Working for a Shamed Company Can Hurt Your Future Compensation

People who work for a company guilty of malfeasance may see their future compensation curtailed, even if they are guilty of nothing, according to research by Boris Groysberg, Eric Lin, and George Serafeim.
by Michael Blanding

In the blink of an instant, a corporate brand can turn from sterling to tarnished. Just ask Volkswagen or Wells Fargo—two prestigious names that have become associated with scandal in recent years, and now become synonymous with shady corporate practices.

What happens to executives who have that employer’s name on their curriculum vitae? “You have this great name on your CV, and suddenly it goes from being an asset to a liability,” says George Serafeim, the Jakurski Family Associate Professor of Business Administration at Harvard Business School.

“It can affect people who had nothing to do with the scandal,” adds HBS colleague Boris Groysberg, the Richard P. Chapman Professor of Business Administration. “It’s almost as if someone is rewriting your CV 10 years after you leave a company.”

Groysberg and Serafeim completed a study in November analyzing how corporate scandals affect executives by examining how they are penalized in starting pay when looking for new work. The study, co-written with Eric Lin of the United States Military Academy at West Point, reveals these executives pay a steep price for guilt by association.

“This might present an opportunity for companies to do some sophisticated talent arbitrage”

In order to gauge the effect on executive pay, the researchers obtained a data set from a large global headhunting company, one of many consulting firms that act as intermediaries between companies and executives looking for work. They found that the potential number of execs with at least one stigma on their resume was large, accounting for 18 percent of more than 2,000 executives placed between 2004 and 2011.

After controlling for education, gender, experience, and other factors, they found that those executives received cash compensation in the form of salary and bonus that were, on average, nearly 4 percent lower than those without a stigma on their CV. That can represent a substantial difference, since the average starting salary and bonus compensation for these executives was more than $300,000.

Moreover, says Serafeim, through an anchoring effect, a compensation discount now can impact future raises and salaries as well. “The growth of compensation will be lower since it starts from a lower starting point,” he says. “That’s a big deal when you are considering it over a lifetime.”

A risky hire?

The researchers speculate that this compensation discount is driven by a lack of information in the marketplace. Since hiring companies have little to go on outside a CV, they may not want to take the risk of hiring someone associated with a tarnished firm.

“They may say, don’t show us anybody from Lehman Brothers,” Groysberg says. “We know they weren’t there at the time, but they have been a part of the culture, and we don’t want to deal with it.”

Headhunting firms, meanwhile, may have to do extra due diligence in order to vet someone with a black mark on their resume, a transaction cost that is passed on to the executive looking for work.

It does seem like companies make some distinctions between employees, who are not all painted with the same broad brush. Senior executives suffer a 6.5 percent compensation discount on average while financial executives take a 10 percent haircut—both presumably on the suspicion that they may bear more responsibility for whatever scandal occurred. And executives are penalized more if the infractions were recent.

For companies in the market to hire, taking a closer look at these candidates could represent a hidden opportunity, the researchers say. Some of the candidates may be punished unfairly. So by checking references and properly vetting these candidates, companies may be able to snap up top talent that others might overlook.

“This might present an opportunity for companies to do some sophisticated talent arbitrage,” Groysberg says. “In a world where you are competing for talent, you may find some people getting a [compensation] discount they don’t deserve.”

Don’t try to hide the past

The researchers have also produced several business cases examining what executives who have found themselves nicked by a black mark can do to rehabilitate themselves. For starters, they say, it’s important that they be transparent about their past history and not try to hide anything—which in itself can raise alarm bells. “Everyone does checks and looks at what’s available on social media, so it’s all discoverable anyway,” says Groysberg.

On the other hand, executives may benefit from reversing the stigma by association by finding advocates in their network who can speak well of them. “These kinds of sponsors and references are really important,” he says. “And the more senior those references the better.”

Finally, they might consider making a lateral move or even taking a step back in compensation to work for a highly reputable company that might counter the black mark from the tarnished firm. “It helps to create a persuasive story that competes with the scandal story,” Groysberg says. Working for a firm that is beyond reproach can help executives buy time, putting distance between themselves and problematic companies, until they are ready to once again climb the corporate ladder with a cleaner record.

Groysberg, Lin, Serafeim, and Robin Abrahams elaborated on “bouncing back” strategies in their September Harvard Business Review article The Scandal Effect.

Related Reading:

Prospective Students Steer Clear of Schools Rocked by Scandal
Lessons from the Lance Armstrong Cheating Scandal
Creating a Global Business Code

What do you think about this research?

Have you been unjustly punished for the sins of an employer? Add your comment to this story below.

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

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