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Published in: Small Business Economics 3/2021

02-06-2020

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

Author: Christopher J. Boudreaux

Published in: Small Business Economics | Issue 3/2021

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Abstract

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.

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Appendix
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Footnotes
1
Recent work also suggests that although some employer policies are intended to prevent employees from leaving to join competitor companies, they may actually encourage employees to become entrepreneurs (Campbell et al. 2017).
 
3
We thank an anonymous reviewer for pointing this out.
 
4
Other reasons for exit include (1) temporary closure, (2) sale, and (3) merger or acquisition. Our analysis estimates the odds of failure due to going out of business only, which helps ensure an equal comparison. Refer to the data analysis section for more detail.
 
5
Strategic HRM is defined as “the study of HRM systems (and/or subsystems) and their interrelationships with other elements comprising an organizational system, including the organization’s external and internal environments, the multiple players who enact HRM systems, and the multiple stakeholders who evaluate the organization’s effectiveness and determine its long-term survival.” (Jackson et al. 2014, p. 2).
 
6
Except in Hawaii
 
7
500 employees or more
 
8
Between 100 and 499 employees
 
9
Fewer than 100 employees
 
10
Wells et al. (2003) found that growth-oriented business owners were more likely than the maintenance-oriented to offer 13 of the 14 benefits listed. The maintenance-oriented owners were nearly twice as likely to offer no benefits at all. Balkin and Logan (1988) reinforce that specific benefits, like lump-sum pay structures, encourage a greater entrepreneurship mentality among employees.
 
11
Survival models allow us to estimate the odds of failure due to going out of business. This should not be confused with an empirical analysis of failing businesses only.
 
12
Interpretation of hazard rates is often counterintuitive to those who are unfamiliar with these estimation methods. A hazard rate h(t) < 1 indicates that increases in the variable are associated with a reduced hazard of failure while hazard rates h(t) > 1 indicate an increased hazard of failure.
 
13
For more information, see (Cleves et al. 2010; Cochran 2007; Korn and Graubard 2011; Levy and Lemeshow 2013). The first is a useful guide for researchers using Stata.
 
14
The Hausman test checks whether the idiosyncratic errors (in our case firm-specific errors) are correlated with the model’s predictors. The null hypothesis is that they are not correlated, which supports the choice of random-effect regression. A rejection of the null hypothesis (i.e., p < 0.05) would instead support fixed-effect logistic regression. We do not reject the null hypothesis so we can be confident that the random-effect model is appropriate (and in fact more efficient).
 
15
The transformation follows three steps: (1) estimate a Poisson regression with the failure indicator as the response variable, (2) add time dummies, and (3) create an exposure variable that records the length of each time span.
 
16
In additional robustness tests, we also included all employee benefits in one regression model. This adjusts for the fact that some start-up firms provide multiple benefits to employees. The results are very similar to those reported here and are available upon request.
 
17
Non-linear fixed effects models (e.g., logit with firm fixed effects) suffer from the incidental parameters problem. Thus, we rely on random effects panel data models for estimation. The Hausman test supports the choice of random effects over fixed effects (χ2 = 13.36; p = 0.861).
 
18
This can be seen from the instrumental variable regressions reported in Table 6.
 
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Metadata
Title
Employee compensation and new venture performance: does benefit type matter?
Author
Christopher J. Boudreaux
Publication date
02-06-2020
Publisher
Springer US
Published in
Small Business Economics / Issue 3/2021
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI
https://doi.org/10.1007/s11187-020-00357-5

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