Non compete clauses (NCCs) are increasingly common in the business world, but whilst they are a mechanism that has been studied from the perspective of a departing employee, their impact is much less well understood from the perspective of an employee that is currently working under them. A new study from the University of Kansas attempts to redress that balance.
“There is an ongoing debate on the use of NCCs in the U.S. about whether they are good or bad,” the researchers explain. “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.”
They conducted their experiment in the mutual fund industry, as NCCs are both a common sight in the industry and they have a wealth of data on employee productivity and other behaviors. They hypothesized that working under a NCC would have one of two effects: employees would work harder knowing that if they were sacked they would struggle to find new work in the industry, or, knowing their chances externally were limited, their motivation levels would drop.
Productivity boon
Interestingly, after crunching the data, it transpired that the first condition was actually evident, with employees at 200 fund managers between 1992 and 2004 showing an increase in productivity when NCC enforcement rose. Increased performance wasn’t the only behavior change however, as they generally engaged in less risky behaviors and had less deviation from the work of their colleagues.
“Once again, they do all of this because they were concerned,” the authors explain. “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.”
NCCs are a common presence in the finance industry as companies are concerned about contacts and trade secrets moving with employees to rival firms. Advocates of them also believe they encourage firms to invest in their people, but critics believe they stifle innovation and promote sub-optimal matching of people and firm.
Whichever side of that particular debate you fall down on, the research provides some tangible evidence of the impact NCCs have on employee behavior, and should go some way to providing an evidence base from which to make decisions on their deployment (or not).
