Caught in the Act How Corporate Scandals Hurt Employees

Abstract

Using a sample of prominent scandals, we study how employees are impacted by corporate misconduct. We find that worker sentiment decreases sharply and persistently following a scandal, driven by diminished perceptions of a firm’s culture and senior management. Further, fewer employees receive variable pay and those that do see it fall 10 percent on average. Base pay and fringe benefits remain unchanged, however, highlighting that variable-pay earners are differentially exposed to firm-level shocks. As rank-and-file employees receive no additional compensation to offset the declines in job satisfaction and variable pay, we conclude that corporate misconduct leaves them strictly worse off.

Keywords: Corporate Misconduct, Firm Reputation, job satisfaction, Variable Pay