More Thoughts on the Misconduct Penalty

My previous post about the salary penalty for people who have “tainted” companies on their resume has generated quite a bit of attention, and rightly so. That penalty — a haircut of 4 to 10 percent off the salary of your next job — says a lot about how people instinctively respond to perceptions of misconduct, and how those perceptions affect your job prospects.

So let’s consider a few more points about how compliance officers can exploit what the “misconduct penalty” means, and how you can protect yourselves from its bite, too.

First, the situation is probably even worse than we understand. The academic paper that identified this penalty, written by Harvard Business School professors Boris Groysberg and George Serafeim, examined more than 2,000 executive-level job placements that happened from 2004 to 2011. From group, they found that: (1) people who worked at companies that experienced financial restatements get a smaller salary offer at their next job; and (2) that misconduct penalty was 4.6 percent overall, and even higher for certain groups.

Alas, we still have a much larger number of job placements that didn’t happen— presumably because recruiters or hiring managers didn’t even consider candidates from those tainted companies. We can’t quantify the effect of that habit; it’s impossible to measure things that don’t happen. But it must exist, and the penalty people face is, most likely, even larger.

Second, the misconduct penalty is, in some cases, common sense. Groysberg and Serafeim speculate that the difference in salary could stem from the extra research and arguing that recruiters need to perform on candidates who worked at tainted companies, to justify hiring that person.

As my brother-in-arms Tom Fox mentioned in a podcast we just posted on this paper, “extra research and arguing” is another way of saying due diligence. If you’re the former vice president of financial planning for a company that experience an accounting meltdown several years ago, of course the recruiter wants to confirm that you personally weren’t involved. Or if you’re a senior software engineer at a big tech company accused of rampant sexual harassment, naturally the recruiter will dig deeper to ensure you weren’t part of that culture.

That extra work eventually translates into higher fees the recruiter will charge. The company will try to keep those fees lower by pushing down the offered salary. From a microeconomic standpoint, all that makes sense.

Third, in other cases the misconduct penalty is grossly unfair. My favorite observation so far comes from Scott Moritz, an anti-corruption specialist at Protiviti. He wrote on LinkedIn, “I have a number of friends who went to work for companies to help turn them around after a scandal, who then spend the rest of their careers explaining that they were not part of the problem anyway.”

That is not fair. It is also totally believable. People don’t recall exactly when every company experienced a restatement or other form of misconduct, and then make assumptions based on faulty memory. In our modern, database-driven world, someone can easily configure a search for job candidates that says, “Nobody from Company X in the last five years.” The innocent get swept away with the guilty.

Fourth, repeat that fact ruthlessly: that the innocent can be swept away with the guilty. What is most alarming to employees (and therefore, most appealing to compliance officers) is that the misconduct penalty affects people indiscriminately. Someone in sales might suffer because of misconduct that happened in the accounting department. Someone who arrived at the company later might suffer because of misconduct that happened before his or her time. Someone who left early might suffer because of misconduct that happened after you left.

Feelings of powerlessness lead to fear. Frankly, compliance officers want people to be afraid of committing misconduct; it’s the dark side of our other mission, that we want employees to embrace good conduct.

So go ahead, hold up that scary chart from my first post, of all the money someone might never earn because he had the misfortune to be at a company that experienced misconduct. The only way to exert any power over that situation is to refrain from committing misconduct in the first place.

And if you can convince everyone in the company to do that, you’ll be in good shape.