Employee Compensation in Entrepreneurial Companies

45 Pages Posted: 24 Nov 2012

See all articles by Ola Bengtsson

Ola Bengtsson

Lund University School of Economics and Management; Research Institute of Industrial Economics (IFN)

John R. M. Hand

University of North Carolina Kenan-Flagler Business School

Date Written: July 2012

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., 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.

Keywords: Entrepreneurship, Compensation Contracts, Private firms

JEL Classification: M13, J3

Suggested Citation

Bengtsson, Ola and Hand, John R. M., Employee Compensation in Entrepreneurial Companies (July 2012). IFN Working Paper No. 922, UNC Kenan-Flagler Research Paper No. 2013-22, Available at SSRN: https://ssrn.com/abstract=2179572 or http://dx.doi.org/10.2139/ssrn.2179572

Ola Bengtsson (Contact Author)

Lund University School of Economics and Management ( email )

P.O Box 7080
Lund
Sweden

HOME PAGE: http://www.olabengtsson.com

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

John R. M. Hand

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3173 (Phone)
919-962-4727 (Fax)

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