What attracts top talent? Is it great benefits, flexible hours, steep pay packages, or state-of-the-art training? New research suggests it’s something simpler – but more difficult to obtain.

Prestige.

The status of a firm is quite possibly the leading driver in attracting the best of the best, at least in investment banking, according to a paper recently accepted by the Strategic Management Journal. Matthew Bidwell, an assistant professor at Wharton, and his colleagues wanted to better understand how something not-so-concrete like reputation stacks up against more tangible enticements. And, in particular, they wanted to find out whether the ability to offer more money is really a competitive advantage. Investment banking in particular offered a good testing ground for these questions because there’s a clear hierarchy of firms, and because a firm’s place in that pecking order is readily quantifiable via surveys on websites like Vault.com.

The researchers found that business school graduates “who had won more awards or graduated with honors took jobs at higher status firms,” supporting their hypothesis that top talent flocks to firms with better reputations. And when they polled current MBA students applying to work at investment banks, “the extent to which firm reputation would help with future employability” was ranked as their most important decision-making factor.

Because of this, high salaries aren’t a competitive advantage, at least at first. “You get the best people, and you don’t have to pay as much as you should early on because they want the stamp of ‘Goldman Sachs,’” Bidwell told me. Employees also want to work with other top talent, which helps when it comes to building strong networks. “When people are thinking about jobs, it isn’t benefits, flex time, or pay,” said Bidwell. “It’s how it will position you for the next step of your career.”

But when Bidwell and his co-authors took a long view of how people choose and then manage their careers over time, a couple of interesting things started to happen. First, they found that the benefits of working for a high status firm don’t take hold until about five years in. And in general, people at top firms wind up seeing those benefits, via more money or better jobs elsewhere. Indeed, the researchers found that that “an employer whose status is ten units higher (e.g. Goldman Sachs vs. Vanguard) pays about 15 percent more for employees at the VP level.” There’s no significant pay difference for new MBAs — Goldman essentially gets better talent for the same price. “In the early stages of your career, positioning yourself for later is important,” Bidwell says. “Subsequently, it’s not – you’re good, and you want to see the benefits.”

Second, and perhaps more importantly, status and reputation start to become the very reason great people leave places like Goldman Sachs – by design. “There’s an increasing tension,” Bidwell told me. “These companies are attractive to join because they’re attractive to leave.” They effectively make a person’s next career step more valuable, and there’s never a shortage of new grads willing to step in to continue the cycle.

For investment banking, Bidwell says, this system works pretty well. “You bring in people young, you don’t pay them much, and you get a lot of value out of them. At the same time, you don’t want everyone to be managing director.” But he cautions that reputation as a hiring advantage might work very differently across other industries and organizations that actually want to retain great employees. And there’s also the sticky problem of how a company develops a high-status reputation in the first place: “The reason why status creates advantage is that it’s very hard to get.”

But in a lot of ways, Bidwell’s findings illuminate the need for strong alumni programs like McKinsey’s, and calls for what LinkedIn co-founder Reid Hoffman calls the new employer-employee compact – in which employees invest in the company’s adaptability, and the company invests in employees’ employability. Indeed, a Knowledge@Wharton article about this research notes that firms might look for ways to help advance workers’ careers as a way of being more competitive in the labor market.

And while Bidwell notes that status-as-competitive-advantage might work well for other industries in which a firm’s status is clear, those companies pining for Facebook’s reputation might be at a loss, and not just because status is hard to obtain. Technology companies, in fact, may be the most prominent example of when reputation has a whole different meaning: status doesn’t necessarily flow from size, or novelty, or any other easy-to-predict variable. “Do you want to work for Google and Apple because they’re at the top of the tree,” Bidwell asks in Knowledge@Wharton. “Or is it actually better to go work for a really cool start-up?”

Even in investment banking, where the pecking order of prestige and the benefits of status are clear, young MBAs won’t accrue those benefits if they don’t remain with that elite company for at least five years. In an industry not known for happy employees or good work-life balance, that may be longer than most want to pay their dues.

This blog first appeared on Harvard Business Review on 4/14/2014.

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