Getting what you pay for

Observers of Silicon Valley have always assumed that the most successful companies get their competitive edge by paying their star employees more than the competition to fuel innovation. Now research, co-authored by Stanford professor Kathryn Shaw, and using the academic field of insider econometrics, has been able to prove that this assumption is indeed true. ??

“Reaching for the Stars: Who Pays for Talent in Innovative Industries?” is noteworthy for more than its insight into the software industry says Shaw, the Ernest C. Arbuckle Professor of Economics in the Stanford Graduate School of Business.

“It’s an example of how insider econometrics, the careful analysis of rich, new sources of data, combined with interviews of industry insiders, is leading to a much clearer understanding of the efficacy of management strategies in general, and human resources practices in particular,” she says.

The researchers concluded: “In short, our results are consistent with the view that innovative firms offer skilled individuals (“stars”) substantial sums of money up front because they bet in a high-stakes game of producing winning high-payoff products. The results are also consistent with the view that such firms reward loyalty with performance pay, which further increases the likelihood that they will win the high stakes product competition.”

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