Noncompete Clauses May Actually Change How Employees Work
April 23, 2019 by Josh Hrala
For decades now, researchers, business leaders, politicians, and many other groups have argued whether or not noncompete clauses (NCCs) help or hinder workers and innovation.
For example, do NCCs stifle careers because they basically make it impossible for skilled workers to start their own businesses or leave organizations for others in the same sector? Or, on the other hand, are NCCs important because they protect trade secrets and help successful businesses insure that employees will not run off to competing firms and give up everything they learned on the inside?
We’re not here to debate the pros and cons of NCCs as a whole. Instead, we’re here to look at a new study that has just been released that examines how employees actually perform when they have a NCC looming over their heads.
The team – led by Gjergji Cici from the University of Kansas – claims that for far too long NCC research and debate has been focused on how NCCs impact organizations, industries, and employee mobility. However, understanding how employees actually perform under NCCs has yet to be the subject of scrutiny.
“There is an ongoing debate on the use of NCCs in the U.S. about whether they are good or bad,” Cici said, according to the university.
“This whole debate has spilled over into academia, and scholars want to see if higher enforcement of NCCs has more effect on economic development and other measures. We wanted to see how they’re actually affecting the people who work under them, their actions and their output.”
Noticing this weird research void, the team set out to find some answers.
How NCCs Impact Workers: The Study and Results
Let’s get right into the findings: Cici and his team found that workers – at least in the mutual fund industry – who worked under NCCs were more likely to take less risks, be more productive, and align their behaviors to the company’s goals more closely than those who did not.
They came to this conclusion by looking to the mutual fund industry where NCCs are almost standard. Mutual fund managers are typically required to sign NCCs because mutual fund management is an ‘information-based’ industry where the sharing of information can make or break portfolios.
The team expected one of two situations to occur. The first effect that they theorized was that employees under NCCs would work harder because they really didn’t want to be fired. If they were, they’d have very tough time finding another role in the industry. This will, therefore, make them great workers at their firms.
The second outcome was the opposite of the first. Workers under NCCs may not work as hard because they have no chance of being hired elsewhere and cannot start their own firm. In other words, NCCs could be demotivating because what’s the point of working extra hard with such limited options.
In the end, the team found that their first theory was by far the winner. Here’s how KU put it:
“After measuring output of mutual fund managers in three states with varying enforcement of NCCs, the researchers found the first effect dominated, regardless of how they controlled for various other factors. They studied about 200 fund managers in Texas, Florida and Louisiana from 1992 to 2004, as those three states had seen changes in the enforcement of NCCs in those years, seeing them increase in Texas, decrease in Florida and initially decrease, then come back in Louisiana.”
These findings suggest that NCCs are motivating employees in the mutual fund industry to strive for success in their roles because they know that if they are let go, their options are very limited in terms of finding a new role. Basically, they’re fearful, and that fear is driving them to become ideal workers in many ways.
Not only did this mean that the participants in the study took less risk and also aligned their goals with the goals of the company, they also did other things that make them more ‘fire proof,’ such as ‘window dressing,’ which is a term used to describe dressing up a portfolio in a way that allows managers to charge more and increase revenue.
“Once again, they do all of this because they were concerned,” Cici said.
“By dressing up their portfolios, they can increase fee revenue for their fund family and decrease their risk of being fired. The NCCs seem to have an effect on behavior in that the managers take less risk and align their behaviors with their employers’ goals.”
The Takeaways
If the team’s findings are correct, NCCs make workers better. They seem to take less risk, become more productive, and generally perform their jobs in a way that makes them ideal and ‘fire proof.’
However, there is definitely a debate here because wouldn’t it be more beneficial to have workers motivated to meet company goals because they believe in the success of the firm and their own careers instead of just the constant threat of being let go and having no options? Does that stress weigh on workers while they perform their tasks?
In the end, the results are great – but the fact that these workers are being motivated for a weird reason that’s based in fear can’t be ideal when you get down to it.
That debate is still raging, though. As more companies adopt NCCs, including academic institutions and other industries where NCCs haven’t been super common in the past, will they stifle innovation overall? Will they make people think twice about going into these fields because they can be so hard to move on to other things later in careers? At the end of the day, do NCCs hinder innovation because no one is moving ideas around? Or is trade secret protection important enough that these concerns are invalid?
That’s a topic for a different day. As you can probably guess, there are fierce fighters on both sides of it.
That being said, it’s a breath of fresh air to see a team looking at how NCCs impact how workers work. We hope that there will be more studies of this nature done in the future to give us an even better understanding at how these types of clauses pan out.
The team’s study was recently presented at the American Finance Association meeting in Atlanta, GA.
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