Breakfast Club

Who leaves, where to, and why worry?

Employee mobility, entrepreneurship, and effects on source firm performance

Benjamin CampbellAssistant ProfessorDepartment of Management and Human Resources

A bit about me…

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

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 firm2. Cannot demand higher or more equitable

wages3. Cannot reject the firm’s authority or be

unmotivated4. Need not be satisfied with supervision,

coworkers or advancement opportunities”

---Coff, 1997, p 374

What do employees take with them?

Not all turnover is the same…

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 replicate82 %

42% 36 % 45%

Complementary Assets

Manufacturing Distribution

Other Employees

Complementarytechnologies

Internal Processes

Client Relationships

Brand Name

Focal

Employee

Adapted from Teece, 1986

Supplier Relationships

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

Importance of firm’s complementary assets to value creation

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Technologically intensive manufacturing

Professional services

Adapted from Campbell, Ganco, Franco and Agarwal (2012)

Firm Advantage

Employee Advantage

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

The birth of Mickey Mouse…

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. – 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

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 employeesgreat leverage

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

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.

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Charter to Start-up Charter Job ChangeMatched Employee Job Change

Charter Employees and Matched Sample- Median EarningsJob Change to Start-up vs. All Other Job Changes

… 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)

How much does it matter?In the legal services sector, we estimate the following:

Pre-mobility earnings of employee:$25,000 $100,000 $300,000

Impa

cton

firm

re

venu

es if

: Employee goes to establishedfirm

Small positive effect!

No effect No effect

Employee goes to start-up

No effect $190,000 $1,000,000 !!

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

Compensation DispersionGreater pay dispersion, more extreme rewards

Less pay dispersion, fewer extreme rewards

Annual Wages

Pr(Wage Level)

• Greater pay dispersion concentrates the value created by the firm in the hands of fewer employees

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

Why does employee entrepreneurship hurt so much?

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 start-up

Is it about the person or the team?

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.

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.

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.

Thank you!

Questions?

Examples?

Counter-examples?