Despite earning roughly 20% less than their peers in large firms, many high-ability scientists and engineers choose to work in startups for the unique work settings and non-monetary benefits, such as autonomy and the chance to work on cutting-edge technologies. A new study shows that these preferences, combined with startups’ ability to “cherry-pick” top talent, mean that startup employees are, on average, of higher ability than those in established firms.
Startups are frequently advised to bring on board top-tier scientists and engineers to bolster their chances of successfully pioneering advanced technologies. Yet, one wonders, why would skilled professionals pass up positions at corporate giants like Amazon and Google to choose less stable startups with potentially lower compensation? A rising tide of research in the entrepreneurial sector confirms that startup employees typically have a lighter paycheck compared to their counterparts in larger, more established organizations. This has led some to speculate that startups might struggle to attract high-caliber talent.
However, a study recently published in Management Science by Michael Roach, an associate professor at the Gies College of Business, University of Illinois at Urbana-Champaign, and Henry Sauermann, a professor of strategy and the academic director at the Vali Entrepreneurship Hub of ESMT Berlin, indicates that many top-tier professionals are enticed by startups due to non-financial incentives, even when this comes with a smaller salary.
“A key insight from our research is that many high-ability scientists and engineers choose jobs in early-stage startups over large tech companies due to specific career preferences that align better with the unique work setting offered in startups,” says Michael Roach. “Many of these individuals are interested in being startup employees rather than founders, which differs from the popular notion that it is primarily aspiring entrepreneurs who choose to work in startups.” At the same time, Roach notes that aspiring founders are also more likely to work in startups, often to gain experience that will help them to become better entrepreneurs in the future.
Using survey data that followed a cohort of more than 2,000 science and engineering PhDs for nearly a decade, the researchers measured respondents’ career preferences while in graduate school and related them to the Ph.D. graduates’ first-time industry jobs in startups or established firms. This comprehensive approach allowed the researchers to capture a nuanced picture of the factors influencing job choice among high-ability scientists and engineers.
“High-ability graduates in startups earn roughly 20% lower pay than their peers in established firms,” adds Henry Sauermann. “This suggests that for these individuals, the non-financial benefits of startup employment outweigh the lower levels of pay and resources compared to established firm employment.”
More detailed data on the underlying reasons suggests that startup joiners highly value factors such as autonomy and opportunities to work on cutting-edge technologies. By analyzing both job applications and job offers, the researchers also found that a large pool of individuals attracted to working at startups enables startups to “cherry-pick” the most talented applicants. As a result, startup employees are on average of higher ability than established firm employees, as measured using the Ph.D. program ranking.
Roach and Sauermann’s research provides valuable insights for founders, managers, and policymakers. It suggests that early-stage technology startups can overcome the challenges of attracting and retaining human capital by appealing to individuals who have a strong preference for working in an entrepreneurial environment.
“Although these individuals appear willing to ‘pay’ to work in startups, this does not necessarily come ‘free’ to their employers. Rather, some of the features that attract workers to startups – such as autonomy – may need to be managed carefully and may involve costs of their own,” the authors caution.
For Ph.D. scientists considering their career paths, the study offers a fresh perspective. It suggests that those who are attracted to the dynamic and innovative environment of startups may have to accept lower pay and higher risks but may end up having a more satisfying job. Still, the authors advise job seekers to consider carefully what each type of job entails, rather than relying on assumptions and stereotypes. They recommend not only using comparison data on things such as pay but also qualitative insights from current employees and those who left the company to go elsewhere.
The study also has implications for the broader technology sector and the economy. By demonstrating that startups can attract high-ability human capital, it underscores the potential of startups to drive innovation and economic growth. The findings also highlight the benefits of fostering an entrepreneurial culture and environment in established firms to attract and retain top talent.
Reference: “Can Technology Startups Hire Talented Early Employees? Ability, Preferences, and Employee First Job” by Michael Roach and Henry Sauermann, 8 August 2023, Management Science.
DOI: 10.1287/mnsc.2023.4868
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