wellness programs, and supply-chain labor standards—means sacrificing somewhere else. So what determines whether a company will take the CSR plunge?
New research by Kellogg’s Brayden King, Tanya Y. Tian of New York University, and the late Edward B. Smith finds that one important factor in the decision is the perceived prestige of the company, which they measure using inclusion in the Fortune 500.
Not surprisingly, the ultra-high revenue companies at the very top of that list have the most ambitious employment-related CSR offerings. But then things get more interesting.
“We find that low-status companies that are just outside of the Fortune 500 tend to invest more in employment-based CSR than companies that are just inside,” says King, a professor of management and organizations. This suggests these companies are using nonmonetary benefits to compete with their high-status 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. Getting hired by a big-name company “feels as if it’s a certification of your quality as an employee,” says King. “Status creates a warm glow that people crave, and it signals to other people in the labor market, but also in your social life, that you are of high quality.” In fact, studies show that some workers will take a lower salary to work for a higher-prestige firm.
That leaves lower-status companies in a tricky spot. If compensation doesn’t win reliably over the crème de la crème, what does?
There’s compelling evidence that employment-related CSR can succeed where salary fails. Previous research suggests that workers may be willing to trade status for such perks. And in contrast to 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 might see lower-status firms going all out with employment-related CSR. So, they decided to test their theory.
Fortune favors the high-status
One challenge dogging scholars of firm status is that the very concept of status is difficult to measure with precision—and to disentangle from a company’s financial performance. But the researchers found a simple and elegant solution to that problem in the Fortune 1000 List.
Since the 1990s, Fortune magazine has ranked the top 1,000 U.S. companies by revenue. However, being in the top half of that list—the vaunted Fortune 500—has its own, independent benefits. “Companies that are in the Fortune 500 get way more [media] attention than those that are not, even if you’re comparing those that are just on the margins,” King says. Plus, “it’s nice to call up your grandparents and tell them that you work for a Fortune 500 company.”
“Status creates a warm glow that people crave, and it signals to other people in the labor market, but also in your social life, that you are of high quality.”
In other words, while company 499 and company 501 are close in revenue (and likely also quality), they are worlds apart in prestige—almost as if they’d been randomly assigned to high-status and low-status groups for the purposes of experimentation. With that fortunate fact in mind, the researchers focused their analysis on companies above and below the cutoff in each year from 1995 to 2015.
Next, they gathered information on companies’ employment-related CSR efforts for the same years from two prominent data sources, MSCI ESG STATS and Thomson Reuters’ ASSET 4 databases. While it’s impossible to know exactly how much a particular firm spends on its employees each year, the data did allow the researchers to infer the extent of each company’s investment in the relevant types of programs.
When they put everything together, the researchers observed a marked difference in employment-related CSR activity between high- and low-status firms near the Fortune 500 threshold. Specifically, just below the cutoff, the degree of investment jumped significantly.
The researchers double-checked their results in a variety of ways. For example, they tried treating rank positions other than 500 as the cutoff for status but did not observe the same trend, suggesting the critical importance of the Fortune 500 list itself as a marker of prestige.
Substituting perks for status
King says the research highlights the sometimes-underdiscussed phenomenon of labor-market competition. While companies are generally laser-focused on winning consumers or investors, “we tend to discount the importance of the human-capital market,” he notes. Thinking about how to attract the best workers may be just as important in creating success but does not tend to receive the same level of attention.
The study also sheds light on how lower-status firms can stand out in a marketplace that heavily favors big names.
When competing with higher-status peers, “you have to be able to say something to your potential employees that’s convincing,” King explains. “Saying, ‘Hey, don’t go work for the fancier company—come work for us, because we’re actually committed to our employees’ wellbeing, 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.”
About the Writer
Susie Allen is the senior research editor of Kellogg Insight.
About the Research
Tanya Y. Tian, Brayden G. King, and Edward B. Smith. 2023. “Effect of organizational status on employment-related corporate social responsibility: Evidence from a regression discontinuity approach.” Strategic Management Journal.
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