The Argument In Favor of Non-Competes Arguably Misses the Point
My great friend Bob Reingold always overpaid his employees. Reingold once told me that a good boss always approaches employees about raises as opposed to being approached.
Reingold’s wisdom about compensation has come to mind a lot lately with the news of the FTC’s attempt to ban non-compete clauses. Leaving aside the constitutional questions that will be brought to bear against both sides on the matter of non-competes, a case will be made here that per Reingold, non-competes are unnecessary if the business in question is compensating its workers properly.
Consider a very reasonable argument made in favor of non-competes by weekly RealClearMarkets columnist Andrew Wilford. In this week’s piece he made the correct point that businesses invest a great deal of time and money into hires, and non-competes are a reasonable way for them to keep their investments in the building. Wilford adds that absent non-competes, businesses might be less likely to make the initial investment. Well put, and well thought out, but Reingold looms large.
As evidenced by his great successes in business, Reingold invested a lot of time and money in his employees. But having done that, he felt it wasn’t enough. He would once again overpay them, he would routinely approach them about paying them more so that they wouldn’t leave. Can it at least be said that non-competes that businesses expect the courts to abide are potentially a way for errant businesses to avoid paying employees their market worth?
Wilford goes on to point out that it’s not compensation and training that vanishes. What about business secrets? If employees can just leave, they don’t just take their talents with them. They also perhaps take with them crucial trade secrets. Again, it’s compelling.
At the same time, it’s useful to point out that if the information inside businesses is truly valuable, it will find a way out. A piece of paper won’t deter an outflow. But perhaps the bigger point is that if a business needs a non-compete to keep its employees from sharing its secrets with the competition, it presumably has problems greater than what a non-compete can solve. Improving its employee-vetting processes would probably be more effective than using contracts in a vain attempt to deter betrayal.
After which, it’s worth pointing out that in truly dynamic industries the value of secrets is short-lived. And it’s hard discern what should be kept secret, or what shouldn’t. Figure that Bill Gates acknowledged erring the vast majority of the time while running Microsoft. So did Jeff Bezos at Amazon. Most “secrets” wind up worthless as is, or are perceived as worthless given the simple truth that innovative business ideas are that way precisely because they’re rejected by most.
All of which brings us to California. It’s well-known as a state where non-competes aren’t protected by government. That they’re not has proven hugely beneficial to California’s economy. The ability of human capital to migrate to its highest use without contracts and courts getting in the way is said to be a major factor in Silicon Valley’s remarkable prosperity.
As a former Goldman Sachs employee in northern California once told me, he couldn’t have been a “former” GS employee in pro-business locales like Texas simply because GS would have held him up in courts for months and years. On the other hand, in California he and his partners were able to quit GS on a Friday only to be in business on a Monday. He notes that his and his partners’ uniquely easy exit in the Golden State crucially applies to the technology sector. In other words, you can be at Google on Friday morning, quit Friday afternoon, and be in business in your new start-up on Monday.
Anti-business as California is said to be, the unrestrained flow of workers is a big deal. Imagine the economic implications of seamless worker flow outside California.
It’s something to think about. No constitutional expert here, history says individuals have the constitutional right to sell their services. Presumably this includes selling their services with a non-compete intact. Which makes it hard to imagine that non-competes can be banned nationally.
Still, it remains the view here that a focus on non-competes misses the point. Henry Ford didn’t give his workers raises because he wanted them to buy Ford cars, but because he was tired of them quitting. It was too expensive not to overpay his employees. Rather than hide behind non-competes, businesses should pay their most valuable employees more. Ford would agree, and Reingold likely does.
