Aggressive Talent Wars Are Good for Cities

ERE 2015 Spring Hero_BGCalifornia is often ranked among the world’s most inventive regions. But most observers miss one of the major reasons why: the absence of non-compete agreements.

In San Diego, at the ERE conference, I’m going to be talking about this, but also will be talking to recruiting leaders about rethinking the whole way they handle departing employees, ex employees, and employees who could depart (that’s all employees).

Anyhow, back to non-competes, barring them is one of California’s longstanding strong talent mobility safeguards.

Unlike most other states in the United States, but more like innovative Western European countries like Germany, the Netherlands, and Sweden, California has rules about allowing job mobility within markets. The California Business Code voids all non-compete agreements between businesses and their employees, while the California Labor Code restricts the ability of corporations to require their employees to pre-assign all inventions, even if unrelated to the job, during the course of employment.

California courts have been so adamant about enforcing the state’s prohibition of non-competes, they’ve held that companies who do not hire or promote talented employees who refuse to sign a non-compete (which would be void anyway if taken to court) are liable in tort and should be subject to punitive damages. They’ve even refused to enforce non-competes that were signed in other states, announcing them contrary to state policy.

bostonConversely, Boston’s Route 128 tech beltway has not flourished the way Silicon Valley has, in part because of restrictive non-compete agreements. Non-competes have contributed to the more rigid, vertically integrated, and prone to insourcing ethos of Boston’s high-tech region. California’s lack of non-compete agreements is the reason Marissa Mayer could assume the position of CEO at Yahoo immediately upon leaving its direct competitor, Google. And, as it turns out, it’s the reason California’s cities are some of the most innovative in the world — and provides a model for fueling innovation and economic growth elsewhere.

Job-hopping at all ranks is part of the California knowledge economy, but the policy spills over to the industrial culture too, creating a culture of openness, movement, and networking, where companies know that the talent wars are a repeat game. Even though Californian companies face a higher risk that their best talent will leave, they also recognize the long-term benefits of talent mobility. And industry leaders learn to view the departure of employees not only as a loss (because of course there is a loss) but also as potential gain, in which former employees may eventually return, bringing new skills back with them.

Although most companies are keen to reduce turnover, a stunning number of new studies demonstrate how high employee turnover actually contributes to economic growth. Research by Matt Marx (Sloan) and Lee Fleming (Berkeley) finds that after Michigan began to allow non-compete agreements, the state experienced a brain drain of its best talent. Many decamped for California — especially those inventors with the most-cited patents.

In another recent study on venture capital investment and non-competes, Yale professors Samila and Sorenson conclude that mobility restrictions not only impede entrepreneurship and startup ventures, they slow the overall economic growth of a region. Studying a decade’s worth of data on over 300 metropolitan areas in the United States, including patent filings, levels of venture capital investment, and level of entrepreneurships, the study finds that relative to states that enforce noncompetes, an increase in venture capital in states that either void or restrict non-competes has significantly stronger positive effects on regional patenting rates, startup rates, and job growth.

Article Continues Below

In response to an identical influx of local venture capital, states that do not enforce non-competes experience twice the increase in patents, double the birth of new companies compared to states that enforce them, and three times the employment growth of non-compete enforcing states, benefiting not only the start-up segment of a region but also incumbents.

There is also a motivational aspect in allowing people to leave and encouraging them to stay using positive, rather than negative, incentives. In recent behavioral studies, my collaborator On Amir from and I find that participants bound by non-compete agreements and other post-employment restrictions did not perform as well and were less motivated to stay on task than those unbound. Participants in our experiments were more likely to quit the task and to make errors when they were asked to sign non-competes. Mark Garmaise, from UCLA, finds that non-compete enforcement strongly reduces executive mobility and shifts compensation from bonuses and performance-based pay to a heavy reliance on a fixed salary. In other words, performance carrots work better than restrictive sticks.

Think about it: human capital is not a static resource in the way real estate or building materials serve a construction company. Human capital is both a resource and a living subject who makes constant judgments, decisions, and choices about the quantity and quality of outputs.

 

a version of this appeared in Harvard Business Review

Orly Lobel is the Don Weckstein Professor of Law at the University of San Diego and the award-winning author of three books and numerous articles. Lobel's research is published widely in the leading scholarly journals in law, economics, and psychology. Lobel's research focuses on the contemporary realities of the labor market, innovation policy, human capital and intellectual property. Her work has been featured in the New York Times, Wall Street Journal, the Economist, Businessweek, Harvard Business Review, Forbes, Sunday Times, Globe and Mail, CNBC, Fortune, CNN Money and HuffPost. Most recently, her book Talent Wants to Be Free received a Gold Medal in the 2014 Axiom Best Business Book Awards and is the winner of Best Business Book in the 2014 International Book Awards. A world traveler, Lobel has lectured at Yale, Harvard, UCSD, Tel-Aviv University, and is a frequent speaker at top research and business institutes throughout Europe, Asia and North America. Lobel lives in La Jolla, California, with her husband and three daughters. In 2013, Lobel was named one of the 50 Sharpest Minds in Research by The Marker Magazine.

Topics

1 Comment on “Aggressive Talent Wars Are Good for Cities

  1. All good points. Just one of the many examples of how companies lobby the government for special favors and privileges that let them push down wages and keep their employees more as slaves rather than actual employees. It’s analogous to contracts which would force capital equipment to lie unused and deteriorate rather than be be re-tasked for other purposes. Or, forcing its continued use for less productive purposes when better options were available. That this would be harmful to employment and the overall economy in an area is common sense, but of course and as usual, companies are always making the argument as to why they need to treat their employees worse than their equipment.

Leave a Comment

Your email address will not be published. Required fields are marked *