My first employee: an empirical investigation
Small Bus Econ
My first employee: an empirical investigation
Alex Coad . Kristian Nielsen . Bram Timmermans 0 1 2 3 4
0 B. Timmermans Department of Strategy and Management, Norwegian School of Economics , Helleveien 30, 5045 Bergen , Norway
1 B. Timmermans Agderforskning , Kristiansand , Norway
2 A. Coad University of Sussex , Falmer , UK
3 K. Nielsen B. Timmermans Aalborg University , Aalborg , Denmark
4 A. Coad (&) Knowledge for Growth Unit, Institute for Prospective Technological Studies (IPTS), European Commission, Joint Research Centre (JRC) , Edificio Expo. C/Inca Garcilaso 3, 41092 Seville , Spain
The challenge for solo entrepreneurs to add their first employee is arguably the single biggest growth event facing any growing firm. To understand how this event affects performance, and the antecedents of hiring, we analyse Danish matched employer-employee data. Those who hire enjoy superior sales outcomes in subsequent years, while the dispersion in profits increases. Furthermore, those that hire enjoy faster sales growth in the previous year, suggesting that sales growth precedes the first hire. Supporting data are available to bona fide researchers, subject to registration, from Statistics Denmark, at www.dst.dk/en.
Solo entrepreneurs; Recruitment; Firm growth; Post-entry growth; Scale-up; Employment growth; Sales growth; Founders; New firm growth
Mark Nickel, founder of Sampler Publications,
did everything himself for a year. Then he hired
the sister of a friend who lived across the street.
Her husband had just left her, and she needed to
support her kids. His second employee was ‘‘a
suicidal alcoholic neighbor. I thought I’d
rehabilitate her. When she sobered up, I’d let her come
over and type names.’’ The third employee was a
friend of the second employee. Bhide (2000: 87)
1 Introduction
The first hire constitutes the single biggest growth event
facing any growing firm—it effectively corresponds to
the challenge to solo entrepreneurs to double their
workforce. A recent article entitled ‘‘Can you afford an
employee’’ from the Danish magazine ‘‘The
Entrepreneur’’ estimates that the total cost of the first
employee is 135 % of the wage paid because of expenses
related to payroll system, additional equipment,
insurance, social security contributions, additional
administration cost, etc., without even taking into account the
opportunity cost of the entrepreneur training the first
employee
(Sand and Paaske 2010)
. However, these costs
and challenges decrease with additional employees
hired. Continuing in the Danish context, only around
one-third of the new ventures registered in 2013 had
employees. In addition, if all 153,364 firms without
employees in 2013 took on one additional employee, this
would solve the unemployment problem (153,110
individuals were registered as full-time unemployed in
2013). Although this statement is rather simplistic as not
all unemployed are employable and there may be
insufficient demand for firms’ output, it remains that
self-employed individuals have considerable
job-creating potential. Also, once they overcome the hurdle of
recruitment and selection, subsequent growth will be
easier, and they will develop a taste for further growth
(Delmar and Wiklund 2008)
. Besides performance
effects, empirical research has also identified well-being
effects for entrepreneurs associated with recruitment, as
the life satisfaction of self-employed with employees is
found to be higher than those who are self-employed
without employees
(Blanchflower 2004)
. Nevertheless,
solo entrepreneurs who seek to take on their first
employee also face great uncertainty as well as the
daunting prospect of trusting someone else with their
‘‘baby’’
(Gartner 1997)
. Furthermore, it is possible that
solo entrepreneurs underestimate the relative abilities of
candidate employees, by overestimating their own (a
phenomenon known as ‘‘illusory superiority’’),1 and for
1 Theoretical work in social psychology has identified the
phenomenon of ‘‘illusory superiority’’, which proposes that
individuals display systematic cognitive biases in the sense of
being overconfident about their abilities when comparing
themselves with others
(Camerer and Lovallo 1999)
. One
classic example is a nationwide survey of high school students,
where 85 % reported they were above the average in ability to
get along with others [College Board 1976–1977, cited in
Krizan
and Suls (2008)
]. The social psychology literature has provided
plenty of empirical support for illusory superiority
(e.g. Hoorens
1993)
. The flip-side of this cognitive bias is that individuals may
wrongly consider the abilities of others to be lower than average.
This makes them underestimate the gains to hiring a new
employee. Although the benefits of hiring of a first employee
may be systematically underestimated, our results may help to
correct for this systematic cognitive bias, if we can demonstrate
that those solo self-employed that take on (...truncated)