The Premier Premium: Decoding the Management Trainee Advantage

Employee: “Can I ask you something frankly?”

CHRO: “Of course.”

Employee: “What’s really the difference between the management trainees and me? I’m from a good business school—maybe not a top-ranked one—but our MBA curriculum is pretty similar. We studied the same frameworks, the same case studies. Yet they join at a much higher salary and with a different label. Why?”

I heard this conversation many years ago. I realized that this was a question many employees think about, but only a few ask out loud. I also realized that this question deserves a proper response, though such a response was elusive in many organizations, as the question hasn’t received sufficient attention, discussion, and crystallization of a response that is in line with the people management philosophy of the organization. Yes, it is indeed true that many organizations make such a differentiation between management trainees hired from premier institutes and other employees at the same stage in their career, and it leads to other organization following suite through the benchmarking route.

Let’s start by acknowledging an uncomfortable truth: companies don’t pay management trainees more just because they like certain campuses. There’s a method—if not always a perfect one—behind the madness. Let’s explore the rationale that underlies this method in some detail.

Predictability and signaling

Hiring is a gamble to some extent. Premier business schools have built strong reputations over decades. For employers, a degree from these institutions acts as a signal—of academic rigor, competitive selection, and exposure to high-quality peer learning. While not perfect, this signal reduces hiring risk. Premier business schools act like a familiar brand. Companies assume—sometimes correctly, sometimes not—that students who survive intense competition, tough grading, and high peer pressure are likely to perform well in demanding roles. The higher salary is, in a way, an insurance premium for reducing hiring risk. 

Recognizing the primary value add of b-schools

Another way to look at this is to separate education from selection. It can be argued that the biggest value a premier business school offers is not dramatically different course content—it is the quality of its selection process and the kind of candidates it attracts into that process. These schools draw thousands of highly driven, capable applicants and then filter them through rigorous exams, interviews, and peer competition. What companies end up hiring is not just someone who has completed an MBA, but someone who has already cleared multiple layers of screening in an intensely competitive environment. For employers, this acts as a powerful pre-hire signal: the candidate has demonstrated ambition, resilience, and consistency long before their first day at work—even if the classroom experience itself looks surprisingly similar across schools.

This also explains another anomaly. People who do executive MBA programs/part-time MBA programs from the premier institutes often don’t get the advantage that regular MBA students from the same institute get. It happens because while the course content and the faculty can be very much comparable, it is much easier to get selected to the executive MBA program as compared to the regular MBA program of the same institute.  

Betting on potential

It’s not really about the first job; it’s a bet on the future - Management trainee roles are designed as long-term leadership investments - to build a strong leadership pipeline. MTs are expected to take on bigger responsibilities faster, move across functions, and eventually occupy senior roles. The salary reflects not just what they do today, but what the company hopes they will become tomorrow. In a way, companies are also paying for potential and not just for performance. Yes, potential assessment is a much more nebulous area than performance assessment. 

The selection processes of many of the premier business schools give importance to cognitive ability. Cognitive ability, which translates into ‘higher processing power’ in the job context, is one of the very few psychometric factors that have a proven linkage to higher performance on the job. Often, it is also associated with ‘conceptual ability’ and ‘metacognitive ability’ that are highly useful in making decisions in complex and uncertain environments. Of course, there are many other factors (like person-organization and person-job fit, emotional intelligence, functional and behavioral competencies, etc.) that impact on the job performance. However, other things remaining the same, the advantage arising from higher cognitive ability can't be denied.  

Employer branding and competition for talent

Top companies compete fiercely for talent from elite campuses. Paying a premium is often necessary to attract these candidates, who may have multiple offers. Offers need to stand out. If one company pays less, another will pay more. Over time, these higher packages become the “market rate”. A differentiated salary offer also strengthens the company’s brand on campus, creating a virtuous cycle of visibility and access.

The other side of the coin

The above discussion doesn’t mean that the above approach is not without faults and side effects. What makes sense on paper doesn’t always work as neatly on the office floor.

Equal work, unequal rewards: When employees from different entry routes do similar work—but with different pay, titles, or access—it creates quiet frustration. People don’t mind starting lower; they mind staying there without a clear reason.

Pedigree ages faster than performance: A business school brand shines brightest at the point of entry. A year or two into the job, results matter far more. When high-performing non-MTs see slower growth despite strong outcomes, motivation begins to dip.

Invisible walls: MT cohorts often—unintentionally—become exclusive circles (see Batch mentality for a related discussion). Different training programs, faster exposure and attention from seniors. Over time, this creates “us and them” dynamics that hurt collaboration and culture.

Good talent quietly walks out: When capable employees feel overlooked, they don’t always complain. They update their résumés. Organizations then lose exactly the kind of steady, proven performers they should be nurturing.

The balancing act

The answer isn’t to scrap management trainee programs. It’s to balance them with fairness and flexibility.

Be honest about the “why”: Employees handle tough realities better than vague explanations. Clear communication about what MT programs are—and what they are not—goes a long way in building trust.

Let performance close the gap: Starting salaries can differ. Staying salaries shouldn’t—at least not forever. Strong performers from all entry paths should be able to converge on pay, roles, and responsibilities within a defined timeframe.

Open up development opportunities: Leadership training, mentoring, and high-visibility projects shouldn’t be reserved for a select few. Potential shows up in many places, not just in campus placements.

Measure outcomes, not just origins: If MTs consistently outperform, the premium is justified. If performance evens out over time (or if the potential doesn't translate into performance over time), compensation and career models should evolve too. Data—not tradition—should drive decisions.

Coming back to where we started 

The employee’s question to the CHRO isn’t about money alone. It’s about recognition, fairness, and future possibilities. Companies will—and should—continue to hire from top business schools. But organizations that combine this approach with fairness, transparency, and genuine meritocracy will build stronger cultures—and far more resilient leadership pipelines in the long run. The organizations that truly win are those that remember one simple thing: talent doesn’t stop at campus gates. And once people are inside the organization, what they deliver should matter more than where they came from. That’s not just good HR. It’s good business.

Any comments/ideas?

Of salary negotiations and psychological contract: Part 3 (after joining)

In this series of posts, we are examining the impact of salary negotiations on the formation and evolution of the psychological contract. In the first post in the series (see Part 1: dramatis personae) we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some basic principles in the domain. In the second post (see Part 2: before joining) we examined the interaction between the employer and the employee before the employee joins the company and its impact on psychological contract. In this post, we will turn the spotlight on the interaction between the employer and the employee after the employee joins the company and examine and how these interactions impact the psychological contract.

The salary negotiations that take place during this phase (after the employee joins the organization) are qualitatively different from those during the previous phase (before the employee joins the organization). This is because of the fact that by now a psychological contract has already been formed. The existing psychological contract will have a big influence on the salary negotiations from now on. Of course, the psychological contract can (and does) get modified by the negotiations at this stage. But the changes to the psychological contract at this stage are incremental changes (evolution). Thus, at this stage, the impact of psychological contract on the salary negotiations is much higher as compared to the impact of the salary negotiations on the psychological contact!

In general, the existing psychological contract makes it difficult for the employee to renegotiate the salary – assuming that there is a regular process for reviewing the salaries that is performance linked and market benchmarked. Most of the negotiations happen at this stage because of the ‘imperfections’ in the previous stage (problems/issues that come up because of the interactions during the phase before the employee joins the organization). For example, if an employee has been promised during the interview stage that that his salary will ‘catch up’ with that of the existing employees, once he proves himself in the organization and if ‘catch up’ never happens (or if it takes too long) the employee might feel that his psychological contract has been violated. Like I had mentioned in part 2 of this series, organizations should be more careful and specific when they are making such promises (and the prospective employee should seek clarifications or specific details - like how long it will take and what would qualify as proving oneself - if the organization does not do so).

There is another type of violation of psychological contract that can occur. This can be traced to fundamentals of the compensation philosophy of the organization – does the organization pay the employees based on what they deserve (within the constraints of what the organization can afford) or does the organization pay the employees as little as it can get away with? This comes into play in a situation where there is an industry downturn (making it difficult for the employees to change jobs) but the particular organization is doing well (growing reasonably fast with healthy profits). In such a scenario the organization can afford to give the employees good salary hikes. But it can choose not to do so (or choose to give a very low salary hike) because even without the salary hike it can retain the employees. This certainly provides short term gains. It can also be explained away in terms of salaries being market benchmarked. However, this will violate the psychological contract and will lead to a situation in which the employees (especially very valuable employees) leave the organization as soon as the job market improves (going by the same logic the organization had used, the employees should leave the organization when the market will pay more). No amount of talk about ‘employees being the biggest asset’ and ‘building a great organization together’ will undo the damage that happened to the loss of trust. Some of the IT organizations in India have learned this lesson the hard way!

Another interesting phenomenon observed during this phase is the so called ‘entitlement mentality’. This happens when an employee (or a group of employees) feels that he (they)  should get a salary hike (or a promotion) because another employee has been given a salary hike or a promotion. While this is usually interpreted as an ‘attitude problem’ on the part of the employee by many of the organizations, there are significant contributing factors to this from the organization’s side. Often, there is no clearly defined promotion policy or policy/process for ‘out of turn’ salary increases. When the employees are not clear as to why somebody has been given a salary hike or a promotion (and why they haven’t been given the same), it is ‘normal’ (in the statistical sense of the term) for them to feel that their psychological contract has been violated. The organization can counteract this to a large extent by having a clearly defined policy for salary hikes and promotions and communicating the same to the employees (and to the prospective employees). Yes, there could be factors related to employee attitudes (e.g. ‘superiority illusion’) that are also operating here and they need to be addressed at that level (Please see ‘Performance ratings and the above average effect' for details).

Somewhat related to this is the situation where new hires join the organization at a salary higher than that of the existing employees at the same responsibility level. In such a situation the existing employees might feel that their psychological contract has been violated. Unless the organization can clearly demonstrate to the existing employees that there is a valid reason for new hires coming in at higher salaries (e.g. they bring in a particular skillset that is not available within the organization and that that skillset enjoys a higher salary level in in the market), this is bound to happen. This situation will also encourage the existing employees (those among the existing employees with skillsets that are highly sought after in the job market) to renegotiate their salaries.   
I am not in favor of frequent renegotiation related to the salary. It puts too much strain on the relationship and on the psychological contract. However, in some of the organizations, it might be culturally acceptable to do so and in those contexts the employee might be able to manage this without damaging the psychological contract too much. I have come across organizations where the best paid person is ‘a great performer who is always on the verge of quitting’. However, my personal opinion is that this kind of brinkmanship creates mistrust and stress and that it is not worth it from a long term perspective.

It has to be noted that existing psychological contract also makes it difficult for the organization (represented by its representative like the managers) to reduce the salary of the employees, to be overly demanding or to terminate the employment. A special situation gets created when there is a change in the manager of the employee as the new manager hasn’t yet formed the psychological contract with the employee. Usually, the new manager does accept at least some part of the existing psychological contract (or at least what the new manager considers to be the existing psychological contract). However, if there is a significant leadership change, with many people in the reporting chain of the employee changing, this might not happen (especially if the new set of managers have been brought in to 'transform the organization' and that transformation involves significant changes to the way people are managed in the organization). Thus, the existing employees might feel hassled as they might feel that their psychological contract has been violated and they don’t have the opportunity to address the violation. On the flip side, this change in managers/leadership also makes it easier of the existing employees to renegotiate their salaries (at least in the case of those employees who are in a position to negotiate)!

In the next post in the series, we will take a closer look at the salary negotiations that take place after the employee submits his/her resignation and explore its impact on psychological contract (and how the psychological contract influences those negotiations).

Please let me know if you have any comments/suggestions at this stage!