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

50 Pages Posted: 16 Aug 2006 Last revised: 25 Jun 2010

See all articles by John Haltiwanger

John Haltiwanger

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

Fredrik Andersson

Office of the Comptroller of the Currency (OCC)

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: August 2006

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.

Suggested Citation

Haltiwanger, John C. and Andersson, Per Fredrik Daniel and Freedman, Matthew and Lane, Julia and Shaw, Kathryn L., Reaching for the Stars: Who Pays for Talent in Innovative Industries? (August 2006). NBER Working Paper No. w12435. Available at SSRN: https://ssrn.com/abstract=923793

John C. Haltiwanger (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3504 (Phone)
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National Bureau of Economic Research (NBER) ( email )

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

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Per Fredrik Daniel Andersson

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

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Matthew Freedman

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

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Irvine, CA 92697-5100
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Julia Lane

Wagner Graduate School of Public Service ( email )

The Puck Building
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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

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