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How Do Recessions Affect the C-Suite?

According to research by Yale labor economist Lisa Kahn, beginning your career during a recession can be a real drag, for a real long time. Finding that first job is obviously harder, and even when you do, the pay is usually much less. Kahn found (full paper here) that people who get their first job during a recession have a starting salary that’s on average 25 percent lower than it would be during a boom. Seventeen years later, those people are typically earning 10 percent less than they would had they started during a better economy.


But what about CEOs who start their business career during a recession? Is it any different for them? 

According to a new study (full version here) from Antoinette Schoar (“The Church of Scionology” podcast contributor) and Luo Zuo, recessions have a peculiar effect on the career trajectory and management style of CEOs. Those who start work during a recession become CEOs faster, but end up at smaller firms and tend to be more risk-averse. From the abstract:

CEOs who start in recessions take less time to become CEOs, but end up as CEOs in smaller firms, receive lower compensation, and are more likely to rise through the ranks within a given firm rather than moving across firms and industries. Moreover, managers who start in recessions have more conservative management styles once they become CEOs. These managers spend less in capital expenditures and R&D, have lower leverage, are more diversified across segments, and show more concerns about cost effectiveness. While looking at the role of early job choices on CEO careers is more endogenous, the results support the idea that certain types of starting positions are feeders for successful long-run management careers: Starting in a firm that ranks within the top ten firms from which CEOs come from is associated with favorable outcomes for a manager – they become CEOs in larger companies and receive higher compensation.

The authors used data from the Executive Compensation Database of Compustat between 1992 and 2010, and then gathered background information of about 85 percent of those CEOs. Those who began their careers during a recession exhibited cautious behavior on several fronts: they tended to have a more conservative management style, invested less in R&D, had larger cash holdings, and “lower working capital needs.”

Schoar and Zuo posit that managers who start during a recession have fewer resources to work with, and develop their skill set accordingly. Managers with a more conservative style are perhaps more likely to be promoted, and less likely to switch business and industries, which explains their faster rise to the top. This risk-aversion, however, could also keep them from bigger companies, and bigger salaries.

The authors point out that companies should strive to have a  mix of both recession and boom-beginning managers: “If the  majority of existing managers are brought up in a boom time there might be a net shortage of managers who know how to manage in a recession once the economic outlook changes.”