Management Accounting Section Midyear Meeting

The Effect of Voluntary Managerial Pay Cuts on Employee Effort

• In Event: Managerial Decision Making

Abstract

When managers cut their own salaries, this receives publicity but also creates controversy. In three experiments, we show that voluntary managerial pay cuts increase employees’ motivation to exert effort. In our first experiment, we disentangle the underlying causal mechanisms and find that employees exert additional effort in response to managers cutting their own salaries (1) to improve fairness by reducing vertical pay dispersion, (2) to help others by giving away their salaries, or (3) to support employees by passing on their salaries to them. This holds independent of whether managers’ salaries before the pay cuts are high or low. Second, we show that the motivational effect of managerial pay cuts is substantially weaker when they are mandated by an external source. Finally, we replicate our findings in a scenario-based experiment with professionals. Overall, our study provides theory-consistent evidence explaining how and why managerial pay cuts influence employee effort.

Authors

• Christoph Feichter, WU Vienna University of Economics and Business

• Martin Wiernsperger, WU Vienna University of Economics and Business