Employee equity, incentive compensation, and growth in entrepreneurial firms

Abstract

We examined the relationship between employee equity compensation, incentive compensation, and firm growth using a sample of 480 privately held firms from the Ewing Marion Kauffman Foundation’s database of Ernst & Young Entrepreneur Of The Year (EOY) winners. Using frameworks from agency and motivation theories, we argued that larger percentages of both equity- and incentivebased compensation allocated to top managers and employees would be associated with firm growth. After controlling for firm and industry effects, the results of the study showed that while the firms in the sample preferred providing incentive compensation, providing equity compensation for employees was a positively significant predictor of firm growth over a three-year period. These findings suggest that prescriptions for growth in larger firms developed from agency theory also may be applicable to entrepreneurial firms, and founder/CEOs seeking to grow their firms should consider using equity compensation to motivate their current employees and to attract new ones.