Consumers Punish Firms that Cut Employee Pay in Response to COVID-19

17 Pages Posted: 21 Aug 2020

See all articles by Bhavya Mohan

Bhavya Mohan

University of San Francisco

Serena Hagerty

Harvard Business School

Michael I. Norton

Harvard Business School - Marketing Unit

Date Written: August 17, 2020

Abstract

Two experiments, including one incentive compatible study, examine the impact of cutting pay for executives versus employees in response to COVID-19 on consumer behavior. Study 1 explores the effect of announcing cuts or no cuts to CEO and employee pay, and shows that firms’ commitment to paying employees their full wages leads to the most positive consumer reactions. Study 2 further examines the effects of announcing employee and CEO pay cuts: though announcing CEO pay cuts in tandem with employee pay cuts can help mitigate the negative effects of employee pay cuts, consumers respond most positively to firms which prioritize paying employees regardless of their strategy for CEO pay. These positive perceptions are mediated by perceptions of financial pain to employees. We discuss the implications of our results for firms and policy-makers during economic crises.

Keywords: employee furloughs, CEO pay cuts, pay ratios, purchase intention

Suggested Citation

Mohan, Bhavya and Hagerty, Serena and Norton, Michael I., Consumers Punish Firms that Cut Employee Pay in Response to COVID-19 (August 17, 2020). Harvard Business School Marketing Unit Working Paper No. 21-020, Available at SSRN: https://ssrn.com/abstract=3678370 or http://dx.doi.org/10.2139/ssrn.3678370

Bhavya Mohan

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

Serena Hagerty

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
6174960479 (Phone)
02163 (Fax)

Michael I. Norton (Contact Author)

Harvard Business School - Marketing Unit ( email )

Soldiers Field
Boston, MA 02163
United States

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