TY - JOUR AU - Andersson,Fredrik AU - Freedman,Matthew AU - Haltiwanger,John C. AU - Lane,Julia AU - Shaw,Kathryn L. TI - Reaching for the Stars: Who Pays for Talent in Innovative Industries? JF - National Bureau of Economic Research Working Paper Series VL - No. 12435 PY - 2006 Y2 - August 2006 UR - http://www.nber.org/papers/w12435 L1 - http://www.nber.org/papers/w12435.pdf N1 - Author contact info: Fredrik Andersson Economics Department The Office of the Comptroller of the Currency 250 E Street, SW Washington, DC 20219 Tel: (202) 874-5089 Fax: (202) 874-5394 E-Mail: Fredrik.Andersson@occ.treas.gov Matthew Freedman Department of Economics Cornell University 262 Ives Faculty Building Ithaca, New York 14853 E-Mail: mf439@cornell.edu John C. Haltiwanger Department of Economics University of Maryland College Park, MD 20742 Tel: 301/405-3504 Fax: 301/405-3542 E-Mail: haltiwan@econ.umd.edu Julia Lane American Institutes of Research E-Mail: jlane@air.org Kathryn L. Shaw Graduate School of Business Stanford University Stanford, CA 94305-5015 Tel: 650/725-4168 Fax: 650/725-0468 E-Mail: kathryns@gsb.stanford.edu AB - Innovation in the U.S. economy is about employing and rewarding highly talented workers to produce new products. Using unique longitudinal matched employer-employee data, this paper makes a key connection between talent and firms in markets with risky product innovations. We show that software firms that operate in product markets with highly skewed returns to innovation, or high variance payoffs, are more likely to attract and pay for star workers. Thus, firms in high variance product markets pay more up-front—in starting salaries—to attract and motivate star employees, because if these star workers produce home-run innovations, the firm’s winnings will be huge. However, we also find these same firms pay highly for loyalty: star workers that stay with a firm have much higher earnings in firms with high variance product market payoffs. The large effects on earnings are robust to the inclusion of a wide range of controls for both workers and firm characteristics. One key control is that we also show that in firms that have actually hit home runs, with high revenues, the rewards for star talent are even greater. We also find that the dispersion of earnings is higher within firms with high variance product payoffs. ER -