Employee compensation and new venture performance: does benefit type matter?

Using insights from strategic human resource management, we examine how employee benefits affect new venture performance. We hypothesize that two categories of benefits affect new venture performance and might do so differently: benefits that promote stability and flexibility. Using employee benefits data from the Kauffman Firm Survey, we find that new ventures that provide stability benefits—healthcare plans, tuition reimbursement, and retirement plans—have lower rates of exit and higher odds of earning a profit. Conversely, we find that firms that provide flexibility benefits—financial packages, stock ownership, bonus pay, and paid sick and vacation leave—do not affect firm exit rates but, with the exception of stock options, also have higher profits. We use IV methods to control for the possibility of reverse causality—firms that can afford to provide better employee benefits probably have better performance. Our IV results support our findings and suggest that firms that provide better employee benefits have lower exit rates and higher odds of earning a profit.