Working Paper: NBER ID: w12435
Authors: Frederik Andersson; Matthew Freedman; John Haltiwanger; Julia Lane; Kathryn Shaw
Abstract: Innovation in the U.S. economy is about employing and rewarding highly talented workers to produce new products. Using unique longitudinal matched employer-employee data, this paper makes a key connection between talent and firms in markets with risky product innovations. We show that software firms that operate in product markets with highly skewed returns to innovation, or high variance payoffs, are more likely to attract and pay for star workers. Thus, firms in high variance product markets pay more up-front--in starting salaries--to attract and motivate star employees, because if these star workers produce home-run innovations, the firm's winnings will be huge. However, we also find these same firms pay highly for loyalty: star workers that stay with a firm have much higher earnings in firms with high variance product market payoffs. The large effects on earnings are robust to the inclusion of a wide range of controls for both workers and firm characteristics. One key control is that we also show that in firms that have actually hit home runs, with high revenues, the rewards for star talent are even greater. We also find that the dispersion of earnings is higher within firms with high variance product payoffs.
Keywords: Talent; Innovation; Software Industry; Compensation; Product Market Risk
JEL Codes: J24; J31; L2; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high variance payoffs (D89) | higher wages for star workers (J31) |
| employee retention (M51) | higher earnings for star workers (J31) |
| successful product outcomes (L15) | higher earnings for star workers (J31) |
| high variance payoffs (D89) | higher dispersion of earnings (D39) |