(Bloomberg) -- You could get dinged on compensation, or even knocked out of contention for a job, by a corporate scandal you had nothing to do with.
The Enrons and Worldcoms and Wells Fargos hurt the careers of innocent bystanders. It's a nasty and persistent reputational ripple effect that can be incredibly hard, and sometimes impossible, to counteract.
Wells Fargo & Co., where bank employees tried to meet quotas and earn bonuses by opening sham accounts for customers without their knowledge, is the scandal of the hour. And it is executives in financial services firms that suffer the most from guilt by association, an article in the September Harvard Business Review suggests.
Initial compensation at these executives' next job is about 10 percent lower than for that their untainted counterparts, the authors found. Across industries, job functions, levels of seniority, and regions, executives with such companies on their résumés took a cut of 4 percent in total compensation. Women were dinged 7 percent to men's 3 percent. The hiring manager may like you and understand that you weren't implicated, but there is that blemish on your resume, so "we're going to pay you what we think you'll take, and you're lucky we're hiring you," said Jeanne Branthover, a partner at executive-search company DHR International, explaining the thinking.
The article's authors speculate that "women from scandal firms, especially those in a male-dominated industry, may feel that they approach the negotiating table with two strikes against them and thus don't push on compensation as hard as they otherwise might, or as their similarly stigmatized male peers do."
The 10 percent hit to financial executives' compensation echoes some of the results in a study published earlier this year by business school professors at the University of Chicago and University of Minnesota, only this time the employees were implicated. The study found that 44 percent of financial advisers who left a job as a result of actual misconduct, rather than guilt by association, were hired by another firm within a year but “tended to take pay cuts of 10 percent and land at companies considered less desirable places to work.”"Even though our article is called 'The Scandal Effect,' what we're really talking about are innocent bystanders," said Boris Groysberg, a professor of business administration at Harvard Business School and one of the article's co-authors. "What upset me most about what we found were the thousands of people who will have bad labor market outcomes—in compensation being lower or in getting offers from outside firms being negatively affected—who had nothing to do with the scandals." To measure the stigma, the authors used proprietary data from an unnamed global executive placement firm to analyze 2,034 executive job moves from 2004 to 2011. About half the moves were for C-level, president, or vice president jobs.
They found that a remarkable 18 percent of the executives had worked for companies marked by financial scandal, defined as earnings misstatements captured in either a database that flags enforcement actions by the Securities and Exchange Commission or in a Government Accountability Office database.
Branthover is struck by how far down in the ranks stigma can reach. She works with senior executives, but when trying to help friends or relatives with job-hunting she has found even midlevel people with a blemished company on their resume "directly impacted by having to explain it in an interview, having to defend themselves in an interview, and being rejected for it—when the person literally had nothing to do with it," she said. "It's a huge amount of people."
Employees in this uncomfortable position have to be strategic in addressing the lingering stench of scandal. Don't remove the company from your résumé, Branthover advises. Bring the topic up with a prospective employer before the question is raised, doing so in a way you're clearly comfortable with. "Get the point across quickly and concisely, and don't dwell on it," she said. Be prepared for tough questions, ready to answer them without sounding defensive. "That can make you come across as a strong professional who can handle any situation," Branthover said. In trying to escape a previous employer's bad reputation, job seekers may want to target companies outside the big banks, said Branthover. "You're looking for the right company that will take the risk," she said, and that may be a more entrepreneurial one. One recruiter the authors of the Harvard study spoke with told them "the private equity guys are more forgiving than anyone else," and "will go deep, deep, deep to understand the particulars of what that person did vs. what the institution did, the inside politics of it." Sometimes executives just can't get past being wrongly associated with a scandal—companies don't want to take the risk or be tainted by the association. Among the flood of e-mails Groysberg and his co-authors got after the article came out were stories from senior executives who had become successful entrepreneurs because they had to.
That's something Branthover has seen as well but says isn't the norm. More likely, an executive who faces these hurdles will have to take a lateral move, a pay cut, or a "rehab job" at a company that's less of a brand name.
Tainting the innocent. It's a scandal.
To contact the author of this story: Suzanne Woolley in New York at [email protected]. To contact the editor responsible for this story: Peter Jeffrey at [email protected]