Influences of Prior Period Revenue, Perceived Psychological Costs, and Manager Agency on Labor Cost Reduction Decisions Following a Current Period Revenue Decline

Abstract

This experimental study investigates whether prior period sales declines, the psychological costs of layoffs, and manager psychological agency (self-focus) influences managers’ decisions to cut labor costs in a “sticky cost” context. Using 149 experienced managers recruited through CloudResearch as participants, we manipulate prior period sales changes (increase versus decrease) and perceived psychological costs of employee layoffs (higher in a “family” culture; lower in a “distant” culture) to investigate managers’ labor downsizing choices in the face of pressure to maintain income due to a current period sales decline. We also measure manager agency to examine its influence on labor cost reduction decisions.

Findings suggest that managers are more likely to lay off employees when facing successive sales decreases, and less likely to do so when psychological costs are high and prior year sales increased. In addition, we find that managers higher in agency are more likely to cut employees in order to achieve a short-term bonus. However, when given the choice to reduce labor costs using pay cuts or layoffs, more-agentic managers favor pay cuts over layoffs, thus retaining labor resources (consistent with empire building). We discuss the implications of our results for practice and future research into asymmetric cost behavior.

Keywords: Sticky costs, bonus compensation, manager agency, strategic advantage

JEL Classification: M41