It’s a nightmare most companies would prefer not to face. A high-potential executive being groomed for senior management is rotated through various assignments with progressively higher responsibilities. After being named country manager in a high-growth market, the executive suddenly resigns to work for a major competitor.
Millions of dollars invested in the employee are lost, and the firm struggles to find a replacement. Even worse is that walking out the door with the departing manager are deep knowledge about firm operations, future product plans, market entry strategies, and relationships with local officials.
When facing such a situation, firms may respond by attempting to keep the departing executive with higher pay and bigger bonuses. But some companies lack deep pockets, and some managers may not be seduced by money. Consequently, companies may resort to litigation to recoup the costs they incur when important executives depart. So it should come as no surprise that many firms have enthusiastically embraced “noncompete agreements” in recent years as a way to deal with executive departures. In brief, noncompetes restrict executive behavior post-employment, specifically prohibiting the executive from working for a competitor after leaving the firm.
Noncompetes are highly variable, but typically include a provision for when they kick in (some apply whenever employees leave, while others apply only if employees leave voluntarily), how long they apply (most last for two or three years), and where they apply (some apply just to areas where the old firm competes, while others cover larger territories). Courts and legislatures have expressed concern that noncompetes might limit someone’s abilit