A key dimension of entrepreneurial performance is financial. Financial performance is usually measured in terms of income or profitability. Income net of costs is equivalent to profits for entrepreneurs who do not incorporate their business, whereas incorporated entrepreneurs pay themselves an income out of their operating profit. To simplify the exposition in this chapter, the two terms income and profits will be used more or less interchangeably unless specifically stated to the contrary.

It is commonly held that profits are the primary goal of entrepreneurs, in much the same way that employees seek jobs paying the highest wages. In view of the occupational choice model of entrepreneurship outlined in chapter 2, one obvious and important question is the extent to which entrepreneurs earn higher incomes than employees do. Naturally, if individuals are risk-averse, the volatility of incomes also bears on the attractiveness of entrepreneurship compared with paid employment. For example, volatility might introduce a risk premium into entrepreneurial returns. The volatility of incomes is related to, but distinct from, the inequality of incomes in entrepreneurship and paid employment. The objective of this chapter is to review the state of knowledge about these issues.

The chapter also discusses the individual-specific determinants of entrepreneurial incomes. A topic of particular interest is the role that skill plays in enhancing entrepreneurs' incomes, especially its embodiment in formal education.