Power, love and paychecks: 30 years of data from Finland reveals the dangers of dating your boss

A comprehensive study utilizing 30 years of Finnish administrative data reveals that manager-subordinate workplace relationships, while active, lead to an average 6% earnings increase for the subordinate, primarily due to preferential treatment rather than merit. However, upon dissolution, the subordinate experiences a steep average 18% earnings decline and a 13 percentage point higher likelihood of exiting the labor force, with these adverse effects persisting for at least four years. Furthermore, these relationships negatively impact the broader organization, causing a 6 percentage point drop in employee retention among coworkers due to perceived unfairness, underscoring significant financial and operational risks for companies and emphasizing the critical need for robust corporate policies to mitigate such governance and human capital issues.

Analysis

A comprehensive Finnish study spanning 30 years reveals significant economic and professional implications of manager-subordinate workplace relationships. While active, these relationships yield an average 6% earnings increase for the subordinate, primarily driven by preferential treatment rather than merit, with gains diminishing or disappearing if either party leaves the firm.

However, the dissolution of such relationships incurs substantial penalties for the subordinate, including an average 18% earnings decline that persists for at least four years. Furthermore, subordinates are 13 percentage points more likely to exit the labor force post-breakup, highlighting severe personal financial and career risks.

Beyond the individuals, these relationships negatively impact the broader organizational environment. Employee retention drops by six percentage points among coworkers, leading to a 14% greater turnover, attributed to perceived unfairness and eroded trust. This talent exodus represents a material operational risk for firms.

The findings underscore the critical importance of robust corporate governance and HR policies, as exemplified by McDonald's dismissal of its CEO for a consensual relationship. Companies must implement safeguards to mitigate the financial, reputational, and human capital risks associated with mixing power dynamics and personal relationships.

Key Decisions for Investors

• Investors should scrutinize corporate governance and human capital management policies regarding cross-reporting line relationships, as these present measurable operational and reputational risks.
• Monitor employee retention and turnover metrics, particularly in companies where such relationships are prevalent or policies are weak, as these can indicate underlying cultural issues and future financial liabilities.
• Factor in the potential for increased legal and talent acquisition costs stemming from poorly managed workplace relationship policies when assessing long-term company fundamentals.