Firms Cutting CEO Pay, Not Jobs, Enjoy Higher Customer Loyalty: Study

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A new study from a researcher at the University of Houston’s Hilton College of Global Hospitality Leadership finds businesses that exhibit care and empathy towards their employees in times of crisis can cultivate significant brand loyalty and future business among customers with high ethical ideals.

Tiffany Legendre, associate professor, UH Hilton College of Global Hospitality Leadership

In the study published in Cornell Hospitality Quarterly, Tiffany Legendre, associate professor at Hilton College, and her co-authors found that companies facing crises beyond their control, such as natural disasters or global pandemics like COVID, can garner goodwill from empathetic customers by prioritizing employee well-being over profits.

“When COVID hit, companies were trying to survive and figuring out how to minimize the financial damage,” Legendre said. “We found that ethics-minded customers really appreciated companies whose CEO’s protected their frontline employees’ jobs rather than their own compensation. They took a pay cut instead of cutting jobs.”

By reducing executive pay instead of laying off or furloughing employees in response to severe financial stress, companies were more likely to receive support from customers and increase brand loyalty and the likelihood of planned future purchasing, potentially creating a larger and more lucrative customer base.

But the research also found that altruistic efforts by companies did not see the same positive results among customers with lower ethical ideals. According to Legendre,  companies that opted for job cuts over alternative cost-cutting measures did not suffer reputational harm for their actions.

“Some customers don’t care what companies do in times of crisis, especially those beyond their control, like COVID,” Legendre said. “They see the company as a sort of victim that’s just trying to survive, and they are more understanding of that.”

Legendre says the findings support the old notion that “heroes rise in tough times”, an indication that consumers evaluate corporate efforts to protect employees more favorably due to the challenges they endure and overcome. And the study emphasizes the importance of businesses considering both the short-term and long-term consequences of their actions.

“We’re not saying companies should fire the CEO at the first sign of crisis, or cut the CEO’s salary immediately,” Legendre said. “But when you’re looking at cost-cutting strategies, letting go of employees as a first line of defense may backfire, especially when a competitor may do the opposite. They look like the hero, and you look like the villain.”

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