- Insights into large-scale enterprises’ commitments to start-ups and young companies
- Results of the hkp/// group study "Pay for Pioneers 2020 – Organization & Compensation in Corporate Start-ups"
Frankfurt am Main, November 6, 2020. Start-ups are currently enjoying a very high level of public attention, especially if they have high market valuations. In many cases operating in the shadow of these independent start-ups, established or large-scale enterprises are themselves setting up their own businesses or have invested in young companies. hkp/// group, a management consulting firm, has analyesd the landscape of “corporate start-ups” in Germany in the Pay for Pioneers 2020 study that has now been submitted. It has particularly examined their organizational ties and compensation practices and identified key aspects for the success of these project.
Established start-up organizations – a fleet on choppy seas
51 large-scale corporations took part in the study. While around one fifth of the study’s participants have founded their own start-ups to date, just under one quarter are running between two and four start-ups, and more than half have between five and up to 20 relevant projects. 4% of the participants in the study have organizations with more than 20 young companies.
Among the study participants, more than half of which are listed, start-ups in the technology, automotive manufacturing and supply, IT and internet, and transport and logistics sectors are represented particularly well – a picture that the authors of the study believe underlines just how important start-ups are in sectors with traditionally high innovative power. At the same time, it is also an indication of which industries are undergoing profound changes.
With regard to the forms of organization, it is apparent that start-ups are linked to their parent company in various ways: through special organizational units, legally independent subsidiaries, or – especially in situations where there is a large number of start-ups – even through special incubators. However, independent subsidiaries dominate (85%), with about half of the participants in the study using more than one form of organization in parallel.
“The study participants represent a cross-section of the German economy. Their origin and the intensity of the identified activities underline the fact that corporate start-ups are long-established market practice, not a particular phenomenon within certain industries,” explained Petra Knab-Hägele, study leader and hkp/// group Senior Partner. “We often see the target vision of an agile fleet. Large-scale corporations as increasingly unwieldly tankers surround themselves with smaller support vessels and speedboats in the form of start-ups so they can use them to tap into new topics or business sectors, and ultimately profit from their agility and entrepreneurial spirit.”
Between collective bargaining and guaranteed rights of return – taking a look at the employees
Around one third of the study participants have start-ups with more than 50 employees. At 14 percent each, the number of employees even exceeds 100 and 250 respectively, why we would tend to speak of maturing young companies in these cases. Given these scales, and taking the young companies’ organizational ties into account too, the question of whether they are covered by collective bargaining agreements is not as distant as might be assumed. Although the vast majority of employees (77%) in the world of corporate start-ups are not covered by collective agreements, 8% of the participants in the study are. 15% of corporate start-ups are at least partially bound by collective bargaining law.
A similar anachronism against the backdrop of corporate start-ups’ goals are return guarantees for corporate employees who have been transferred to corporate start-ups. 33% of the start-up teams that took part in the study have such guarantees.
Focus on compensation – significant differences compared to independent start-ups
Compensation in independent start-ups is preceded by the reputation for offering little security but plenty of opportunity through variable compensation or equity participation. This picture is only partially confirmed by the current study for start-ups in the corporate environment. 59% of corporate start-ups, pay base salary at the same level as the parent company. The one-year variable compensation (annual bonus) is equivalent in around half of start-ups. 7% of corporate start-ups guarantee their employees minimum payouts in this respect.
Viktoria Jahn, author of the study and hkp/// group manager, also refers to the fact that bonus payments are capped in almost all cases. “Together with the realities regarding long-term compensation systems as well as risk and equity participation, when compared to independent start-ups, corporate start-ups have an reward-risk profile that is characterized by greater security and less risk – with the corresponding consequences in terms of attracting, retaining and motivating talented staff that is critical to success.”
If multi-year variable compensation is granted, it is higher than in the parent company in 90% of cases. However, guaranteed minimum payments are not provided for in this situation; 72% of corporate start-ups define payout caps. In 90% of corporate start-ups, multi-year variable compensation is paid in cash; payout in shares or equity is not common among the study participants, usual market practice whereas our market experience deviates at this point from the study's findings. 40% of corporate start-ups have not implemented long-term incentive plans.
Another 40% of corporate start-ups let their employees participate from the company's value. This participation is usually virtual. About one-third uses performance cash plans as long-term incentives - another holdover from the corporate world that we don't find in the independent startup environment.
Recommendations for corporate start-ups
The hkp/// group study illustrates whether and by which means established companies succeed in bringing the advantages of these young, dynamic organizations into the corporate world or profiting from these activities by founding or taking over their own start-ups, and by managing them in a targeted fashion. From the study authors’ point of view, while the companies have often taken the right path, they are frequently still too willing to compromise.
“Combining the best of both worlds is not the right way forward in this case. Corporate start-ups are successful when the entrepreneurial spirit typical for young companies is maintained including the corresponding degrees of freedom at the different levels,” explained Petra Knab-Hägele, hkp/// group’s compensation expert. The authors of the study take the stance that, while adherence to collective bargaining agreements, classical compensation practices or return guarantees are understandable, they counteracts the goals associated with the start-up project and make them more difficult to achieve.