Who Leaves, Where To, and Why Worry
Entrepreneurial employees spur firms forward with innovation. But they can also
set firms back if they are entrepreneurial enough to leave and start their own competing
ventures. The lesson for managers: Keep your most entrepreneurial employees happy
to retain them and prevent big revenue losses.
New research from Rajshree Agarwal, chaired professor in entrepreneurship and
strategy, and co-authors Benjamin Campbell of Ohio State University, Martin Ganco
of the University of Minnesota and April Franco of the University of Toronto, looked
at the bargaining power of high-ability employees and the effect on firm performance
when those people leave to start competing ventures (spin-outs).
They found that a firm losing a top employee to another established firm did
not matter, but having that employee create a spin-out equated to a loss of more
than $1 million in revenues. The researchers looked at U.S. Census data for the
legal services industry, but their findings can be applied across various industries.
Their findings suggest that managers should focus on tailoring compensation packages
to incentivize entrepreneurial employees to stay at the firm.
“You want employees to be entrepreneurial, but you want their entrepreneurial
initiative to be harnessed within the firm,” Agarwal said.
Agarwal’s research supports a pay-for-performance strategy for firms.
“Managers cannot be thinking about blanket policies and one-size-fits all,” she
said. “Firms need to think about which top employees are most likely to leave and
focus on keeping them. This strategy may be more effective in increasing overall
retention, because it reduces the likelihood of team exodus when following the leader.”
The two biggest reasons that employees leave to start their own firms are to
make more money or to have more control. The way to retain superstar employees has
to be a combination of offering them high earnings and high autonomy.
So how do managers hang onto superstar employees, simultaneously warding off
the threat they pose as competitors?:
- Give employees freedom. Create opportunities and organizational support for
employees to be innovative.
- Pay well to make sure top employees don’t leave for more money elsewhere.
- Don’t treat everyone the same. Not all employees are important to retain. Structure
incentives, programs and autonomy based on individuals.
- Ensure loyalty to the firm, not the immediate team of individuals. To prevent
team exodus when the lead employee leaves, create stickiness of employees to the
firm itself, not just co-workers and immediate bosses.
On the flip side, for employees, the more entrepreneurial you are, the more leverage
Employees can increase their individual value by focusing not only on developing
their own skills and abilities, but also on creating synergies with the resources
provided by the firm. It turns out the most valuable employees are those most successful
at utilizing their firm’s resources, which the researchers call complementary assets
and define as other employees, clients, operational support, intellectual property,
Employees can leverage their entrepreneurial prowess as a bargaining chip:
- Pinpoint what makes you most successful. Determine how you can recreate that
success, and what complementary assets you will need to transfer and replicate if
- Build your internal network. Figure out which people you work best with.
- Negotiate the right way. Signal rather than tell the firm your ability to replicate
and transfer all the things you need for success. What won’t work: Telling your
boss “pay me more, or I’m leaving and taking these people with me.” What does work:
Making sure your boss is aware that you are a key person keeping together a very
valuable team, or are very connected both internally and externally.
- Focus on the value you add. Your best bargaining chip should be focused on
the value your firm will ultimately lose if you leave and take clients, potential
accounts, consumers, and other current employees with you.
Continuously improve. If you want to be a top-level employee, focus on continuously
upping the value you add.
“Who Leaves, Where to, and Why Worry?: Employee Mobility, Entrepreneurship and
Effects on Source Firm Performance,” will be published in Strategic Management Journal
in Winter 2012.