For Whistleblowing, Bigger Rewards Can Backfire

Oversized payouts can reduce external reporting or delay fixing problems by discouraging internal communication

Based on the research of Ronghuo Zheng

From JPMorgan Chase to Tesla, whistleblowers have become a central force in corporate accountability, flagging everything from misleading disclosures to safety risks. Regulators have responded in kind, with the Securities and Exchange Commission handing out whistleblower awards as high as $20 million.

The assumption behind those payouts is simple: Bigger rewards mean more people will come forward. That logic may be flawed, suggests new research by Ronghuo Zheng, associate professor of accounting at the McCombs School of Business at The University of Texas at Austin.

Zheng and Lin Nan of Purdue University suggest that whistleblower incentives operate in a Goldilocks range. Make them too small, and they fail to motivate reporting. But make them too large, and they can cut down whistleblowing, allowing serious problems to go unresolved.

“If the whistleblowing incentive is too strong, it can potentially backfire,” Zheng says.

The mechanism runs through something less visible than whistleblower headlines: internal communication between managers and employees.

In the researchers’ model, a manager who discovers a defect — such as a safety flaw or regulatory violation — must decide whether to share that information with a worker, who could either fix the issue internally or decide to report it externally.

At moderate reward levels, the system works as intended. Managers share information. Employees correct defects or, on occasion, report misconduct to regulators.

But when rewards become too large, the dynamic shifts. Employees who learn about problems are more likely to report them rather than simply fix them. Anticipating that risk, managers respond strategically — by restricting access to information in the first place.

“Management may not share useful information with employees because of the whistleblowing threat,” Zheng explains.

Less Info, Higher Risk of Catastrophes

The study is theoretical, Zheng notes, based on a formal economic model rather than real-world data. Even so, the risks his model highlights are grounded in real-world scenarios.

He points to Theranos as an example of how limited information-sharing can amplify harm. At the blood-testing startup, founder Elizabeth Holmes tightly controlled access to information about the company’s faulty Edison devices. That made it difficult for employees to piece together the scope of the problems.

Those devices were later shown to produce unreliable results, leading to misdiagnoses for patients. The company collapsed, and Holmes and another founder went to jail.

Theranos is not alone, Zheng says. When companies delay addressing defects — whether in medical devices, cars, or aircraft — problems can escalate. If issues are kept internal but not fixed, they can lead to catastrophic outcomes.

Unfortunately, overly aggressive whistleblower incentives could inadvertently push companies in that direction, his model suggests. Once rewards rise too high, the likelihood of whistleblowing declines, because employees don’t receive the information needed to report problems.

The implications extend to regulators such as the SEC, Zheng says. The agency has made large awards a cornerstone of its enforcement strategy.

Instead, his findings point to a more calibrated, case-by-case approach. Incentives should be strong enough to encourage reporting, but not so strong that they discourage internal communication, preventing problems from being identified and resolved early.

“Regulators shouldn’t think higher is always better,” Zheng says.

“Whistleblowing and Internal Communication” is published in The Accounting Review.

Story by Kiah Collier