Does a Company’s Collapse Hurt Workers’ Careers?

Every year, hundreds of thousands of firms in the United States go under, leaving millions of employees scrambling to find new jobs. What happens to their career trajectories? Is their previous company’s failure seen as a red flag or not?

Surprisingly, there hasn’t been much research on a question that affects so many workers. Previous studies have found that executives’ careers often falter afterward, but the fates of average employees have been largely ignored. “There was a large proportion of people in the labor force who were experiencing this event, and we just knew so little about it,” says Prof. Tristan Botelho.

In a new study, Botelho and Matt Marx of Cornell University found that while leaders’ careers seem to dip after their past firm’s failure, regular workers generally aren’t. When the team compared the career and wage trajectories of people from failed and surviving companies, there wasn’t much difference between the two.

The researchers did identify some exceptions—for instance, when the firm implodes due to a scandal. But broadly speaking, the study is good news for the average worker who is considering taking a job at an exciting new firm with uncertain prospects. Even if the company goes under, “it doesn’t seem like it is going to create an enormous stigma for you going forward,” Botelho says.

It makes sense that leaders’ careers would suffer after their company’s failure, since they made key strategic decisions. But it seems less likely that lower-ranking employees would be viewed as responsible. If a bank goes under, the tellers and IT department probably didn’t have much power to shape the firm’s destiny.

Still, prospective employers might be wary. Perhaps working for a failed company signals that the employee wasn’t very good, and if the firm had hired better people, they wouldn’t have gone bankrupt. The employer might decide to play it safe by hiring a candidate from another company.

On the other hand, a firm failure could paradoxically give workers a career boost. Many people tend to stay in their current jobs, even if they could be paid more elsewhere, because they dread the job search process. Being tossed off a sinking ship could force them to find new positions and end up with higher salaries.

To investigate, Botelho and Marx analyzed U.S. Census data from 1976 to 2014, which showed how workers’ earnings changed as they moved from job to job. The researchers could also see which firms had failed and when. While the data didn’t include job titles, the team assumed that people in the top 5% of their company’s pay range were more likely to be leaders.

The researchers then compared people from failed companies to similar people, such as in the same industry and state, who switched jobs in the same quarter—but whose previous firm was still around. Overall, their analysis covered 2.2 million people in 25 states and the District of Columbia.

They found that non-executive workers’ pay increased by an average of 11 percentage points when they changed employers. When the person came from a failed firm, the salary boost was slightly higher than that for employees of surviving firms. In other words, they didn’t seem to be penalized.

In line with previous studies, the executives fared worse. Leaders of failed companies still got higher salaries at their next jobs, but the pay bump was about one-third less than for leaders of surviving firms. “They’re going to make less in comparison to their peers,” Botelho says.

To get a closer look, Botelho and Marx examined a cutting-edge industry with a particularly large number of firm failures: automatic speech recognition (ASR), which develops technology that translates spoken language into text. The team gathered data on job titles and career moves of workers in the field by combing through materials such as trade journals, conference proceedings, patent records, and industry newsletters.

While they couldn’t track each person’s wages, they could see who had stayed in the industry after a firm failed. On that metric, the results were similar to the U.S. Census analysis: executives of failed companies were less likely to remain, while regular workers were just as likely to stay as those from surviving firms.

In fact, among engineers, the failures seemed to be a boon. These workers were even more likely to continue working in ASR than engineers from surviving companies, perhaps because competitors knew they were available and snapped them up.

But the researchers wondered whether these patterns would hold true if a firm went down in flames after an Enron- or Theranos-esque scandal. Maybe “everyone is going to be painted with the same brush,” regardless of rank, Botelho says. The team zeroed in on two ASR firms that nosedived in dramatic fashion: Kurzweil Applied Intelligence and Lernout & Hauspie Speech Products. Executives at these companies had fabricated sales data and been sentenced to jail.

All employees at these scandal-ridden firms were less likely to remain in the ASR industry, and engineers were no longer as sought after despite having valuable skills. The benefit that high-tech talent previously enjoyed “gets wiped away,” Botelho says.

The finding suggests that workers should suss out leaders’ integrity before taking a job at a new company. “If you’re going to a startup and you have any sense that this could be an Elizabeth Holmes-esque situation, it’s best to run,” he says.

The researchers also found that immigrants and people from minority groups were penalized for firm failures, even those that weren’t due to scandal. On average, these workers’ salaries still increased at their next jobs. But the bump was about half that of similar workers from surviving firms.

Previous research has shown that “underrepresented groups often face greater evaluative stigma,” Botelho says. Evaluators need “to be aware of these differences.”

As for leaders, the study reinforces the reality that their résumé will be marred by their company’s failure. Executives should be ready to discuss their record, be honest about missteps, and take responsibility. “They should expect blame,” Botelho says. “Discussing it openly is likely the best course of action.”

“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”

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