The Scandal Effect

The Scandal Effect

In September 2015 Volkswagen was found to have intentionally set controls on its diesel engines to misrepresent their emissions levels. Some 11 million cars worldwide had the “defeat” program installed. This discovery led to an immediate plunge in Volkswagen’s stock price; government investigations in North America, Europe, and Asia; the resignation of its CEO and the suspension of other executives; the company’s record loss in 2015; and a tab estimated at more than $19 billion to rectify the issues.

The scandal did incalculable damage to Volkswagen’s brand. Imagine that you are an engineer in Mexico, or an HR executive in the United States, or a logistics expert in Poland. You worked for Volkswagen from 2004 to 2008, before the new emissions controls were even in place, and you never worked in the divisions that created the deceptive programming. Lately you’ve been unhappy in your current job and have been thinking about making a change. Your long-ago association with VW shouldn’t be a problem—right?

Wrong. Our research shows that executives with scandal-tainted companies on their résumés pay a penalty on the job market, even if they clearly had nothing to do with the trouble. Overall, these executives are paid nearly 4% less than their peers. Given that initial compensation in a job strongly affects future compensation, the difference can become truly significant over a career.

Interviews with senior leaders at international executive search firms complemented our quantitative analysis and corroborated our findings. One European headhunter recounted the difficulty of placing an executive who had once worked for a bank that had recently experienced a scandal, although the executive had left the company a decade before the trouble even started. The headhunter’s client, a managing director, resisted meeting the candidate for some time. “It’s too risky,” he finally said. “Even though the guy has been out of the bank for 10 years, I cannot consider him for this search.”

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