Voluntary managerial pay cuts and employee effort

When managers voluntarily cut their own pay, it is often dismissed as symbolic gesture that employees do not care about. We conduct a series of four experiments to examine whether and how such pay cuts influence employee effort, and how the effect varies depending on two key design features: (1) how the forgone pay is used and (2) whether the pay cut is voluntary or externally imposed. Across our experiments, we find that managerial pay cuts increase employee effort, particularly when the forgone pay benefits employees or social causes, and when the cut is a voluntary act of self-sacrifice. Employees respond positively even when managers retain compensation through other channels, such as bonuses or stock awards. Our results suggest that the motivational effect is not only driven by reduced pay dispersion or material outcomes, but also by the perceived intention behind the manager's voluntary pay cut. Overall, our study shows that the gesture of managerial pay cuts can meaningfully influence employee behavior and enhance firm performance, and it identifies the conditions under which such effects are most likely to occur.