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Whose pay should be cut in economic crises? Consumers prefer firms that prioritize paying employees over CEOs

Published online by Cambridge University Press:  13 October 2021

Serena F. Hagerty Open the ORCID record for Serena F. Hagerty [Opens in a new window] ,
Bhavya Mohan Open the ORCID record for Bhavya Mohan [Opens in a new window]  and
Michael I. Norton
Serena F. Hagerty*
Affiliation:
Harvard Business School, Harvard University, Boston, MA, USA
Bhavya Mohan
Affiliation:
University of San Francisco, San Francisco, CA, USA
Michael I. Norton
Affiliation:
Harvard Business School, Harvard University, Boston, MA, USA
*
*Correspondence to: E-mail: shagerty@hbs.edu
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Abstract

Four experiments examine the impact of a firm deciding to no longer pay salaries for executives versus employees on consumer behavior, particularly in the context of the COVID-19 pandemic. Study 1 explores the effect of announcing either pay cessations or continued pay for either CEO or employees, and shows that firms’ commitment to maintaining employee pay leads to the most positive consumer reactions. Study 2 examines the effects of simultaneously announcing employee and CEO pay cessations: consumers respond most positively to firms prioritizing employee pay, regardless of their strategy for CEO pay. Moreover, these positive perceptions are mediated by perceptions of financial pain to employees, more than perceptions of CEO-to-worker pay ratio fairness. Study 3, using an incentive-compatible design, shows that firms’ commitment to paying employees their full wages matters more to consumers than cuts to executive pay, even when those executive pay cuts lead to a lower CEO-to-worker pay ratio. Study 4 tests our account in a non-COVID-19 context, and shows that consumers continue to react favorably to firms that maintain employee pay, but when loss is less salient, consumers prioritize cutting CEO pay and lowering the CEO-to-worker pay ratio. We discuss the implications of our results for firms and policymakers during economic crises.

Keywords

employee furloughsCEO pay cutspay ratiospurchase intention
Type
Article
Information
Behavioural Public Policy , Volume 7 , Issue 3 , July 2023 , pp. 644 - 661
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press

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