2020
Working Paper
HBS Working Paper Series

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

By: Bhavya Mohan, Serena Hagerty and Michael Norton

Format:Print
| Language:English
| Pages:17

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; Health Pandemics; Employees; Wages; Executive Compensation; Consumer Behavior

Citation

Mohan, Bhavya, Serena Hagerty, and Michael Norton. "Consumers Punish Firms That Cut Employee Pay in Response to COVID-19." Harvard Business School Working Paper, No. 21-020, August 2020.