The size and scope of a benefits package can either boost or sink startup businesses. They key is the timing of when that package is offered, new research finds.
Startup businesses typically find increased success after offering improved benefits plans that include perks like stock options, cash bonuses and flex time. However, those companies that starting handing out such perks before reaching a certain level of financial viability are often forced out of businesses; the costs become so mounting that it significantly slows the companies' growth, according to a study set to be published in an upcoming issue of the Journal of Management.
"If you offer them too quickly, you're buried in the costs and you lose the competitive advantage that these enhanced benefits packages provide," Ernest O'Boyle, one of the study's authors and an assistant professor at the University of Iowa's Tippie College of Business, said in a statement. "If you start handing out stock options in year one, for instance, you're probably going to be hurting by year two."
For the study, researchers tracked what happened to more than 1,100 technology startups that went into business between 2004 and 2010. Researchers investigated what happened to these businesses after they started offering employees improved benefits packages. Specifically, the study's authors looked at four benefits not typically available to employees when a startup first launches, but which are often offered later: stock options, flex time, health insurance and cash bonuses.
The researchers discovered that the startups that offered better benefit plans at some point were more likely to survive long-term than those that didn't. This held especially true for startups that relied on funding from investors and capital markets and not on the owners' own financial resources or personal credit. [See Related Story: 12 Cool Job Benefits That Keep Employees Happy]
However, the researchers also found that startups that were just getting by and had yet to reach financial viability were more likely to fail, because the benefit costs were too much for those companies to withstand.
"For firms that are in the growth stage, benefits are like a life preserver," O'Boyle said. "For firms still in the viability stage, they're like an anvil."
While the timing of when companies reach financial stability varies, it was generally found to occur during the third year of existence, the research showed.
Since the study looked at only technology startups, the researchers said the results may not hold exactly true for other types of companies, such as restaurants or mom-and-pop businesses. However, O'Boyle said the results do show all entrepreneurs that human resources policies can be used strategically to gain a competitive advantage and help ensure long-term survival.
The study was co-authored by David DeGeest, a University of Iowa doctoral alumnus now teaching at the University of Groningen in the Netherlands, and current Iowa doctoral students Elizabeth Follmer and Sheryl Walter.