To Compete or not to Compete!
Hello there my Competitive Computer Champions! Hopefully your week so far has been filled with perfectly brewed coffee and sweetened by HR's weekly donut run! Todays topic will discuss the pros and cons for both businesses and employees regarding Non-Compete Clauses, given the recent Federal Trade Commissions (almost) universal ban on non-competes.
First lets tackle the historical precedence used to promote the benefits of non-competes...lets begin!
<insert time machine making sounds here>
A Long time ago, in a time we call "the good old days" (The quotes are indeed sarcastic, 5 points to whomever picked up on that! lol), the paradigm for running business had some arguably better pieces to it. One of those paradigms was dedication to your company, and your company having dedication to the employee. Being hired by big companies like IBM, or Coca-Cola, or any big company was an almost guarantee that one would end their career there. The company implicitly had a duty to provide for your family, and you had a duty to stay with your company...the 50's are seen as a great time for the middle class.
American corporations were rising from a vicious world war, and we had a strong economy based on rebuilding...this being said, it all came crashing down in the 70's. While I wont get into that crash, what I will focus on is a massive management change that focused on short term profitability and breaking the corporate side of the unspoken “loyalty to the employee” paradigm…the dissolving of that bond was pioneered by Jack Welch (GE CEO, 1981-2001), with the excuse of remaining competitive with the new global competition.
Mind you, I am not ignoring all the other "visionary leaders" that helped build the 80's management paradigm as there's tons of blame to go around, including people like Sam Bushnell, legendary Atari leader (YAY! My childhood!) who created many of my childhood joys on the broken backs on his staff, but for sake of brevity, lets focus couple paragraphs on Jack Welch.
The benefit of hindsight tells us his management paradigm obviously did not have legs as we now no longer have GE as a company, it is now 3 smaller companies. Creating a hyper competitive company with a harsh HR who seemingly relished in firing the bottom 10% every year. This is called the Vitality curve and you can read more about it here.
This created an atmosphere where one would not want to be a Rockstar on a team of Rockstars, since 10% of those Rockstars would be cut every year, whittling away not only solid talent, but also literally decimating corporate culture. Talented people not wanting to work with other talented people created less and less stellar projects...the race to mediocrity was in full effect.
<insert death knell sounds here>
If you logically think about it...no one ever praises the Roman decimation paradigm...why would it work any better in corporations? <dun, dun dun>
What made all this even harsher were non-compete clauses. Imagine this...you're a Rockstar but you were not as strong as other Rockstars. You were still producing massively to the bottom line, but you had the bad luck on being on a team of greater Rockstars. It doesn't matter that there were weaker performers in other departments or other teams, it only matters that you were on the weaker side of Rockstars...now you are fired and you can’t even provide for your family due to a non-compete clause in the industry that you were a Rockstar in. Ooooff...that's harsh. You could not longer work in your field nor could you build up a competitive company...capitalistic competition being what the United States prides itself on...it was an odd paradigm to say the least that benefitted the business massively, but wrecked havoc on middle class families.
This ultimately lead to teams built around a couple of Rockstars, but mainly comprised of average employees and "canon fodder" employees so that the arbitrary firings at the end of the year would not target good/great employees...leading to an ever increasing mediocre set of products.
At the end of the day, what might have looked great short term in terms of stock gains, it was slowly eroding the quality of the brand through creation of substandard products. While I am sure some will argue against my judgement of this management paradigm, its hard to argue when GE as a global, “force of nature” conglomerate is no longer here.
Now lets tackle what was decided by the FTC since merely stating that the FTC has banned non-competes across the board is not the entire story...that would be entirely to simple an answer to a complex issue. What the FTC did was:
- Ban on New Noncompete
- The final rule bans new noncompete with all workers, including senior executives, after the effective date. Employers entering into noncompete with workers after the effective date would be considered an unfair method of competition under Section 5 of the FTC Act.
- Treatment of existing noncompete
- For senior executives, existing noncompete can remain in force. However, existing noncompete with other workers (excluding senior executives) are not enforceable after the effective date of the final rule. Fewer than 1% of workers are estimated to be senior executives under this rule.
- Definition of “Senior Executive”:
- The final rule defines a senior executive as a worker earning more than $151,164 annually and in a “policy-making position.”
Long story short, it’s a complete ban on future Non-Compete Clauses, but existing Non Competes on senior executives making more than $151,164/year are enforceable. This feels like it was a clause made to give corporations a bone after getting...hosed. 😳
Lets discuss Pros and Cons.
Pros:
- Increased Worker Mobility:
- The ban allows workers greater freedom to change jobs without fear of legal repercussions. Employees can pursue new opportunities and contribute their skills to different employers.
- Healthcare Cost Reduction:
- Banning noncompete is estimated to result in reduced spending on physician services by $74-$194 billion over the next decade.
- New Business Formation:
- The rate of new firm formation is expected to increase by 2.7%, leading to over 8,500 additional new businesses created each year.
- Innovation Boost:
- The ban could lead to an average of 17,000-29,000 more patents each year for the next ten years. This represents an estimated increase of about 11-19% annually over a decade.
- Higher Worker Earnings:
- Workers’ earnings are projected to rise by $400-$488 billion over the next decade, with the average worker earning an extra $524 per year.
Cons:
- Impact on Employers:
- Some employers argue that noncompete agreements are necessary to protect their business interests, prevent trade secrets from being shared, and retain key talent.
- Senior Executives Exemption:
- Existing noncompete with senior executives (defined as workers earning more than $151,164 annually in a “policy-making position”) can remain in force. However, this exemption affects fewer than 1% of workers.
- Legal Challenges:
- The ban may face legal challenges from employers who rely on noncompete to safeguard their competitive edge.
Having been an employee, a business owner, and an investor at different points of my life, I feel all of these pros and cons.
I fear people getting hired and then taking off and forming their own business. I fear not being able to provide for my family if I can't do work that I am proficient in...but all in all I think this is a good move for everyone involved, even businesses. Businesses have to return a little to the old paradigm of caring for their employees if they want their employees to care about them. Since Jack Welch and his cadre of culture destroyers blew through town, I honestly believe that all workers have a poor view of their companies and it shows through their work effort.
That is all for now, please feel free to write in your thoughts and comments and I will try and answer them all!
Thanks and looking forward to seeing you shortly.