A new study from the University of Iowa finds startup companies typically see significant growth once they’ve begun offering a beefed-up benefits package to their employees.
But the study found it’s all a matter of timing—if the entrepreneur offers an improved benefits package before the firm has achieved a certain level of financial viability, the costs can be so overwhelming that growth slows, and the company may even be forced out of business.
“If you offer them too quickly, you’re buried in the costs and you lose the competitive advantage that these enhanced benefits packages provide,” says Ernest O’Boyle, assistant professor of management and organizations in the Tippie College of Business. “If you start handing out stock options in year one, for instance, you’re probably going to be hurting by year two.”
The study looked at more than 1,100 technology startups that went into business between 2004 and 2010 and tracked what happened to those firms after they started offering employees an improved benefits package. O’Boyle and his team looked at four benefits not normally offered to employees when a firm first goes into business but which are often offered later: stock options, flex time, health insurance, and cash bonuses.
The results showed that startups were more likely to survive long-term when they offered an improved benefits package than those that did not. The study also found that firms in strong financial condition—that is, ones that relied on vetted funding from investors and capital markets and not on the owners’ own financial resources or personal credit—saw the strongest continued growth after offering an improved benefits package. O’Boyle says the effect is the result not only of a more highly motivated workforce but also because the improved benefits are a sign that the company has grown so strong it has access to the capital needed to pay for the benefits.
But the study found that firms still in the viability stage, or “just keeping their head above water,” as O’Boyle says, had an increased likelihood of failure because the costs were too much.
“For firms that are in the growth stage, benefits are like a life preserver,” he says. “For firms still in the viability stage, they’re like an anvil.”
The timing of when startups transition from the viability to the growth stage differs business to business, O’Boyle says, but with the firms in the database the researchers studied, the best time to expand the benefits was typically in the third year.
O’Boyle cautions his study looked only at technology startups and so the findings will likely not fully apply to a local restaurant or a mom-and-pop shop. Nevertheless, he says the findings show that entrepreneurs can use HR policy strategically to help their firm accelerate growth and give them a competitive advantage that ensures long-term survival.
He adds that the study is also one of only a few of its type because entrepreneurialism is still a growing field for scholars. Most researchers have tended to focus on large enterprises, but he says this doesn’t help entrepreneurs much “because what works for IBM isn’t going to work for a small startup.”
But more and more scholars have in recent years been studying how startups succeed—and, just as importantly, how they fail—and O’Boyle expects that more data in the future will provide researchers with a better understanding of entrepreneurialism and show entrepreneurs how to build successful firms.
The study, “The Benefit of Benefits: A Dynamic Approach to Motivation-Enhancing Human Resource Practices and Entrepreneurial Survival,” will be published in a forthcoming issue of the Journal of Management. It was co-authored by David S. DeGeest, a University of Iowa doctoral alumnus now teaching at the University of Groningen in the Netherlands, and current Tippie doctoral students Elizabeth H. Follmer and Sheryl L. Walter.