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Small Bus Econ
https://doi.org/10.1007/s11187-020-00357-5
Employee compensation and new venture performance:
does benefit type matter?
Christopher J. Boudreaux
Accepted: 16 April 2020
#SpringerScience+Business Media, LLC, part of Springer Nature 2020
Abstract Usinginsightsfromstrategichumanresource JELcodes L25.L26.M21.M52
management,weexaminehowemployeebenefitsaffect
new venture performance. We hypothesize that two
categories of benefits affect new venture performance 1Introduction
and might do so differently: benefits that promote sta-
bility and flexibility. Using employee benefits data from It is now widely acknowledged that human capital is a
the Kauffman Firm Survey, we find that new ventures viable source of sustainable competitive advantage for
that provide stability benefits—healthcare plans, tuition the firm (Pfeffer 1994; Prahalad 1983; Wright et al.
reimbursement, and retirement plans—have lower rates 1994; Youndt et al. 1996). Organizations invest in hu-
of exit and higher odds of earning a profit. Conversely, man capital through high-involvement work practices
we find that firms that provide flexibility benefits— (Guthrie 2001) and invest in high-performance human
financial packages, stock ownership, bonus pay, and resource (HR) practices to motivate organizational citi-
paid sick and vacation leave—do not affect firm exit zenship (Kehoe and Wright 2013), and ultimately im-
rates but, with the exception of stock options, also have prove corporate financial performance (Huselid 1995).
higher profits. We use IV methods to control for the The extant literature strongly supports the notion that
possibility of reverse causality—firms that can afford to HRpractices are linked to employee participation and
provide better employee benefits probably have better firm performance (Jackson et al. 2014;Kehoeand
performance. Our IV results support our findings and Wright 2013;Wrightetal.2003)1 as well as
suggest that firms that provide better employee benefits employee-based innovations (Pandher et al. 2017).
havelowerexitratesandhigheroddsofearningaprofit. Strategic human resource management (HRM) con-
Keywords Employeebenefits.Newventure tends that effective HRM contributes to superior firm
. . . performance (Jackson et al. 2014). Yet, most studies link
performance Stability Flexibility KauffmanFirm constructs like employee motivation (Kehoe and Wright
Survey 2013) and formal human resource practices (Sheehan
Electronic supplementary material The online version of this 2014) to firm performance. A notable exception is recent
article (https://doi.org/10.1007/s11187-020-00357-5)contains work that links employee motivations as an antecedent of
supplementary material, which is available to authorized users. firm performance and finds that start-up employees place
lower importance on job security and salary but greater
C. J. Boudreaux (*)
Department of Economics, College of Business, Florida Atlantic 1 Recent work also suggests that although some employer policies are
University, 777 Glades Road, Kaye Hall 145, Boca Raton, FL intended to prevent employees from leaving to join competitor com-
33431, USA panies, they may actually encourage employees to become entrepre-
e-mail: cboudreaux@fau.edu neurs (Campbell et al. 2017).
C. J. Boudreaux
importance on independence and responsibility Survey (KFS)—we examine how the provision of em-
(Sauermann 2018). Despite these advances, little is known ployee benefits affects new venture performance in two
abouthowspecificformsofcompensationandrecruitment ways: (1) risk of business failure and (2) firm profits. It is
such as HR benefits packages affect new venture perfor- important to consider multiple performance metrics be-
mance. Strategically, employers might offer attractive ben- causerelyingononeperformancemeasurealonedoesnot
efits to recruit and retain top employee talent with the adequately capture start-up firm performance. In the con-
anticipation that good talent will contribute towards the text of start-up firms, some can survive without having
newventure’s performance. Do new ventures that provide profits for a long time, and this does not necessarily imply
employee benefits exhibit superior performance? the company is not performing well. After some time,
The purpose of this paper is to address this question such start-up firms can survive and grow thanks to huge
by examining the effect that the provision of employee financing rounds.3 Thus, we focus our analysis on both
benefits has on new venture performance. This is espe- profit and business failure outcomes to avoid relying too
cially important because, according to recent Bureau of heavily on one performance measure alone. The KFS
Labor Statistics (BLS) estimates (BLS 2018), average provides a unique opportunity to examine nascent enter-
private-sector spending on employeebenefits is roughly prises that began in 2004 and either exited or survived
2
a third of total employee costs (30.4%). This is a non- until the culmination of the study in 2011. This is espe-
trivial sum that can severely constrain the resource cially important because the competitive landscape is
allocation of small start-up firms. Consequently, man- challenging and difficult to navigate, particularly for
agementpractitionersmightdesiretoassesstheefficien- small businesses in their formative years (Hannan and
cyofthisspending.Moreover,managementcanprovide Freeman 1988). This has led researchers to coin terms
several different types of benefits from which we delin- like “liability of newness” (Stinchcombe 1965), “liability
eate two categories: benefits that promote stability and of adolescence” (Fichman and Levinthal 1991), and “li-
benefits that promote flexibility. We hypothesize that, ability of smallness” (Freeman et al. 1983), which all
while employees will value both benefit types, they will explain how fledgling, small businesses face substantial
prioritize benefits that promote stability over flexibility. obstacles to business generation—one of which is the
In carrying out this research, we make several con- constraint that comes with hiring employees during a
tributions to the literature on strategic HRM and entre- firm’s formative years (Deshpande and Golhar 1994;
preneurship. First, we examine how the provision of Hornsby and Kuratko 1990;MathisandJackson1991).
benefit type affects new venture performance. Benefits Importantly, the KFS dataset allows us to distinguish
that promote stability include healthcare plans, educa- between exit types, which is important because not all
tion tuition reimbursements, and retirement plans exit reasons should be treated the same. Consistent with
whereas benefits that promote flexibility include bonus prior KFS studies (Bates and Robb 2014; Cole and
pay plans, sick pay leave, vacation pay leave, and in- Sokolyk 2018a, 2018b, 2019; Coleman et al. 2013), we
vestment plans. Recent work illustrates substantial dif- examine start-up firm exit. Yet, we distinguish between
ferences in innovation performance between environ- different reasons for exit and focus on those start-ups that
4
ments that promote stability and those that promote exit due to going out of business.
flexibility (Young et al. 2018). Although Young et al. Finally, our results have the potential to influence
(2018) discuss stability and flexibility at the country management practice and small business policy. Using
level, we believe this distinction has important implica- theoretical insights from strategic HRM and data from
tions at the founder level for organizational environ- the KFS, our findings speak to the relationship between
ments and the recruitment and retaining of employee HR practices and new venture performance. Previous
talent. By delving closer into the type of benefits offered studies illustrate how HR practices can encourage em-
to employees, we uncover how new ventures can opti- ployee effort and financial performance (McClean and
mize their human resources to enhance firm Collins 2011;Subramony2009). Our study builds on
performance.
Second,ouranalysisfocusesonnewlycreatedstart-up 3 We thank an anonymous reviewer for pointing this out.
firms. Using a unique dataset—the Kauffman Firm 4 Other reasons for exit include (1) temporary closure, (2) sale, and (3)
mergeroracquisition.Ouranalysis estimatesthe oddsof failure due to
going out of business only, which helps ensure an equal comparison.
2 https://www.bls.gov/news.release/ecec.nr0.htm Refer to the data analysis section for more detail.
Employee compensation and new venture performance: does benefit type matter?
this research stream and highlights how employee ben- human capital at the center of the production process,
efits encourage greater new venture performance. From and because investments in human capital are vital to
apracticalperspective,HRmanagerswillfindourstudy improving firm performance (Barro 1991; Becker et al.
usefulbecauseweidentifythebenefitsofferedthathave 1990;Cooperetal.1994;Martinetal.2013),employees
the most potential to optimize start-up firm perfor- are key resources for management (Bakke 1961;
mance. Policy analysts will also find our results useful Drucker 2012). “Strategic HRM involves addressing
because we identify HRM as a viable mechanism for long term business needs by achieving a fit between
improving start-up firm performance. This is especially theorganization’sfuturehumanresources,externalcon-
important considering that recent evidence suggests that ditions, and the organization’s strategy (Jackson et al.
talent development is a better solution for business 2014,p.8).” Consequently, recruiting and talent devel-
policy when compared with a policy of choosing win- opmentbecomesavitalconcernforaspiringenterprises,
ners (Acs et al. 2016). If the provision of benefits and successful strategic HRM will help acquire a sus-
packages reduces business failure risks for start-up tainable competitive advantage.
firms, then policy makers might want to consider how For start-up firms to obtain a sustainable competitive
start-upfirmscanmorereadilyprovidevaluablebenefits advantage, they must acquire resources that are rare,
to recruit productive employees. valuable, and difficult to imitate (Barney 1991). The
Our findings reveal that new ventures that offer more resource-based view (RBV) emphasizes the internal
employee benefits packages experience lower rates of characteristics of the firm—especially the ability to de-
business failure and higher odds of earning a profit. The velopdistinctresources and capabilities thatare difficult
results also indicate that the type of benefit offered matters. to imitate and substitute (Sheehan 2014). From a
New ventures have a lower rate of business failure when resource-based perspective, HR practices provide inter-
they provide benefits that promote stability like healthcare nal or external benefits, or both. Internal benefits theory
plans, retirement plans, and education tuition reimburse- argues that start-up firms might provide better benefits
ments to employees. In contrast, we find no effect on packages to recruit, invest in human capital, and main-
business failure rates for start-up firms that provide flexi- tain high performing employees thereby improving fi-
bility benefits such as bonus pay, investment plans, paid nancialperformance(BrancoandRodrigues2006).This
sick leave, and paid vacation leave. Our results also indi- theory contends that the start-up firms with the best
cate that both benefit categories are associated with higher compensation will attract the best employees, and the
odds of earning a profit with the largest effect from pro- best employees, in turn, contribute to superior financial
viding retirement benefits. Interestingly, however, we find performance (Youndt et al. 1996). This occurs because
that start-up firms that provide stock options actually ex- human resource activities can acquire a competitive
perience lower odds of earning a profit. We discuss poten- advantage by developing a skilled workforce to effec-
tial explanations for these findings. tively carry out the firm’s business strategy (Branco and
Rodrigues 2006).
2.2 Benefits as employee recruitment
2 Theoretical development
Start-up firms must be willing to increase their compen-
2.1 Strategic human resource management sation (pecuniary and non-pecuniary) in order to attract
talent—especially talent with high human capital en-
The belief that effective HR practices contributes to dowments (Ang et al. 2002). Microeconomic theory
increased financial performance is known as strategic explains the supply and demand for labor where start-
HRM (Jackson et al. 2014).5 Strategic HRM places
up firms demand labor and labor is supplied to the
5 Strategic HRM is defined as “the study of HRM systems (and/or market by workers. Increases in the demand for labor
subsystems) and their interrelationships with other elements compris- andreductionsinthesupplyoflaborbothacttoincrease
inganorganizationalsystem,includingtheorganization’s external and the prevailing wage. It is in this market that start-up
internal environments, the multiple players who enact HRM systems, firms must offer the most competitive packages to re-
and the multiple stakeholders who evaluate the organization’s effec- cruit and retain employees with their desired skillset.
tiveness and determine its long-term survival.” (Jackson et al. 2014,p.
2). This is crucial to the long-run success of the firm
C. J. Boudreaux
6
(Pandher et al. 2017). Start-up firms that are not able to sick days), retirement plans, health plans, dental or
recruit highly productive employees might develop in- vision plans, or life insurance plans (Entrepreneur
ferior structures, internal processes, and human re- 2005).Inpractice,manyUSemployersprovidebenefits
sources relative to their competitors (Shane and Stuart to employees, though this varies greatly by establish-
2002). While salaries and wages are often the driving ment size. For example, although 88% of workers in
7
forcebehindhiringdecisions(Angetal.2002),thereisa large establishments and 83% of workers in medium-
morerecentphenomenonthatstart-upfirmsareusingto 8
sized establishments receive medical care benefits, on-
attract talent. ly 55% receive medical care benefits in small establish-
9
Analternative to monetary (i.e., pecuniary) compen- ments (BLS2018).
sation is to provide incentives and benefits packages Empirical evidence supports these surveys. Research
(Bryant and Allen 2013). Now more than ever, em- suggests that stock options (Dunford et al. 2008)and
ployees are increasingly interested in the benefits of- insurance and retirement benefits (Sutton 1985)reduce
fered by prospective employers. According to the 2013 employeeturnover. Employees are increasingly placing
Aflac Work Forces Report, “nearly 1-in-2 U.S. em- values such as independence and flexibility above other
ployees say that improving their benefits options is benefits (Sauermann2018),andmoreover,flexibleben-
one thing their employer can do to keep them in their efit arrangements have been linked to higher employee
job” (Aflac 2013, p. 1). So-called talent attractors (i.e., andjobsatisfaction(Barberetal.1992).Jobsatisfaction,
start-up firms that offer benefits packages above the US in turn, corresponds to higher rates of employee reten-
national average) observe a significant correlation be- tion (Hausknecht et al. 2009) and has a positive influ-
tween benefits and other important human resources ence on business outcomes (Koys 2001).
outcomes like job satisfaction, loyalty to employer,
willingness to refer a friend, and workforce productivity 2.3 Benefits that promote stability vs. flexibility
(Aflac 2013). The report goes further and finds that
employeeswhoworkfortalentattractorsare“morethan Recent work illustrates substantial differences in inno-
twice as likely to agree strongly or very strongly that vation performance between institutional environments
their organization’s profitability is due in part to offering that promote stability and those that promote flexibility
a robust benefit package. It’s clear that these companies (Young et al. 2018). This work uses the crucial distinc-
benefits as part of their overall business strategy to tion between risk and uncertainty (Knight 1921)to
achieve bottom line results” (Aflac 2013, p. 3). Echoing theorize howcertaininstitutional arrangementsfacilitate
this sentiment, a survey conducted by the Society of an entrepreneur’s ability to assess risk whereas other
Human Resource Management found that 35% of em- arrangements support an entrepreneur’s ability to re-
ployers cited bigger benefits packages compared with spond to uncertainty (Young et al. 2018). Although this
28% in the previous year, and job seekers frequently frameworkisdevelopedatthecountrylevelofanalysis,
place greater importance on benefits such as health care webelieve this distinction has several important impli-
coverage, flexible work schedules, and other benefits cations for start-up firms as well. There are several
beyondtheir base salary (Bloomberg 2015). While ben- reasons for this belief. For starters, several academic
efits often comeattheexpenseofsalaryincreases,many studies indicate that employee benefits can be an inno-
employees place greater emphasis on benefits due to vative strategic practice for start-ups10 (Balkin and
concerns such as rising healthcare costs (Bloomberg Logan 1988; Carraher and Whitely 1998; Wells et al.
2015). 2003). Start-up firms might desire to offer employee
Despite the favorable light of these surveys, many
employers opt not to provide certain benefits to em- 6 Except in Hawaii
ployees. Under US law, employers must provide em- 7 500 employees or more
8 Between 100 and 499 employees
ployees with benefits like time off to vote, FICA tax 9 Fewer than 100 employees
withholding, paying state and federal unemployment 10 Wellsetal.(2003)foundthatgrowth-orientedbusinessownerswere
taxes, contributing to state short-term disability pro- morelikelythanthemaintenance-orientedtooffer13ofthe14benefits
grams, and complying with the Federal Family and listed. The maintenance-oriented owners were nearly twice as likely to
Medical Leave (FMLA) act. Employers are not, how- offer no benefits at all. Balkin and Logan (1988) reinforce that specific
benefits, like lump-sum pay structures, encourage a greater entrepre-
ever, required to provide paid leave (e.g., holidays and neurship mentality among employees.
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