Hostname: page-component-669899f699-chc8l Total loading time: 0 Render date: 2025-04-26T10:29:52.408Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

AFL-CIO (2019), Executive Paywatch. Retrieved from: https://aflcio.org/paywatch.Google Scholar
Anderson, S. and Pizzigati, S. (2020), Why CEO pay belongs at the center of the coronavirus bailout debate. MarketWatch. Retrieved from: https://www.marketwatch.com/story/why-ceo-pay-belongs-at-the-center-of-the-coronavirus-bailout-debate-2020-03-26.Google Scholar
Benedetti, A. H. and Chen, S. (2018), ‘High CEO-to-worker pay ratios negatively impact consumer and employee perceptions of companies’, Journal of Experimental Social Psychology, 79: 378–393.10.1016/j.jesp.2018.09.003CrossRefGoogle Scholar
Brenan, M. (2020), Record-high 25% of U.S. workers say job loss is likely. Gallup. Retrieved from: https://news.gallup.com/poll/308960/record-high-workers-say-job-loss-likely.aspx.Google Scholar
Bureau of Labor Statistics (2021), The employment situation – December 2020. Retrieved from: https://www.bls.gov/news.release/pdf/empsit.pdf.Google Scholar
Campbell, A. F. (2019), CEOs made 287 times more money last year than their workers did. Vox. Retrieved from: https://www.vox.com/policy-and-politics/2019/6/26/18744304/ceo-pay-ratio-disclosure-2018.Google Scholar
Cappiello, E. (2020), 26 stores that promise to keep paying employees amid coronavirus closures. Reader's Digest. Retrieved from: https://www.rd.com/culture/stores-paying-employees-during-coronavirus/.Google Scholar
Chochrek, E. (2020), Kohl's to furlough workers, CEO to forfeit salary as coronavirus closures drag on. Footwear News. Retrieved from: https://footwearnews.com/2020/business/retail/kohls-furloughs-workers-ceo-forfeits-salary-coronavirus-1202956895/.Google Scholar
Creyer, E. H. and Ross, W. T. (1996), ‘The impact of corporate behavior on perceived product value’, Marketing Letters, 7(2): 173–185.10.1007/BF00434908CrossRefGoogle Scholar
Danziger, P. N. (2020), Essential retailers need to pay their essential employees fairly, not just during but after coronavirus. Forbes. Retrieved from: https://www.forbes.com/sites/pamdanziger/2020/04/08/essential-retailers-need-to-reward-their-essential-employees-not-just-during-but-after-coronavirus/.Google Scholar
de León, R. and Geller, J. (2020), Here's how every major workforce has been impacted by the coronavirus pandemic. CNBC. Retrieved from: https://www.cnbc.com/2020/03/13/workforce-wire-coronavirus-heres-what-every-major-company-is-doing-about-the-pandemic.html.Google Scholar
DiNapoli, J. and Kerber, R. (2020), U.S. firms shield CEO pay as pandemic hits workers, investors. Reuters. Retrieved from: https://www.reuters.com/article/us-health-coronavirus-ceopay-insight/u-s-firms-shield-ceo-pay-as-pandemic-hits-workers-investors-idUSKBN2341N9.Google Scholar
Gould, E. (2019), State of working America wages 2018: Wage inequality marches on and is even threatening data reliability. Economic Policy Institute. Retrieved from: https://www.epi.org/publication/state-of-american-wages-2018.Google Scholar
Hiscox, M. J., Broukhim, M. and Litwin, C. (2011), Consumer demand for fair trade: New evidence from a field experiment using eBay auctions of fresh roasted coffee. Harvard University. Working Paper.10.2139/ssrn.1811783CrossRefGoogle Scholar
Horowitz, J. (2020), The global coronavirus recession is beginning. CNN. Retrieved from: https://edition.cnn.com/2020/03/16/economy/global-recession-coronavirus/index.html.Google Scholar
Kiatpongsan, S. and Norton, M. I. (2014), ‘How much (more) should CEOs make? A universal desire for more equal pay’, Perspectives on Psychological Science, 9(6): 587–593.10.1177/1745691614549773CrossRefGoogle ScholarPubMed
Lee, A. (2020), Columbia Sportswear CEO takes pay cut to help support employees during coronavirus crisis. CNN. Retrieved from: https://edition.cnn.com/2020/03/29/business/tim-boyle-columbia-sportswear-salary-coronavirus-trnd/index.html.Google Scholar
McGregor, J. (2013), What's the right ratio for CEO-to-worker pay? The Washington Post. Retrieved from: http://www.washingtonpost.com/blogs/on-leadership/wp/2013/09/19/whats-the-right-ratio-for-ceo-to-worker-pay/.Google Scholar
Mishel, L. and Wolfe, J. (2019), CEO compensation has grown 940% since 1978. Economic Policy Institute. Retrieved from: https://www.epi.org/publication/ceo-compensation-2018/.Google Scholar
Mohan, B., Schlager, T., Deshpandé, R. and Norton, M. I. (2018), ‘Consumers avoid buying from firms with higher CEO-to-worker pay ratios’, Journal of Consumer Psychology, 28(2): 344–52.10.1002/jcpy.1033CrossRefGoogle Scholar
Morgan, B. (2020), 50 ways companies are giving back during the coronavirus pandemic. Forbes. Retrieved from: https://www.forbes.com/sites/blakemorgan/2020/03/17/50-ways-companies-are-giving-back-during-the-corona-pandemic/.Google Scholar
Paharia, N., Vohs, K. D. and Deshpandé, R. (2013), ‘Sweatshop labor is wrong unless the shoes are cute: Cognition can both help and hurt moral motivated reasoning’, Organizational Behavior and Human Decision Processes, 121(1): 81–88.10.1016/j.obhdp.2013.01.001CrossRefGoogle Scholar
Peloza, J., White, K. and Shang, J. (2013), ‘Good and guilt-free: The role of self-accountability in influencing preferences for products with ethical attributes’, Journal of Marketing, 77(1): 104–19.10.1509/jm.11.0454CrossRefGoogle Scholar
Prasad, M., Kimeldorf, H., Meyer, R. and Robinson, I. (2004), ‘Consumers of the world unite: A market-based response to sweatshops’, Labor Studies Journal, 29(3): 57–79.Google Scholar
Sheyman, I., Winter, E. and Coblentz, J. (2020), The need for accountable bailouts: Warren's bailout conditions are both necessary and popular. Files for Progress. Retrieved from: http://filesforprogress.org/memos/accountable-bailouts.pdf.Google Scholar
Smith, C. (2020), J.C. Penney joins Macy's, Gap, and other retailers to furlough thousands of workers without pay. Barron's. Retrieved from: https://www.barrons.com/articles/macys-gap-and-kohls-furlough-thousands-of-workers-51585617549.Google Scholar
Spears, N. and Singh, S. N. (2004), ‘Measuring attitude toward the brand and purchase intentions’, Journal of Current Issues & Research in Advertising, 26(2): 53–66.10.1080/10641734.2004.10505164CrossRefGoogle Scholar
Stewart, E. (2020), Poll: Americans want corporations to promise no layoffs in exchange for bailouts. Vox. Retrieved from: https://www.vox.com/policy-and-politics/2020/3/23/21191502/coronavirus-stimulus-bill-bailout-steve-mnuchin-democrats-elizabeth-warren.Google Scholar
Tarki, A., Levy, P. and Weiss, J. (2020), The Coronavirus crisis doesn't have to lead to layoffs. Harvard Business Review. Retrieved from: https://hbr.org/2020/03/the-coronavirus-crisis-doesnt-have-to-lead-to-layoffs.Google Scholar
Trentmann, N. and Broughton, K. (2020), Companies that don't cut executive pay now could pay for it later. Wall Street Journal. Retrieved from: https://www.wsj.com/articles/companies-that-dont-cut-executive-pay-now-could-pay-for-it-later-11587477361.Google Scholar
Vasel, K. (2020), What does it mean to be furloughed? CNN. Retrieved from: https://edition.cnn.com/2020/04/01/success/what-is-a-furlough/index.html.Google Scholar
Supplementary material: File

Hagerty et al. supplementary material

Hagerty et al. supplementary material

Download Hagerty et al. supplementary material(File)
File 63.1 KB