Cut CEO pay, not jobs, to boost customer loyalty: Study

Companies that slash costs by reducing CEO pay rather than headcount might enjoy a "larger, more lucrative customer base," according to the University of Houston. 

A Feb. 12 news article from the university refers to a December study published in Cornell Hospitality Quarterly. Researchers affiliated with the University of Houston, as well as Amherst-based University of Massachusetts; West Lafayette, Ind.-based Purdue University; and Lexington-based University of Kentucky, analyzed customers' emotional and behavioral responses to companies' crisis measures. 

They found that businesses that show care and empathy to employees in situations beyond their control — like a pandemic or natural disaster — can gain "significant brand loyalty." Specifically, the benefits are observed when companies cut executive pay before laying off or furloughing workers. 

This phenomenon of increased loyalty was observed in a specific customer base: those with high ethical ideals, according to the researchers. Customers with lower ethical ideals were less reactive to news of companies' internal dealings, so businesses that did opt for layoffs did not suffer long-term reputational harm. 

More companies have been taking note of how layoffs affect their brand as employees take matters public, filming their conversations with HR leaders and screenshotting internal memos to publish online. When job cuts are necessary, some businesses are letting workers know their position well in advance of their layoff date, allowing them to calculate their next move while collecting their final paychecks. 

Treating employees with empathy during layoffs is always good practice. But avoiding them when possible — and showing the public that leadership is in the trenches, too — is good PR, according to Tiffany Legendre, PhD, associate professor at the University of Houston Hilton College of Global Hospitality Leadership and an author on the study. 

"We're not saying companies should fire the CEO at the first sign of crisis, or cut the CEO's salary immediately," Dr. Legendre said in the university's news article.

"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," she continued. "They look like the hero, and you look like the villain."

At least 12 health systems have announced job cuts this year. View the growing list here.

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