Human Resources Insights
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HASA Newsletter 201501 |
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Keeping Talent in House or at Bay?
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y to earn a living. In legal terms, noncompetes occupy strange ground—covenants not to compete are usually indicative of monopolistic tendencies and are generally prohibited. But when employing executives, firms believe that extracting a noncompete is critical for protecting their investments.
A research study confirms the notion that when states enforce noncompetes, executive turnover is lower and job tenures longer. Firms in high-enforcement states also tend to spend less in capital expenditures per employee and pay executives less, with a greater chunk of compensation coming from base salary. And when executives in these states do move to other firms, they receive smaller pay increases and assume lower ranked positions, at least compared to executives in states where noncompetes aren’t strongly enforced. Employer concerns about being sued in these high enforcement jurisdictions may lead to greater negotiation power with the departing executive.
Less employee turnover, more executive stability, lower capital expenditures, and less upward pressure on compensation would appear to be good news for firms using noncompetes. But a study found surprising effects when firms use noncompetes in high-enforcement states. Indeed, a study found that maintaining managers’ exposure to the firm’s stock price through the use of stock options was less important in high-enforcement states.
Ironically, the study also suggests that executive quality suffers when firms use noncompetes in high-enforcement states—the very thing that noncompetes are supposedly designed to avoid. While noncompetes bind executives to firms, in doing so they may be changing the quality of their leadership for the worse. Working under a noncompete in a high-enforc
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