Reaching for the Stars: Who Pays for Talent in Innovative Industries?

47 Pages Posted: 20 Jul 2006 Last revised: 20 Dec 2013

See all articles by Fredrik Andersson

Fredrik Andersson

Office of the Comptroller of the Currency (OCC)

John Haltiwanger

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Matthew Freedman

University of California, Irvine - Department of Economics

Julia Lane

Wagner Graduate School of Public Service; Institute for the Study of Labor (IZA)

Kathryn L. Shaw

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 7, 2007

Abstract

Firms that want to innovate successfully need to hire and motivate highly talented workers. This paper makes a key connection between the potential returns to innovation in terms of new products and the structure of compensation to skilled employees. We use linked employer-employee data to show that software firms that operate in software sectors with high potential upside gains to innovation (as in video games or Internet firms) pay more to 'star' workers than do other firms that operate in stable markets (like mainframe software). Firms operating in product domains with highly skewed positive returns are shown to pay employees more in up-front starting salaries and to offer much higher compensation growth. Thus, these firms appear to pay for initial skills and also to pay much more for effort and experience: star workers who stay with these firms are paid more than in other firms. The large effects on earnings are robust to the inclusion of a wide range of controls for both worker and firm characteristics. We also show that firms that have actually developed products with high revenues or that have hit "home runs" pays compensation that is even higher.

Keywords: Innovation, matched employer-employee data, performance pay, inequality

JEL Classification: J24, J31, L20, L86

Suggested Citation

Andersson, Per Fredrik Daniel and Haltiwanger, John C. and Freedman, Matthew and Lane, Julia and Shaw, Kathryn L., Reaching for the Stars: Who Pays for Talent in Innovative Industries? (November 7, 2007). Available at SSRN: https://ssrn.com/abstract=918000 or http://dx.doi.org/10.2139/ssrn.918000

Per Fredrik Daniel Andersson (Contact Author)

Office of the Comptroller of the Currency (OCC) ( email )

400 7th St. SW
Washington, DC 20219-0001
United States
202-649-5528 (Phone)
571-465-3246 (Fax)

John C. Haltiwanger

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3504 (Phone)
301-405-3542 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Matthew Freedman

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Julia Lane

Wagner Graduate School of Public Service ( email )

The Puck Building
295 Lafayette Street, Second Floor
New York, NY 10012
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org

Kathryn L. Shaw

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
158
rank
143,844
Abstract Views
1,411
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information