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Employee Compensation in Entrepreneurial Companies

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  • Ola Bengtsson
  • John R. M. Hand

Abstract

Despite the central role played by human capital in entrepreneurship, little is known about how employees in entrepreneurial firms are compensated and incentivized. We address this gap in the literature by studying 18,935 non‐CEO compensation contracts across 1,809 privately held venture‐backed companies. Our key finding is that employee compensation varies with the degree to which VCs versus founders control the business. We show that relative to founder‐controlled firms, VC‐controlled firms pay their hired‐on (i.e., nonfounder) employees higher cash salaries, provide stronger cash and equity incentives, and have more formal pay policies in place. We also observe that founder employees earn less cash pay and face weaker cash incentives than do hired‐on employees, but have stronger equity incentives. We propose that the compensation differences we identify arise because the preferences and capabilities of controlling shareholders significantly influence the quality of the human capital attracted and retained by the firm.

Suggested Citation

  • Ola Bengtsson & John R. M. Hand, 2013. "Employee Compensation in Entrepreneurial Companies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 312-340, June.
  • Handle: RePEc:bla:jemstr:v:22:y:2013:i:2:p:312-340
    DOI: 10.1111/gems.2013.22.issue-2
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    Cited by:

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    2. Dorner, Matthias & Fryges, Helmut & Schopen, Kathrin, 2017. "Wages in high-tech start-ups – Do academic spin-offs pay a wage premium?," Research Policy, Elsevier, vol. 46(1), pages 1-18.
    3. Magnus Henrekson & Tino Sanandaji, 2018. "Stock option taxation: a missing piece in European innovation policy?," Small Business Economics, Springer, vol. 51(2), pages 411-424, August.
    4. Amaka Orakwue & Osarumwense Iguisi, 2020. "Conceptualizing entrepreneurship in human resource management," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(3), pages 85-93, April.
    5. Henrekson, Magnus & Johansson, Dan & Karlsson, Johan, 2021. "To Be or Not to Be: The Entrepreneur in Neo-Schumpeterian Growth Theory," Working Papers 2021:3, Örebro University, School of Business, revised 01 Dec 2021.
    6. Daniel Rusu, 2022. "80 Review of International Comparative Management Volume 23, Issue 1, March 2022 Standardization of Entrepreneurship in the Concept of Human Resource Management in SMEs," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 23(1), pages 80-100, March.
    7. Chua, Ansley & Nasser, Tareque, 2016. "Insider sales in IPOs: Consequences of liquidity needs," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 1-17.
    8. Kim, J. Daniel, 2018. "Is there a startup wage premium? Evidence from MIT graduates," Research Policy, Elsevier, vol. 47(3), pages 637-649.
    9. Henry Sauermann, 2017. "Fire in the Belly? Employee Motives and Innovative Performance in Startups versus Established Firms," NBER Working Papers 23099, National Bureau of Economic Research, Inc.
    10. Maryann P. Feldman & Serden Ozcan & Toke Reichstein, 2019. "Falling Not Far from the Tree: Entrepreneurs and Organizational Heritage," Organization Science, INFORMS, vol. 30(2), pages 337-360, March.
    11. Tereza Tykvová, 2018. "Venture capital and private equity financing: an overview of recent literature and an agenda for future research," Journal of Business Economics, Springer, vol. 88(3), pages 325-362, May.

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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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