Employee mobility, entrepreneurship, and effects on source firm performance

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1 Breakfast Club Who leaves, where to, and why worry? Employee mobility, entrepreneurship, and effects on source firm performance Benjamin Campbell Assistant Professor Department of Management and Human Resources

2 A bit about me

3 Human Capital Our people are our single greatest strength and most enduring long-term competitive advantage. Gary Kelly, Southwest Airlines The thing that wakes me up in the middle of the night is not the economy or our competitors [but] whether we have the [right] leadership capacity and talent David Whitwam, former Chairman & CEO, Whirlpool Employee first, customer second. The scarce resource is not customers, it is great employees. Vineet Nayar, President, HCL Technologies Any day in the office I don t know how many of our key employees will still be there. Dealing with turnover and retention issues takes up over 50% of my time. CEO, Health IT Systems Firm

4 Why should firms worry about employee turnover (and motivation)? Like human assets, an oil field may be a strategic asset. However, once acquired, an oil field 1. Cannot quit and move to a competing firm 2. Cannot demand higher or more equitable wages 3. Cannot reject the firm s authority or be unmotivated 4. Need not be satisfied with supervision, coworkers or advancement opportunities ---Coff, 1997, p 374

5 What do employees take with them?

6 Not all turnover is the same

compete in the same industry Prevalent in many knowledge intensive

7 What are spinouts, and how pervasive are they? Spinouts are firms founded by employees that leave the parent firm that compete in the same industry Prevalent in many knowledge intensive industries i.e. industries where complementary assets are easy to transfer or replicate 82 % 42% 36 % 45%

8 Complementary Assets Manufacturing Distribution Other Employees Brand Name Focal Employee Supplier Relationships Complementary technologies Internal Processes Client Relationships Adapted from Teece, 1986

9 Why does this matter? Control over non-human assets leads to control over human assets Hart, 1995, p 58 Implications for value appropriation between co-creators of knowledge (firms and employees)

Complementary Assets and Turnover Ability of employee to transfer/reproduce firm s complementary assets Employee Advantage Professional services

10 Complementary Assets and Turnover Ability of employee to transfer/reproduce firm s complementary assets Employee Advantage Professional services Technologically intensive manufacturing Firm Advantage Importance of firm s complementary assets to value creation Adapted from Campbell, Ganco, Franco and Agarwal (2012)

11 That is the big picture Drill down and ask: Who Leaves, Where to, and Why Worry? Employee mobility, entrepreneurship, and effects on source firm performance

13 The birth of Mickey Mouse

14 Founders and followers Not everyone can be a founder. We talk about the founders of startups and companies. We focus on the founders. The founders get press coverage. Sometimes they get rich. But for every founder, there is an early employee that takes near equal risks in joining an early-stage company. David Crow, StartupNorth (2009)

The Double-Edged Sword of Entrepreneurial Employees Entrepreneurial employees are the employees who might leave to found or a join a new venture. Why should we love them? They innovate.

15 The Double-Edged Sword of Entrepreneurial Employees Entrepreneurial employees are the employees who might leave to found or a join a new venture. Why should we love them? They innovate. They bear risk. They understand the market and the business. They are motivated. Why should we worry about them? They leave and compete against you and they take great people with them

16 What does this mean? Employees that are potential entrepreneurs are likely some of the most valuable people in the organization and some of the people most able and most likely to move. which gives entrepreneurial employees great leverage

17 Who leaves? Or why do some employees become entrepreneurs? Selection Entrepreneurs are born, not made Franco and Filson, 2006 Spillovers Exposure to ideas creates entrepreneurial spirit Agarwal, Echambadi, Franco and Sarkar, 2004 Spats Disagreements with top management creates frustration Klepper and Thompson, 2010 Skills & Signals Start-up experience enhances general/transferrable human capital Campbell, 2012

18 Antecedents and Consequences of Employee Entrepreneurship 1. What are the long-term earnings effects of the decision to become an entrepreneur? Entrepreneurial experience has positive effects on the long-term earnings trajectory of individuals (even after subsequent job change and firm death). Entrepreneurial experience generates (or reveals) general/transferable human capital. Management Science, 2012.

19 Real Quarterly Earnings (2003$) Job Change to Start-up vs. All Other Job Changes Charter Employees and Matched Sample- Median Earnings Quarters Charter to Start-up Matched Employee Job Change Charter Job Change

20 does it matter? Employees that generate more value (as proxied by earnings) are more likely to stay They are able to bargain for higher compensation, given the credible threat of mobility But if they leave, they are more likely to create spinouts And they are likely to take other employees, clients, and critical business relationships with them Adverse effects on firm is higher due to spinout events rather than mobility alone increases with employee earnings Campbell, Ganco, Franco and Agarwal (2012)

21 How much does it matter? In the legal services sector, we estimate the following: Impact on firm revenues if: Employee goes to established firm Employee goes to startup Pre-mobility earnings of employee: $25,000 $100,000 $300,000 Small positive effect! No effect No effect No effect $190,000 $1,000,000!!

22 Can you just throw money at the problem? Do firms that offer pay for performance retain their top employees? Or, how does pay dispersion affect the likelihood of losing an employee to a spin-out? Carnahan, Agarwal and Campbell, 2012

23 Compensation Dispersion Pr(Wage Level) Greater pay dispersion, more extreme rewards Less pay dispersion, fewer extreme rewards Annual Wages Greater pay dispersion concentrates the value created by the firm in the hands of fewer employees

24 Can you just throw money at the problem? Do firms that offer pay for performance retain their top employees? Yes, but Yes! Top performers are less likely to leave firms with dispersed pay structures But, they are also more likely to create spinouts! But, money is often not the driving motivation for spinning out Desire for autonomy, mastery, and purpose Carnahan, Agarwal and Campbell, 2012

25 Why does employee entrepreneurship hurt so much? Is it about the person or the team? Agarwal, Campbell, Franco & Ganco, 2013 Higher human capital founders rally better teams (bigger and more human capital). Most of the impact of founders is attributable to the teams they bring with them. Drives negative impact on source firm Drives positive impact on startup

26 Why is this good news? Firms can target followers ex post, instead of potential founders a priori. Followers may be easier to retain and they mitigate the loss of the founder. plus founders may not go at all if they can not take their ideal team.

27 Antecedents and Consequences of Employee Entrepreneurship Fitting it all together: - Selecting into entrepreneurship has positive long-term effects on individuals. - Employee entrepreneurship hurts source firms more than traditional mobility. - Source firms can minimize the risks by implementing pay-for-performance compensation schemes and by targeting potential followers.

28 Managerial Advice Give employees freedom. Create opportunities and organizational support for employees to be innovative. Pay top employees well to make sure they don t leave and found a competitor. If they do, aggressively retain likely followers. Don t treat everyone the same. Not all employees are important to retain. Founders, followers and employees pursuing traditional mobility have different motives and have different consequences on the organization.

29 Thank you! Questions? Examples? Counter-examples?

Designing and Leading the Entrepreneurial Organization. MIT Sloan School of Management

15.394 Designing and Leading the Entrepreneurial Organization MIT Sloan School of Management Agenda? Re Cap? Introduction to Employment Models Course Overview Leadership Setting Direction Building Organizational