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Employee Compensation in Entrepreneurial Companies

  • Bengtsson, Ola


    (Research Institute of Industrial Economics (IFN))

  • Hand, John R. M.

    (University of North Carolina Chapel Hill)

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., non-founder) 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.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 922.

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Length: 45 pages
Date of creation: 13 Aug 2012
Date of revision:
Handle: RePEc:hhs:iuiwop:0922
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
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Fax: +46 8 665 4599
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