When a firm goes public, which matters more for firm value: people or sales? In How Does Your Garden Grow? The Interface of Employee and Sales Growth Post IPO, published in Strategic Entrepreneurship Journal, Culverhouse’s Dr. Theresa Welbourne, along with collaborators Varkey Titus, Jr. (University of Nebraska-Lincoln), Jenna R. Pieper (University of Nebraska-Lincoln), and Matthew Josefy (Indiana University) survey a sample of 1,181 firms between 1996 and 2006 to understand the relationship between sales growth and employee growth, and how this relationship affects firm value in post-IPO companies. The authors consider three patterns of growth: congruent (employee growth and sales growth roughly match), employee-dominant (employee growth exceeds sales growth), and sales-dominant (sales growth exceeds employee growth).
Though common sense might suggest that a congruent pattern wherein employee growth matches sales growth would be most strongly related to firm value, the authors surprisingly find that an employee-dominant pattern of growth is most strongly associated with firm value post-IPO. This suggests that post-IPO, when critical decisions are being made about resource allocation, managers should ensure that infrastructure–which requires a forward-thinking HR and talent management strategy that outpaces sales. Otherwise, the result may be employee overwhelm or burnout, which is ultimately detrimental to profit.
The authors also argue that for firms with high research and development expenditures, this employee-dominant pattern provides the necessary workforce to flexibly respond to innovation. This principle also holds true in highly dynamic or frequently changing industries: An investment in people outweighs the cost, because it gives firms flexibility to meet new challenges.