Skin in the game? Experimental reactions to prospective reputational damage by corporate personnel

Abstract

All organizations confront the possibility of scandal; however, the reputational threat caused by scandal is exacerbated when these events are not properly addressed. Since scandals also have the potential to adversely affect organizational personnel, dilemmas arise regarding traditional ideas of employee agency. In this study, we conduct an experiment manipulating the severity of the reputational threat and its financial consequences for decision-makers, using actual corporate officers and internal auditors. One key question is this: “Are corporate decision-makers’ responses to potential scandals affected by whether they, as incentivized individuals (via stock options), have “skin in the game?” Findings indicate that corporate personnel believe corporations should respond aggressively to scandals having potential reputational consequences; however, they prefer not to proactively respond to reputational threats when expected personal gains are likely to be jeopardized. Internal auditors, by contrast, are less sensitive to personal gains. An archival supplementary analysis supports these findings by suggesting that equity compensation was 17.7% higher before a severe reputational event.