Let them go? How losing employees to competitors can enhance firm status

• Author: Christopher I. Rider,David Tan
• Published date: 01 September 2017
• Date: 01 September 2017
• DOI: http://doi.org/10.1002/smj.2630

Strategic Management Journal

Strat. Mgmt. J.,38: 1848–1874 (2017)

Published online EarlyView 7 February 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2630

Received 25 September 2015;Final revision received2 December 2016

LET THEM GO? HOW LOSING EMPLOYEES

TO COMPETITORS CAN ENHANCE FIRM STATUS

DAVID TAN1*and CHRISTOPHER I. RIDER2

1Foster School of Business, University of Washington, Seattle, Washington, U.S.A.

2McDonough School of Business, Georgetown University, Washington, District of

Columbia, U.S.A.

Research summary: Because employees can provide a rm with human capital advantages over

competitors, rms invest considerably in employee recruiting and retention. Departing from the

retention imperative of strategic human capital management, we propose that certain employee

departures can enhance a rm’s competitiveness in the labor market. Specically, increased rates

of career-advancing departures by a rm’s employees can signal to potential future employees

that the rm offers a prestigious employment experience that enhances external mobility oppor-

tunities. Characterizing advancement based on subsequent employers and positions, we analyze

data on U.S. law rm hiring and industry surveys of perceivedrm status between 2004 and 2013.

We nd that increased rates of employee departures lead to increases in a rm’s prestige when

these departures are for promotionswith high-status competitors.

Managerial summary: Firms often emphasize employee retention. Employee departures, espe-

cially as a result of being hired away by competitors, are often viewed as threats to a rm’s

competitive advantage.We propose, however, that employee retention need not be an unconditional

strategic imperative. We argue that certain employee departures can enhance a rm’s competi-

tiveness in the market for human capital by signaling to potential employees that the rm offers

a prestigious employment experience, which can help them obtain attractive positions with other

employers. Analyzing data on U.S. law rm hiring and industry surveys of rm associates between

2004 and 2013, we nd that increased rates of employee departures lead to increases in a rm’s

prestige when these departures are for promotions with high-status competitors. Copyright ©

2016 John Wiley & Sons, Ltd.

INTRODUCTION

In many industries, human capital is an important

basis for competitive advantage. Yet, such advan-

tages are tenuous because employees can depart to

work elsewhere (Coff, 1997; Karim and Williams,

2012). Firms consequently compete intensely to

hire and retain personnel. Hiring a competitor’s

employees can help rms develop new products

Keywords: employee mobility; rm status; labor market;

human capital; hiring

*Correspondence to: David Tan, Foster School of Busi-

ness, University of Washington, PACCAR Hall, Box 353226,

4277 NE Stevens Way, Seattle, WA 98195, U.S.A. E-mail:

davidtan@uw.edu

Copyright © 2016 John Wiley & Sons, Ltd.

(e.g., Boeker, 1997; Rao and Drazin, 2002),

access technical knowledge (e.g., Rosenkopf and

Almeida, 2003), form relationships (e.g., Dokko

and Rosenkopf, 2010), and expand geographic

scope (e.g., Song, Almeida, and Wu, 2003).

Conversely, losing employees to competitors

can diminish service quality (e.g., Hausknecht,

Trevor, and Howard, 2009), lead to a loss of client

business (e.g., Batt, 2002; Broschak, 2004; Rogan,

2014; Somaya, Williamson, and Lorinkova, 2008),

encourage “talent wars” (e.g., Gardner, 2002,

2005; Somaya and Williamson, 2008), disrupt

intrarm coordination (Briscoe and Rogan, 2016),

increase rm failure risks (e.g., Phillips, 2002;

Wezel, Cattani, and Pennings, 2006), increase

How Losing Employees to Competitors Can Enhance Firm Status 1849

recruiting and training costs, and signal to potential

employees that the rm is not a good employer

(e.g., Backes-Gellner and Tuor, 2010).

Given these negative consequences of losing

human capital, rms invest considerable resources

in retaining employees (e.g., Agarwal, Ganco, and

Ziedonis, 2009; Campbell, Coff, and Kryscynski,

2012; Carnahan, Agarwal, and Campbell, 2012;

Marx, 2011). Such investments reect two implicit

imperatives of strategic human capital manage-

ment: attract individuals who are likely to stay

(e.g., Rynes, 1991), and discourage turnover (e.g.,

McEvoy and Cascio, 1985). Together, these two

strategic imperatives suggest that it is disadvanta-

geous for rms to become employee waypoints that

serve as training grounds for rivals.

Against the backdrop of these strategic imper-

atives, some recent work has raised the provoca-

tive question of whether employee departures are

necessarily entirely detrimental for rms. Evidence

from knowledge-intensive industries suggests, for

example, that while employee departures repre-

sent human capital losses, they can also result in

the inow of new ideas. When employee depar-

tures force rms to hire replacements, this can help

refresh the talent pool with new areas of exper-

tise (McKendrick, Wade, and Jaffee, 2009). Depar-

tures can also provide rms with access to new

technical knowledge or new business opportuni-

ties via relationships that departed employees main-

tain with former colleagues (e.g., Carnahan and

Somaya, 2013; Corredoira and Rosenkopf, 2010;

Somaya et al., 2008). This work highlights how

individuals’ interrm employment transitions are

not necessarily one-way outows of human capital;

a rm’s human capital losses might be, at least par-

tially, offset by the inow of other kinds of assets.

Departing even more dramatically from the pre-

vailing retention imperative of strategic human cap-

ital management, we argue that losing employees

to rivals can actually enhance a rm’s competi-

tive position in the labor market. Depending on the

kinds of rivals and positions that a rm’s employ-

ees have departed to, increased rates of depar-

ture can potentially enhance a rm’s appeal to

potential future employees by indicating external

mobility opportunities that open up as a result of

working for the rm. Our argument draws inspi-

ration from the literature on interorganizational

careers, which documents how individuals’ career

paths are becoming less likely to progress from

job to job within a rm’s internal labor market

and more likely to progress through employment

spells at different rms (Arthur and Rousseau,

1996; Cappelli, 1999). Individuals accordingly rec-

ognize the likelihood of changing employers dur-

ing their careers and increasingly favor jobs that

provide future external mobility opportunities for

career advancement (e.g., Bidwell and Briscoe,

2010; Bidwell et al., 2015; Dokko, Wilk, and Roth-

bard, 2009; Groysberg and Lee, 2009; O’Mahony

and Bechky, 2006; Williams, Agarwal, and Chen,

2013). This literature yields the insight that rms

are more and more likely to appeal to prospec-

tive employees— especially those at early career

stages— not only because of perceived internal

opportunities to stay but because of perceived exter-

nal opportunities to leave. For example, research

suggests that rms whose employees leave to start

successful ventures become known as attractive

stepping stones for would-be entrepreneurs (Bur-

ton, Sørensen, and Beckman, 2002; McKendrick,

Wade, and Jaffee, 2009).

Integrating research on strategic human capital

management with organization theory, we theo-

rize that under certain conditions, increased rates

of employee departures may cast a rm in a

more positive— rather than a negative— light in

the eyes of potential future employees. By observ-

ing employees move from a focal rm to other

employers, potential employees can infer possible

mobility opportunities for the rm’s employees.

We posit that when these moves are more salient

and more clearly indicative of career advancement,

increased rm-level departure rates will enhance

potential employees’ perceptions of the focal rm

as an employer. Specically, we expect that the

rm’s perceived status among potential employees

will be enhanced. Increased rates of departures that

are either less salient or less clearly indicative of

career advancement are not expected to be similarly

status-enhancing.

We test these predictions using data on employee

departures to competitors and survey mea-

sures of perceived employer status for the 200

highest-grossing U.S. law rms between 2004 and

2013 (i.e., the Am Law 200). Several features of

our empirical design lend face validity to our test

of the hypothesized mechanism linking departures

to rm-level perceptions among potential employ-

ees. First, we analyze survey data that directly

measure individuals’ perceptions of a rm’s status

as an employer. The survey questionnaire asks

individuals who are not afliated with the rm to

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1848–1874 (2017)

DOI: 10.1002/smj