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

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  • Fredrik Andersson
  • Matthew Freedman
  • John Haltiwanger
  • Julia Lane
  • Kathryn Shaw

Abstract

Innovative firms need to hire and motivate highly talented workers. This article connects the potential returns to innovation to the structure of compensation for skilled employees. We show that the software firms that operate in software sectors with high potential upside gains to innovation pay more to ‘star’ workers than do other firms that operate in stable markets. Firms operating in product domains with highly skewed positive returns pay employees more in up‐front starting salaries and offer higher compensation growth. The large estimated effects on earnings are robust to the inclusion of a wide range of controls for worker and firm characteristics.

Suggested Citation

  • Fredrik Andersson & Matthew Freedman & John Haltiwanger & Julia Lane & Kathryn Shaw, 2009. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," Economic Journal, Royal Economic Society, vol. 119(538), pages 308-332, June.
    • Handle: RePEc:wly:econjl:v:119:y:2009:i:538:p:f308-f332
    DOI: 10.1111/j.1468-0297.2009.02277.x
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    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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