My first employee: an empirical investigation

Small Business Economics, Jun 2016

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. Finally, we show that founders with a stronger profile in terms of education and previous income are more likely to increase profits, while the characteristics of the employee are less important. The latter finding is important from a job creation perspective, in light of the suggested sorting of more marginalized employees into new and established firms.

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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)


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Alex Coad, Kristian Nielsen, Bram Timmermans. My first employee: an empirical investigation, Small Business Economics, 2016, pp. 25-45, Volume 48, Issue 1, DOI: 10.1007/s11187-016-9748-3