Hot Take: FTC Bans Non-Competes

Everyone’s talking about the FTC’s new rule banning non-compete agreements and dissolving any currently in place. Speculation is running wild about how it will affect businesses, employees, and the entire talent landscape. One thing is clear to me, though: this ruling signals a pivotal moment in how businesses leverage compensation and total rewards strategies to support talent goals. 

Some Background on Non-Competes

Traditionally bundled with confidentiality and non-solicit agreements, non-competes were either targeted narrowly (e.g., named companies) or broadly (e.g., all companies in the HR technology space). Companies used non-competes to "lick the cupcake" (employee) so key talent was harder to poach and less likely to look for employment elsewhere.

In the event an employee left for a competitor or a competitor attempted to lure away an employee with a non-compete, both parties risked anything from a nasty-gram saying “hands off” to lawsuits and court hearings. Sometimes employers would choose not to enforce non-competes with no repercussions at all and sometimes the courts would decide the agreement wasn’t enforceable, but it was a roll of the dice.

Now, the game has changed…

The Carrot and Stick of Talent

There are two key ways of getting people to do what you want: rewards and repercussions, or the carrot and the stick. Non-competes were a stick – threat of negative consequences for the undesirable action of leaving to work for a competitor. Compensation, however, is a carrot – rewarding the desirable behavior of staying with an employer. Without non-competes to tie employees to employers, compensation now stands as the most potent tool for employers to retain top talent, fostering loyalty and aligning employees' interests with the organization's success.

Using the Compensation Carrot

Within comp packages, equity has traditionally been one of the biggest retention hooks – equity granted at a lower value with a vesting schedule over multiple years could mean a payoff at a multiple of an employee’s annual comp years down the line. 

However, for companies without equity available to grant (or without increasing equity values), the shift away from non-competes necessitates a recalibration of compensation structures. Employers may face pressure to make up the difference in value through higher salaries or other financial incentives, ensuring competitiveness in the talent market while maintaining employee satisfaction and engagement. This transition underscores the need for organizations to adapt their compensation strategies to remain attractive employers of choice in an evolving landscape of talent acquisition and retention.

In revising compensation packages, compensation teams and HR departments will need to strike a balance between competitive salaries and sustainable financial practices. While higher salaries may serve as a short-term solution to compensate for the loss of non-competes, companies must carefully consider the long-term implications on their bottom line and organizational culture. Moreover, relying solely on salary increases may fail to address the broader issue of employee engagement and retention, highlighting the importance of holistic compensation and talent strategies that encompass both financial and non-financial incentives.

Rewards Beyond Compensation

Compensation is a critical piece to the talent attraction and retention puzzle, but this new world without non-competes presents an opportunity for companies to explore alternative means of incentivizing and retaining talent beyond traditional compensation structures. Employee benefits, professional development opportunities, flexible work arrangements, and a positive work culture are just some of the non-monetary factors that can play a crucial role in attracting and retaining top talent.

By investing in these areas, companies can differentiate themselves as employers of choice, fostering a workplace environment that prioritizes employee well-being, growth, and satisfaction. As the competitive landscape of talent acquisition continues to evolve, organizations must remain agile and innovative in their approach to compensation and employee retention, leveraging a diverse array of strategies to meet the evolving needs and expectations of the workforce.

This ruling falling in the current flurry of return-to-office mandates is particularly interesting. The RTO push was signaling more of a buyers’ market, but with  95% of employees wanting some sort of remote work and the stick of non-competes disappearing, companies may once again need to bend to meet employees’ demands.

Going Forward

The dissolution of non-compete agreements will reshape the compensation landscape for employers and employees alike. With the removal of restrictive clauses, employees gain increased mobility and flexibility to explore new opportunities and pursue career growth without fear of legal repercussions.

And, as employers turn their focus towards total rewards levers to achieve their talent goals, employees will benefit from higher compensation packages and a greater emphasis on overall well-being and job satisfaction. With that focus, the removal of non-competes from a company’s talent arsenal could actually lead to a new era of heightened engagement, satisfaction, and productivity. Only time will tell.