Journal of Small Business Management 2015 53(1), pp.

3753
doi: 10.1111/jsbm.12066

Identifying and Differentiating Key Employees from

Owners and Other Employees in SMEs
by Francine Schlosser

This research examines how to identify and differentiate key employees from small and
medium-sized enterprises (SME) owners and other employees and how their characteristics influence firm success factors. Interviews are conducted with 14 matched pairs of entrepreneurs and
key employees operating Canadian SMEs. The study develops a profile whereby the key employee
typically (1) corresponds to the key success factors of the SME, (2) is willing to undertake a
moderate amount of risk, and (3) differs in education and experience from the entrepreneur/
owner. Although employees are important to firm strategy and culture, this is one of the first to
examine key employees in small business.

Introduction
On average in 2007, just over 5.1 million
employees on payroll, or 48 percent of the total
private sector labor force worked for small and
medium-sized enterprises (SMEs; SMEs with
fewer than 100 employees), constituting 98
percent of all businesses in Canada (Industry
Canada 2009). Most owners of SMEs have effective employees that they trust more than others
and that become key employees over time.
However, very little has been written or
researched on those important actors in the
context of SMEs. Employees are an important
part of strategy implementation and indeed
reflect firm culture, but to date, little research
has examined the phenomena of key employees critical to small business success. In this
research, a key employee is defined as an
employee that an owner (1) believes is the most
effective, (2) relies upon and trusts to get the
job done, and (3) whose work is perceived by

the entrepreneur to contribute the most to the

success of the venture.
Although human capital is an important indicator of organizational success (Altinay,
Altinay, and Gannon 2008; Manigart et al.
2007), there is mounting evidence that small
firms manage human resources (HRs) quite differently than larger firms and that young firms
manage differently than small firms (Cardon
and Stevens 2004; Hmieleski and Ensley 2007).
Despite this evidence, much entrepreneurial
research focuses upon firms and top management teams that target high growth and that
quickly leave small business status behind (i.e.,
Ensley, Pearson, and Pearce 2003). Yet SMEs
(firms with fewer than 500 employees) represent a significant 90 percent of total employment in the United States (US Census Bureau
2002).
Heneman, Tansky, and Camp (2000) concluded that the topic of staffing was less
emphasized in the research literature than it

Francine Schlosser, Ph.D., is Associate Professor, Management at the Odette School of Business, University
of Windsor.
Address correspondence to: Francine Schlosser, Odette School of Business, University of Windsor,
Windsor, ON N9B 3P4. E-mail: fschloss@uwindsor.ca.

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37

was by actual entrepreneurs. Although employees are an important part of strategy implementation and a reflection of firm culture, there is
scant research on key employees who do not
hold an ownership stake in small businesses. In
a rare study of SMEs, Kemelgor and Meek
(2008) concluded that offering employees
freedom, flexibility, growth, opportunities, and
clarity and communication of HR policies
decreases employee turnover. However, such
researchers have not distinguished between
key employees and other employees who are
not as effective.
This is an important oversight because
SMEs are faced with greater challenges than
larger organizations in retaining and attracting
key employees (Thatcher 1996). One explanation is that SMEs lack internal promotion
opportunities and may be more likely to lay
off or lose employees to competitors in times
of a volatile external markets. Small firms are
often faced with more competition for human
capital (Marchington, Carroll, and Boxall
2003), have less access to a quality labor pool
(Hornsby and Kuratko 1990), and experience
greater rates of failure (i.e., Strotmann 2007)
than larger firms. These challenges are exacerbated by the lack of advancement in the
sophistication of HR practices in SMEs over
the past 10 years (Hornsby and Kuratko 2003).
Recent research on key employee mobility has
highlighted that competitive advantage gained
through advantageous routines is lost when a
key employee leaves, even though the routines themselves may remain in the firm (Aime
et al. 2010).
Human resource management (HRM) has
generally been considered a large firm phenomenon because small organizations usually
require flexibility in role descriptions (Katz
et al. 2000). Small firms depend upon the
owners labor market contacts and the presence of long-term reliable employees for firm
survival (Marchington, Carroll, and Boxall
2003) but may not require progression to
more formalized policies because they do not
necessarily need to grow as they age. They
may choose to rely upon more informal and
emergent HR management practices to choose
the right employees (Harney and Dundon
2006). Researchers who have considered HRM
in business start-ups have described developmental and evolutionary models (Aldrich and
von Glinow 1991) that prescribe changes to
HR management as the small business grows,

38

often formalizing HR practices (Kidwell and

Fish 2007).
Extant literature considers and defines concepts such as HRs and human capital but
appears to overlook the existence of certain
employees who are perceived by small business owners to be key to the effective management of their businesses. Consequently,
the purpose of this research is to understand
how to identify and differentiate key effective
employees from SME owner entrepreneurs
and other employees, and how this relates to
firm key success factors. Building upon a
review of the current literature relating to
human capital in SMEs, I explore the gap
in the literature surrounding key employees through semistructured interviews with
14 matched sets of entrepreneurs and key
employees operating SMEs in central Canada.
I contribute to new knowledge by exploring
the perceptions of owners and key employees
in SMEs.
Additionally, this research considers the
views of both founders and employees with
respect to the attitudes and behaviors of effective entrepreneurs and employees. This
complements other qualitative research on
entrepreneurial
characteristics
(Barringer,
Jones, and Neubaum 2005). In contrast with
recent attention paid to high tech and financial services industries, I investigate the profiles of key employees across SMEs in diverse
industries with differing dynamics and
resource availability. Recent research has indicated that there are industry differences in
entrepreneurial orientation (i.e., Wiklund and
Shepherd 2005). My research investigates
small businesses operating in different areas
of the economy and contributes to knowledge
of all individuals that shape the entrepreneurial orientation necessary for competitive
advantage.
The paper begins by discussing previous
literature on key employees, entrepreneurial
founders, and founding team. A recent study
found that most SMEs are managed by entrepreneurial or management teams (Tihula,
Huovinen, and Fink 2009); hence, I consider
the implications of this literature for the study
of key employees. Then, the results of my
qualitative study examining characteristics of
key employees are compared and contrasted
with the characteristics of entrepreneurs and
other employees. Implications for practice and
future study are discussed.

JOURNAL OF SMALL BUSINESS MANAGEMENT

Literature Review
Key Employees in Entrepreneurial SMEs
Entrepreneurship may include, but does not
require, the creation of a new organization (i.e.,
Amit and Schoemaker 1993; Casson 1982;
Erikson 2001; Shane and Venkataraman 2000).
There are key HRs required as new organizations develop, including entrepreneurial founders or founding teams, and their key employees.
Key employees are those whom owners are
comfortable relying upon, not necessarily
employees who are liked the most, but certainly ones propensity for risk-taking the owners
believe to be most effective and trust to get the
job done. These effective employees are key
individuals who choose to work in a small
business with an entrepreneurial owner. It is
possible that they may even follow the owner
from business to business, providing a base of
organizational learning, although usually not
playing a founding role in the business. They
represent a key source of human capital upon
which the owner relies. A definition of key
employees must consider the length of time the
owner and employee have worked together,
because trusting relationships develop over time
through a process of reciprocity and social
exchange (Blau 1964). McGrath, MacMillan, and
Venkataraman (1995) determined that an important predictor of advantage is how well entrepreneurs can minimize nonfinancial costs like
the need to spend time developing relationships
in a new venture, role confusion in a new
venture, and the lack of history that shapes
trust in each other.
Only recently have researchers examined
and defined key employees, for example
although Aime et al. (2010) do not specifically
define key employee, they select their sample
of key hires based on a knowledge of advantageous routines in the firm. Cosack,
Guthridge, and Lawson (2010) define key
employees in two ways: (1) the visible ones,
that is the high-potential employees and senior
executives in roles that are critical for business
success, and (2) hidden gems, more average
performers whose skills or social networks may
be critical. However, as neither of these definitions gives us much insight into the characteristics of key employees, such a gap warrants
more exploration, and consequently, this study
will explore characteristics of key employees.
In terms of key employee emergence, other
theories contribute to understanding of the

entrepreneurs identification of and relationship with key employees. For example, the
Pygmalion effect (Eden 1992) and other theories describing in-groups and out-groups
describe how leaders initial impressions of
their employees may lead to preferential treatment and grooming. Additionally, previous
entrepreneurship researchers have identified
several characteristics related to entrepreneurial founders or team, such as proactiveness,
propensity for risk-taking, innovativeness
(Cauthorn 1989), cognitive style (Mitchell et al.
2002), education (Ucsbasaran, Westhead and
Wright 2008), and achievement (Collins,
Hanges, and Locke 2004). These characteristics
may inform understanding of key employee
characteristics and behaviors.

Entrepreneurial Founders
Entrepreneurially
oriented
individuals
embody traits such as propensity for risk-taking,
proactiveness, and innovativeness (Cauthorn
1989). Lumpkin and Dess (2001) explained propensity for risk-taking as characterized by
making bold moves to enter emerging markets,
making significant investments, or taking out
large loans under uncertain conditions;
proactiveness as involving emerging opportunities and being the first to enter markets or
produce products; and innovativeness as
promoting creativity and experimentation
with respect to organizational products and
processes.
Building on Cantillons inclusion of risk in the
18th century, there has been a substantial debate
in the literature about whether entrepreneurs
consider risk differently than nonentrepreneurs.
Given an entrepreneurial context of uncertainty
and decision-making, researchers have suggested self-selection into an entrepreneurial
career underlines a different type of personality
needed to cope in this context (i.e., Stewart et al.
1999). A meta-analysis of entrepreneurial risk
taking highlighted significant differences
between high growth-oriented SME owners and
managers, and to a lesser degree, between
income-oriented SME owners and managers
(Stewart and Roth 2001).
Proactiveness, or the willingness to act on
opportunities, is fundamental to entrepreneurship (i.e., Miller 1983). The longer an entrepreneur is with an organization, the more likely
he/she will strike out in a new venture and may
even close a successful business because of a
new opportunity (Dobrev and Barnett 2005). In

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39

contrast, the longer employees work for an

organization, the less likely the employees to
strike out on their own. Dobrev and Barnett
also found that a variety in jobs or businesses
increased the likelihood that a founder or
employee would find a new venture.
A recent meta-analysis of entrepreneurial
achievement found significant differences in
the achievement motivation of entrepreneurs
and managers, and this may indicate that fear
of failure and a high need for achievement are
as much a differentiating factor as actual risk
taking (Stewart and Roth 2007). On a similar
tack, other researchers have noted that entrepreneurs are more likely to frame their regret in
missed opportunities rather than regret of mistakes they made (Markman, Balkin, and Baron
2002). Indeed, alternative opportunities have
been identified as a key reason for entrepreneurs choosing to discontinue successful firms
(Bates 2005).
Finally, SMEs with an entrepreneurial orientation are led by founders who value and build
an innovative strategy. Seminal entrepreneurship researchers, Miller and Friesen (1982),
found that the determinants of product innovation in firms are to a very great extent a function of the strategy that is being pursued. My
research will contemplate how key employees
compare and contrast with such entrepreneurial traits.
An entrepreneur can be defined by personality, position, or behavior. Business people are
more likely to define entrepreneur as someone
who has founded, run, or owned a small business, whereas most researchers will focus on
entrepreneurial behaviors or thinking (Verheul,
Uhlaner, and Thurik 2005). For example,
Herron and Robinson (1993) conceptualized
interactive effects between personality traits,
entrepreneurial management abilities, and
motivation on new venture performance. Similarly, Baron (1998) proposed that there are not
really personality differences between entrepreneurs and other people, but there are cognitive differences. Entrepreneurial cognition is
defined as the knowledge structures that
people use to make assessments, judgments or
decisions involving opportunity evaluation,
venture creation, and growth (Mitchell et al.
2002, p. 97). Researchers of entrepreneurial
cognition have concluded that entrepreneurs
do not respond as much to new information/
market signals as to their own prior beliefs
(they use biases and heuristics to make deci-

40

sions) (Parker 2006). They are more likely to

use heuristics than are managers in large corporations (Busenitz and Barney 1997). Building
on this research on the cognitive style of
entrepreneneurs, I consider how key employees may exhibit similar cognitive styles.
There are some demographic differences
between
successful
entrepreneurs
and
nonentrepreneurs. High-growth firms have
founders who are better educated, have a stronger entrepreneurial story, and have prior industry experience (Barringer, Jones, and Neubaum
2005). Entrepreneurs have a higher return on
education than do managers (Van der Sluis, van
Praag, and Vijverberg 2008), probably because
entrepreneurs retain the full value of their educational investment and consequent human
capital (Becker 1993). Researchers have found
that measures of human capital (related
to industry specific know-how) and initial
financial capital influenced both survival and
growth (Cooper and Gimeno-Gascon 1994).
Ucsbasaran, Westhead, and Wright (2008)
found that entrepreneurs reporting higher
levels of education reported a higher probability of identifying more opportunities. Accordingly, perhaps this research will uncover
differences in the human capital of entrepreneurial owners and key employees.
A strong entrepreneurial motivation or story
also characterizes the founders of rapid growth
firms (Barringer, Jones, and Neubaum 2005). A
recent study conducted by Collins, Hanges, and
Locke (2004) identified the need for achievement (N Ach) as a strong differentiator between
a firm founder and nonmanagerial employees (mean r = 0.39) but not as a strong
differentiator between firm founders and managers (mean r = 0.14). Accordingly, achievement motivation was found to significantly
correlate with entrepreneurial career choice
(founding a company) and entrepreneurial performance (Collins, Hanges, and Locke 2004).
Entrepreneurs believe in their own abilities, are
tolerant of ambiguity, and set goals (Shane,
Locke, and Collins 2003). The entrepreneurial
motivation needed to grow a venture is task
focused and involves a desire to achieve on
ones own, to avoid risk, to seek feedback, to
introduce innovative solutions, and to plan
(Miner 1990). The current study will consider
whether differences in the need for achievement between key employees and owners and
other employees may help to explain the existence of key employees.

JOURNAL OF SMALL BUSINESS MANAGEMENT

Entrepreneurship Found in
Entrepreneurial Teams
The research on entrepreneurial teams has
generally considered firms where two or more
individuals who jointly establish a business in
which they have an equity (financial) interest
(Kamm et al. 1990, p. 7). In contrast, the current
paper focuses on key employees who do not
hold an ownership interest. Cohesion and collective vision (Ensley, Pearson, and Pearce
2003) and even friendship (Francis and
Sandberg 2000) have been conceptualized to
create new venture performance. Team interpersonal process involves agreement on leadership,
interpersonal flexibility, commitment, and helpfulness. A study that developed a measure of
team interpersonal processes found that team
member agreement on views of this process
reflected higher venture rating growth and profit
(Watson, Ponthieu, and Critelli 1995). Teams
build an organizations ability to learn and to
understand the future value of resources and to
retain this understanding in organizational memory (McGrath, Venkataraman, and
MacMillan 1994). Cooney (2005) noted that
resources, complementary team, and opportunity evaluation should be discussed and agreed
upon by the entrepreneurial team even before
the venture has been started. However, Pasanen
and Laukkanen (2006) concluded that entrepreneurial teams used similar strategies to solo
entrepreneurs. The only differences Pasanen
and Laukkanen found were that the teammanaged SMEs were younger, placed a higher
value on customer feedback, and involved fewer
owners with less tenure than the individually
managed SMEs. This highlights further differences between prior literature on entrepreneurial founding teams and our examination of the
entrepreneur/key employee relationship.
Teams also allow firms to bundle assets and
routines differently and so create a unique competitive advantage (McGrath, Venkataraman,
and MacMillan 1994). According to a later,
quantitative test of their earlier theories,
McGrath, MacMillan, and Venkataraman (1995)
determined that the two most important predictors of advantage are (1) how well management understands how everything fits together
in their industry, and (2) how well they can
minimize nonfinancial costs like the need to
spend time developing relationships in a new
venture, role confusion in a new venture, and
the lack of history that shapes trust in each
other. These nonfinancial costs may be mini-

mized by hiring people with whom the entrepreneur has already established a trust
relationship (such as friends) (Francis and
Sandberg 2000). Kamm and Nurick (1993)
developed a model of new venture formation
that noted the entrepreneurs use of strong ties
in recruiting the resources needed to implement the idea (e.g., friends, relatives, or associates from former employers or educational
institutions). In this way, entrepreneurial teams
emerge from existing relationships but may not
reflect members capabilities to successfully
launch a new business (Kamm et al. 1990).
Recent research has provided conflicting
results on demographic diversity; some indicated that demographic diversity is not important for entrepreneurial team effectiveness
(Chowdhury 2005). In contrast, others have
noted the importance of age diversity to perceived new venture team effectiveness (Foo
2011) and team viability (Foo, Sin, and Yiong
2006). Ruef, Aldrich, and Carter (2003) concluded that gender and ethnic similarity among
team members stimulated team formation.
Indeed, differences in education field, area,
and amount of experience may lead to conflict
and turnover. Conflict was also found to
negatively affect perceptions of new venture
effectiveness, measured using a sample of
aspiring entrepreneurs entering business plan
competitions (Foo 2011). Sample selection
might explain some differences between
the Chowdhury and Foo studies because
Chowdhury chose high-tech ventures that were
already in place, whereas Foo focused on very
nascent entrepreneurs. Also, Foo measured
team effectiveness aggregating rankings from
all members, and Chowdhury measured only
the lead entrepreneurs opinion. Interviews in
the current study will discuss effectiveness
from both the entrepreneur and key employee
perspective.
According to Chowdhury, it is more important to focus on developing team processes that
use diverse perspectives on problems with a
variety of potential solutions and a variety of
criteria. It is possible to create diversity of
problem solving based on personalities and
thinking styles. Forbes et al. (2006) identified
resource seeking and interpersonal attraction
as primary alternative and complementary
motivators for a new teammate addition. Other
research indicates that as firms develop, additions to entrepreneurial teams are dysfunctional, but departures are functional (Chandler,

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41

Honig, and Wiklund 2005). Therefore, ideally

the new venture should start with a large team
rather than adding new people later. A large
team, consisting of entrepreneur and employees, may cloud the issue of key employees and
prompt the question of whether the entrepreneur owner can even identify one key
employee.
A recent study conducted by Cantner,
Goethner, and Stuetzer (2010) tested the scope
and disparity of knowledge in entrepreneurial
teams as they related to the stage of the business. Interestingly, this study found that new
ventures require a high degree of similarity in
the functional backgrounds of their entrepreneurial team members; however, a wider scope
and disparity of knowledge is required for the
venture to grow. This seems to contradict the
previous research by Ensley, Carland, and
Carland (1998) that concluded team skill heterogeneity (with respect to education, human,
technical, and conceptual skills) essentially
limits new venture growth and performance.
Similarly, Liao, Li, and Gartner (2009) showed
that social similarity, but not functional heterogeneity, within a new venture team contributed
to getting an emerging business up and
running. Such variation in results underlines
the need for further study of potential differences between owners and key employees of
successful SMEs.

Implications of Previous Research

To sum, previous entrepreneurial research
highlights (1) entrepreneurial characteristics of
propensity for risk-taking, proactiveness, and
innovation, (2) cognitive styles relying on heuristics, (3) education and industry experience,
and (4) high achievement. Additionally, successful entrepreneurial teams reflect (1) agreement
on interpersonal processes, (2) an existing base
of trust, and (3) diversity in cognitive styles but
similarity in demographics. Building upon this
information, we propose that key employees
who support the founding entrepreneur in a
small business are likely to exhibit some or all of
these characteristics. We consider questions
such as Do key employees have profiles that
complement the profile of the entrepreneurial
owner? Extrapolating this thought, should we
consider and treat key employees as members of
entrepreneurial teams or as subordinates? Consequently, these themes and key interrogations
will be examined in the entrepreneurs descriptions of key employees.

42

Method
I conducted semistructured interviews with
14 matched sets of entrepreneurs and key
employees operating small businesses in
central Canada. Table 1 profiles the demographics of the pairs. Previous researchers have
discovered that an entrepreneurial orientation
is more important to firms operating under less
favorable conditions (such as resourceconstrained and stable market conditions)
because it allows opportunity seeking to gain
competitive advantage (Wiklund and Shepherd
2005). Accordingly, small businesses ranging in
size from three to 75 employees were selected
from four different areas of the economy: retail,
restaurant, service (including three consultants
and a distributor), and manufacturing. These
businesses were located in a geographic area of
manufacturing concentration that was historically quite stable but was recently experiencing
significant resource constraints. Entrepreneurs
in these sectors were selected based upon peer
recognition (local business awards, reputation,
and referrals) and longevity (length of time
established in current or earlier ventures).
Entrepreneur (personal) length of time in business ranged from 1.5 years to 40 years.
Responses established that most had been
involved in multiple businesses and had grown
their business as new opportunities arose. For
example, the formal wear retailer expanded into
dry cleaning in order to provide higher quality
formal wear and to smooth seasonal sales. Later,
he saw an opportunity for retail management
information systems and developed and marketed his management information system to
other formal wear retailers. A ladys wear retailer
began with home party clothing, leased warehouse space for the clothing, which then
became a popular back door destination for
high-end clothing. Subsequently, she expanded
into a variety of high-end names and opened up
an award-winning retail location. All of the
restaurateurs had owned multiple restaurants in
various cities, and each incarnation served a
new and equally fickle slice of the market.
Others saw new opportunities and branched out
from family businesses. Hence, the experiences
discussed by interview participants served to
validate their selection and inclusion in the
sample of entrepreneurs.
Entrepreneurs then directed us to employees
that they believed exemplified their most effective employees who were key to their success.

JOURNAL OF SMALL BUSINESS MANAGEMENT

Table 1
Profile of Participants
Owner
Demographics

Length of
Relationship
(years)

Age of
Business
(years)

Male, 65
Female, 48
Male, 59
Male, 38
Male, 52
Female, 55

3
15
20
14
15
6

40
20
15
8
15
4

Female, 50
Female, 58
Female, 53
Male, 49
Male, 33
Male, 34

1
20
10
21
12
7

1.5
30
10
15
10
7

Male, 58
Male, 55

10
2+6

25
2

The interviewer introduced the term key

employee in the question and then further
explained it as most effective. This created
consistency in their responses because all were
using the same definition. The criteria that
entrepreneurs used to differentiate these
employees from the others often included the
employees tenure in the business or tenure
employed with the entrepreneur, but the entrepreneurs were unanimous that they relied upon
and expected high performance from these key
employees. For example, an entrepreneur
noted, Oh definitely, my general manager now
she has been with me for 13 years. She started
as a bartender with me at the first [restaurant
name] we did in [in city 1] she went out to
[neighboring city 2] with me as a general
manager when I opened that store and then she
came downtown and she is the general
manager here so she has been with me for 14
years.
Entrepreneurs and employees were asked 22
open-ended questions in a semistructured
format. These questions were designed to
understand their own motivations and goals,
how they perceived the other party (entrepreneur or employee), and the context of the business. They were asked to distinguish (1)

Industry Sector

Formalwear retail
Ladies clothing retail
Italian restaurant
Pub restaurant
Technology
Communication and
marketing consulting
Recruitment agency
Jeweller retail
Cosmetics retail
Cleaning supply distributor
Tool manufacturing
Basement and concrete
paving
Ski retail
Italian restaurant

Employee
Demographics

Female, 28
Female, 51
Male, 35
Female, 40
Male, 42
Female, 27
Female, 28
Female, 58
Female, 33
Female, 37
Male, 36
Male, 48
Male, 32
Male, 42

between entrepreneurs and nonentrepreneurs

and (2) between effective key employees and
less effective employees.
The interviews were content analyzed with
the assistance of the statistics software program
NVivo 9 (NVivo 2010). NVivo is a powerful
program for coding and interpreting textual
data. The initial coding was done by a research
assistant and was audited by the author. The
narratives were coded using standard qualitative analysis techniques (Creswell 1998). The
minor discrepancies that existed between the
coders were resolved by examining the data
together. The questions were open ended, and
samples with keywords from entrepreneurs
and key employees are compared and contrasted in Table 2. The cases were initially
coded at the sentence level with each substantive sentence assigned to one or more of four
themes. Consistent with the literature review, I
originally sorted the data into categories of
founder characteristics, employee characteristics, firm characteristics, and interpersonal processes. Then, trends, similarities, and
dissimilarities in the characteristics, behaviors,
and treatment of key employees were identified
in Table 3. Tables 13 profile the results and
are discussed in the following section.

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43

Table 2
Sample Questions and Answer Comparison
Sample Questions (There
Were 22 in Total)

Quotes and Key

Words: Employer

Quotes and Key

Words: Employee

(1) How would you describe

someone entrepreneurial?

Risk taker; challenges; family;

vision; community

(2) Name two personal

growth areas that you
would like to develop.
(3) What does the
owner/your employee
expect from you? What do
you expect from the
owner/your employee?
(4) Do you ever go out on a
limb/take a risk? When?
Can you give an example?
What happens when you
do?
(5) Have you (your key
employee) ever suggested
any changes in the way
the business operates to
your owner? Can you give
me some examples?
(6) From a personal
perspective, what are your
key abilities?

Not really key wordswide

range and business-related

Money; success; business;

drive (note all employees
responded with drive);
responsible
Learning something new;
grow; training;

Wages; honesty; work hard;

performance

Fairly; honestly; respect;

work hard; communicate

Everyday; all; financial

Check with; tell me;

direction

Improve

Together

Knowledge

Loyalty

Findings
Characteristics That Bind or Separate
Although Table 1 highlights a lack of demographic similarity between the matched pairs,
entrepreneurs and key employees resembled
each other in their willingness to assume the
risk associated with a small, growing business.
However, the context of the risk varied
between the two roles, and entrepreneurs
acknowledged the risk that employees took in
working for an SME but noted that this risk was
confined to their roles. For example, an
owner commented about the risks that key
employees took,
They have no risk, they get a cheque
every two weeks whether or not it was a
phenomenal week or a shitty week.

44

These results suggested that differences in

risk profile between owners and employees
stemmed from a different locus of control.
Locus of control refers to the degree an individual perceives success and failure as being
contingent upon personal initiative (Rotter
1966). In the current matched pair study, entrepreneurs generally exhibited confidence that
they were successful because of their own personal initiative and risk taking (internal locus of
control). Previous researchers have found such
a difference between entrepreneurs and managers (i.e., Timmons 1978) and the propensity
of senior executives to take risks (Miller, Kets
de Vries, and Toulouse 1982).
There were also differences in roles, abilities, and motivation between entrepreneurs
and employees. Employee roles tended to be

JOURNAL OF SMALL BUSINESS MANAGEMENT

Table 3
Key Employee Differentiated from Less Effective Employees
Entrepreneurs
Industry Segment
Retail

Restaurant

Entrepreneurs
Industry Segment
Services

Manufacturing

Entrepreneur Quotes

An effective employee is loyal to the employer. They are motivated to succeed in their job
and take some pride in their job. Its not all about money; its also about fulfilment in what
they do. They are doing their job.
A not effective employee is someone who doesnt work. They sit around, and they want to
chit-chat. You can just tell that their heart is not there. They are not really interested with
being part of the business because they enjoy it.
If they are loyal just not to me but to my clients, then they are going to want to sell and
follow through with that sale.
To work in a restaurant, you have to have passion. A lot of people look at working at a
restaurant as just a fill in job until they can find something else. Those are the people you
have to try and weed out.
I have one exceptional employee. I have customers who want this particular guy to come
to their house and cook them dinner. He could leave tomorrow and be fine, but he is only
one.
I dont have to look at their tables and worry about it. The ones that up sell. People who
smile and flirt with a customer. Maintaining a table, being consistent, topping off a persons
glass.
He is consistent. He is good. He has speed, but the best part about him is that I can depend
on him. I can spend $25,000 out of my pocket, and I dont have to worry about my
kitchen. He handles all the ordering, whereas I work out front. He knows how to speak
with me.
An effective employee is going to come in and service the client, whereas an ineffective
employee who comes in and just lingers around and not at tentative to their tables and not
the level of service that we expect and demand and not the team work that we expect and
demand.

Key Employee Differentiated from Less Effective Employees (Entrepreneur Quotes)

I think that they have to want to work, and they have to want to learn. I have been fortunate
enough to have vendors who provide good training not only on product knowledge but on
selling skills, personal life, time management, and prioritizing your life. A better person is a
better employee. I think if they want to work and they have some common sense (since
this is not a technically difficult), this business is something you can learn. It is not high
glamour, it is not high tech, and it is not computers. It is a basic need.
Good communicators, the people that I have hired even in subordinate roles have degrees in
this area. And good writing skills. They have initiative and dont wait to be told what to do,
can operate independently, are self-starters, detail oriented, methodical, and careful in doing
their work. Good interpersonal skills because were in the public relations business.
Youre going to get good guys whose abilities are only so good which is fine as long as they
are reaching my standard and dont go below it. You have a certain standard and thats it.
There is no settling for anything less. From there it only goes up. So youre going to have a
standard, and than a guy could be above it. There are a couple of guys who are way above
the standard who are as good as myself or maybe better. Youre only going to get one or
two of those guys out of eight or 10 people and you try and keep them.
I have certain guys who can talk to project managers or customers but others cant because
they dont know enough about the job. So knowledge and having good customer skills.
Certain individuals fit into the organization better then others, those are the ones that want
to acquire the knowledge and are hungry to learn more.
They are interested in pursuing to know more about mechanics, robots, and so on . . . These
employees function better, then those that just come in to do the job based on their
capabilities.

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45

much more structured than entrepreneurs.

There was an agreement about specific differences in responsibilities and roles between
matched entrepreneurs and key employees.
This structure provided boundaries on the
expectation that employees would assume risk.
A different entrepreneur summed it up as
I think for the most part when somebody
is hired to do a job, unless it is in sales or
supervisory, its not necessarily a risktaking role.
Entrepreneurs were willing to support risk
taking in employees but only in very specific
role-related ways. This type of support was
linked to how they delegated. For example, one
employee noted:
Yes I can use my discretion, but it has to
be very good discretion. I just cant go
around and give out discounts to
anyone. I do follow the rules, but I can
use discretion.
All entrepreneurs exhibited more experience
or more education (or both) than their key
employees. Most had developed experience or
been educated in the process of business
administration, or had developed previous
experience in product or service proposition.
This difference in experience and education
from employees reflected the entrepreneurs
increased confidence in their abilities and
stronger desire for achievement. An employee
noted
Its something in the people. Some
people wish to move on and some dont
want to.
Employees described a variety of personal
growth needs indirectly related to remedying
the education and experience gaps. For
example, all of the employees perceived learning to be important and demonstrated interest
in improving their work through learning. For
example,
Always learning, everyday, I see different things, especially from customers,
they give you ideas.

In general, this sample suggested that

although entrepreneurs exhibited a strong
achievement orientation, key employees more
often demonstrated a strong learning orientation. This might be explained by the limited
opportunities for advancement in SMEs for key
employees. To explain, if employees knew they
could not advance, perhaps learning provided
them with more satisfaction in their current
positions?1 The entrepreneurs and employees
also shared a common emphasis on the customer. Much of the conversation in both the
entrepreneur and employee interviews focused
upon meeting customer needs, whether in a
tool and die shop, a restaurant, retail business,
or consulting. Superior customer service was an
important priority and vision that both entrepreneurs and employees valued and worked
toward.

How to Identify and Differentiate Key

Employees from Owners and Other
Employees
Entrepreneurs were also asked to identify
firm key success factors, specifically, What do
you need to do for your business to survive and
grow? Analysis of these answers provided
themes related to each sector. For retail businesses, entrepreneurs believed it was important
to provide superior customer service and to
understand customer needs. For manufacturing
businesses, owners discussed how critical it
was to deliver a quality product on time in an
efficient way. In consulting and distribution,
entrepreneurs competed by meeting customer
needs with superior area expertise. Finally, the
most stringent success factors applied to restaurants. Restaurant owners sought competitive
advantage by delivering a quality product on
time in an efficient way with superior customer
service.
Different themes were identified in the
description, expectations, and hiring criteria
applied to key employees in each of these
sectors. Desirable attributes and actions of key
employees aligned strongly with industry key
success factors for each venture. For example,
retailers used hiring criteria such as customer
skills, product knowledge or experience,
appearance, and specifically a nice smile,
bright eyes, and personality. In manufacturing, participants listed criteria such as technical

I would like to thank an anonymous reviewer for this suggestion.

46

JOURNAL OF SMALL BUSINESS MANAGEMENT

expertise, a desire for knowledge, punctuality

and dependability, and politeness. Restaurateurs searched for employees who upsell
(e.g., by selling dessert in addition to the main
meal), employees they could depend on, and
who would chip in (do their share of the
teamwork). They also identified extroverted
personality, friendliness, and appearance as
important hiring criteria. Employees who could
respond quickly to situations and answer
questions that are off base were desirable.
Finally, for consulting and distribution, owners
identified attitude, personality and product
knowledge, expertise, and experience.
Owners were also able to distinguish
between their most effective and key employees and less effective ones. Table 3 highlights
differences that seemed to center on work
ethic, initiative, and dedication. The vagueness
of these descriptions, most notably with
respect to personality, creates difficulties
when trying to identify key employees.
Although owners were intuitively seeking
employees that would strengthen their core
competencies, they did not approach it in a
measurable and well-thought-out manner.
Indeed, consideration of these criteria supports
previous research concerning the tendency of
entrepreneurs to use heuristics and biases and
the need for more consistent HR policies and
practices.

Why Do Key Employees Choose to Stay?

Previous research on key employees and
talent management has focused upon the implications of high employee mobility and the
development of retention strategies (i.e., Aime
et al. 2010; Cosack, Guthridge, and Lawson
2010). The current study did not consider retention strategies per se; however, findings highlighted that key employees stayed with the
entrepreneur because they were exposed to the
effort and time small business owners needed
to put into their current jobs. Twelve of the 14
employees interviewed in the study had contemplated or even tried their own business.
Most had specific product or service idea in
mind, but, related to their current product focus
or not, most would implement their idea in a
different way than their employer. In spite of
having a variety of business ideas, some key
employees had chosen not to start their own
ventures because the timing was not right for
successful business. For example, three
employees noted:

There are a lot of places closing. It is

pretty saturated . . . It will not happen for
a year or year and a half down the road.
If it was the right time and the right
opportunity I would go out on my own
There are too many competitors.
Others recognized entry barriers connected
to networking and experience:
[The owner] for herself knows every HR
person in the city, you need to know a
lot of people and do a lot of networking
and be out there so shes very well
known out there.
Her family has been in the business for
55 years here . . . so the old jewellery
families, they mentor and support each
other.
Most did not want to dedicate a significant
time necessary to start-up and/or did not feel
comfortable taking on responsibility for lives of
others. For example, different employees noted:
I think its the responsibility part. I know
what he goes through. He has a lot of
late nights, he has to do all of the bookkeeping and there are a lot of things he
has to do to keep us working. There is a
lot of responsibility there. I dont want
anything to do with it. To take on something like that plus your family. I dont
know how he does it.
Its a lot of aggravation that I dont really
want to get into . . . it is risky because if
something goes wrong I dont want that
on my conscience . . . He [the owner] has
to worry about employees, the cash flow
and people paying.
To this point, my own store, I wouldnt
have had the knowledge, economics is
another issue and also time issues. Time
is critical for my little girl, but I would
love it.
I am happy with my days off.

The Importance of
Interpersonal Processes
The main issues that shaped effective use
and retention of human capital in small entrepreneurial businesses appeared to surround

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47

interpersonal processes. These include structured, well-defined employee and entrepreneur

roles and the entrepreneurs commitment to
relationship building.
Roles and Interaction. Entrepreneurs believed
that they needed employees that were willing to
exceed employer expectations but restricted risk
taking to fairly narrow roles and expertise. A
defined role for the entrepreneur was also
important to employees, and they demanded
that entrepreneurs understand both business
process and substance. Employees cited reasons
for not starting their own businesses that were
related to responsibility and stress management.
Accordingly, they had high expectations of
the owners ability to deal with these aspects of
entrepreneurship. For example,
I expect him to be organized, for him to
know what he is doing. To know how to
treat his staff and be a people person
and not freak out every time something
goes wrong. You cant add more stress to
this business when there is already
enough stress. You shouldnt yell at your
employees, you should learn to deal
with it.
Building Good Relationships. Employee participants in the study valued fair entrepreneurs who listen to ideas and appreciate
and respect employees and provide a fun,
enjoyable, and interesting place to work
with fair compensation. These comments
supported previous research about relational
outcomes connected to employee perceptions
of entrepreneurs. Entrepreneurs described key
employees as honest employees who motivate other employees and can read people.
Again, these attributes are relational in nature.
Most employees and employers used the word
trust when discussing their actual relationships, but all of them used it in connection with
mutual expectations of each other.
Enabling Employees. Employees and entrepreneurs were asked about the risk inherent in
the employees role. Both put conditions on the
amount and type of risk that they were comfortable with the employee taking. The owners
set boundaries based on the employees role
and responsibilities in the venture, and employees qualified their own risk propensity relative
to their family roles. I found this interesting

48

because employees in small firms are often

responsible for multiple roles with ambiguous
boundaries (Heneman and Berkley 1999), and
because it sends a confusing message to entrepreneurs who are trying to recruit and identify
key employees. As noted, the qualitative study
also implied that employees were more likely
to pursue a learning orientation than achievement orientation. Perhaps through learning,
employees were able to extend the boundaries
of their roles, and thus take more risks in a way
that was acceptable to the employer. Similarly,
Kitching (2007) noted that it was important for
small employers to enable employee learning
rather than take an active role in training
employees.

The Importance of HR Practices

Most of the owners knew what an effective,
key employee should look like. As noted in
Table 3, they were able, without much thought,
to describe these employees and differentiate
them from less effective employees. However,
when initially they were asked What about your
most effective people? How would your most
effective people differ from the people who are
not as effective? Most entrepreneurs began to
discuss how they compensated and recognized
the more effective employees. For example,
My most effective people make more
money, they will get special treatment.
Ill go out of my way a bit more. When I
hire someone I tell them to treat me the
way you want to be treated. You have
some good employees, but then they
slack off and thats apart of life. Its
going to happen. But as for your really
good guys, you want to try and make
them happy. If there are any problems
you take care of it for them. If they need
to borrow something, than its no
problem. The better people get better
treatment, but thats not to say that the
other employees are not treated good.
But if you deserve it than I want to be
able to give it to you.
Two restaurateurs noted:
They get extra privileges. They get good
sections and they make the most money
in tips. The least effective ones who cant
keep up get smaller sections till they
prove to me that they can do it.

JOURNAL OF SMALL BUSINESS MANAGEMENT

Its like a sports team, everybody knows

you have first line players, you have
second line players and third line players
and I think I am loyal to people who have
been here for a long time. They are the
first line players they get our premium
shifts because they have proven year in
year out. They dont call in sicktheyre
here and their level of service is great.
Their friendliness is great and they are
very thorough. Whereas the fourth line
players come in and expect those shifts.
The fourth line players are usually the
ones more in transit than the first and
second line players.
A manufacturing owner said:
And the ones who catch on quicker are
the ones who get the special treatment
because they are catching on to it faster.
They are more conscientious. So that is
what makes them different from the
people who dont really care and who
are just here for a paycheck.
And from the recruitment agency owner,
I would hire somebody that does not
have the entrepreneur spirit because
there are tasks and jobs that need to get
done first but I would enjoy and probably encourage and probably compensate somebody better if they have that
extra spirit.
This brings to mind traditional leader
follower theory related to follower in group and
out group and the Pygmalion effect (Eden 1992)
where higher entrepreneur expectations and
greater resources made available to employees
who are perceived to be effective might increase
their effectiveness, especially in relationship to
less effective employees. Such a situation underlines a need for entrepreneurs to employ consistent HR practices related to identification and
retention of key employees, and the development and training of less effective employees.

Discussion
Academic Contributions and
Practical Implications
The study provides valuable insights regarding how entrepreneurs view key employees, an
oft-neglected part of the entrepreneurial litera-

ture. It contributes to the existing qualitative

literature by providing the views of matched
entrepreneur and employee respondents about
each other. Data collection from the entrepreneur also highlighted that entrepreneurs, when
asked, had no trouble identifying a single key
employee. Consequently, it appears to differ
from but still complement existing research on
founding teams (who begin the venture
holding equity in the organization) and entrepreneurs (who are the proactive and passionate
forces behind venture start-up). Indeed, this
underlines that there are additional motivations
for working in SMEs beyond passion and financial gain. Even more importantly, entrepreneurs
clearly value and view key employees as having
a longer-term role in their organizations.
I have identified that many SMEs still require
support for the entrepreneurial owner, and
sometimes, that support comes without a desire
for ownership. The key employees in the study
did not have aspirations to take over the
company or to start their own business and
were clear in their reasons. In particular, this
research has identified how important it is for
the entrepreneur to develop trust and value
interpersonal relationships with key employees. Indeed, in most of the participant pairs,
there were a mutual trust and good working
relationship between the entrepreneurs and
employees who encouraged them to work in a
coordinated way toward the entrepreneurial
goal.
The study develops a profile of the key
employee, whereby the key employee typically
(1) corresponds to the key success factors of
the SME, (2) is willing to undertake a moderate
amount of risk, and (3) differs from the owner/
entrepreneur in the type and amount of education and/or experience. The education and
experience gap between entrepreneurs and key
employees may explain differences in selfconfidence and their willingness to go out on
their own. Additionally, academics and practitioners gain understanding of the characteristics and motivations of key employees who
choose to work for an entrepreneur instead of
being entrepreneurs themselves.
The research helps to understand the importance of matching core competencies in HRs
with organizational core competencies. It
enables future research to build testable models
of the underlying processes with which entrepreneurial small businesses gain competitive
advantage. Hence, from a practical standpoint,

SCHLOSSER

49

the entrepreneur can gain from this research by

identifying core organizational competencies
and hiring and retaining good relationships
with key employees who exemplify these.

Limitations and Future Research

The research was conducted with a small
local sample of entrepreneurs and employees
who were initially selected based on the reputation of the entrepreneur (i.e., winning
awards, local recognition) and then narrowed
to those SMEs that had employees. Other
researchers might expand this focus to include
comparisons of firms with and without employees, with and without key employees, and
questioning for example, Does success
depend on the presence of a key employee?
and Which entrepreneurs have a key
employee and which entrepreneurs do not? As
the participants are relating past experiences,
there is some exposure to recall bias (i.e., Zott
and Huy 2007). Additionally, the small sample
touched four areas of small business and
without further research, conclusions cannot be
generalizable to any one industry sector. Future
research must investigate empirical relationships between entrepreneurs, their key
employees, and influence on competitive
advantage.

Conclusion
In conclusion, it may seem like finding key
employees is as difficult as finding a needle in
a haystack. However, this research indicates
that behind successful entrepreneurs, there
are indeed key employees. Identification of
the right employees depends in part on the
core competencies of the organization. In the
words of an entrepreneurial participant, Its
because I surround myself with good people.
Youre only as good as the people you surround yourself with. That same entrepreneurs key employee suggested, You yourself
have to know the organization, or hire
someone who does and is successful. Furthermore, the long-term retention of these
critical employees may rest on the development and sustenance of strong interpersonal
processes, including trust.

Acknowledgments
This research project was supported by a
grant from the Social Sciences and Humanities
Research Council of Canada.

50

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