Non-Competes, Health Insurance and Other Ugly Limits To Innovation

Limits and creativity run in the same circles.

Desire to dig under, work around, leap over and push through is strong motivation to think anew.

However, there are limits, that — hmm, — limit.

Did you know that a major difference between moribund Detroit and high flyin’ Silicon Valley is the difference in how non-compete agreements are enforced? (Michigan enforces them, California limits them.)

In the recent Carnegie Mellon University publication: “Renewing Globalization and Economic Growth in a Post-Crises World – The Future of the G-20 Agenda” Serguey Braguinsky and Steven Klepper write about various ways worker mobility can limit innovation on a regional scale. In addition to visa restrictions, social pressure and lifetime employment guarantees, they use the non-compete as a primary example of the damaging effects of limiting mobility in the United States.

I’ve been on both sides of non-compete covenants. I’ve never particularly liked them, but never really questioned the idea either.

The comparison of Michigan to California is the poster child for how non-competes appear to damage innovation and economic development, in part due to a rather sudden change made by Michigan in the 80s. Matt Marx, Deborah Strumsky and Lee Fleming mention the similarities between Detroit around 1900 and Silicon Valley around 2000. In their youth, both were hotbeds of innovation and both rejected non-compete agreements. Thanks to a change in 1986 however, Michigan moved to a restrictive view of non-competes. Mobility of inventors appears to have fallen about 25%. Is that why Tesla Motors started out west?

Why Care If Inventors Can Jump Ship?

“In addition to infusing the hiring firm with knowledge, employee mobility has been shown to be associated with changes in strategic direction (Boeker 1997), organizational structure (Klette, Moen et al. 2000), the compensation of R&D staff (Moen 2005), innovation and patenting (Kim and Marschke, 2005; Singh 2006b), though not necessarily with performance (Groysberg, Lee, and Nanda, forthcoming). The growth of industries (Franco and Filson 2000; Klepper 2002; Klepper and Sleeper 2002) and even regions (Rosengrant and Lampe 1992; Saxenian 1994) has been attributed in part to the movement of technical personnel between firms. (Mobility, Skills, and the Michigan Non-compete Experiment. Marx, Strumsky and Fleming 2008)

So there appears to be a strong regional reason to promote worker mobility. There is an obvious personal, individual reason to promote mobility. But is that at the expense of innovation within a corporation that now has more difficulty holding onto key employees? I think not for a number of reasons.

Reasons why I think all companies can benefit from a mobile workforce:

  1. Good ideas go out the door, but better ideas come in. The grass is greener argument. Employees who are unhappy with the recognition and impact of their current job go somewhere they feel things will improve. Since companies will raid each other’s employees with some care for consequences (you take mine, I’ll take yours) things tend to balance out. You get a guru, he gets a guru, she gets a guru….
  2. Systemic Problems Alert. Loss of great employees (or mavericks) is a huge warning signal that something is not right with your firm. A warning signal that you can act on.
  3. Empowered Employees are more willing to stand up for good ideas. Employees terrified of not only losing their job, but being driven from an industry may be less willing to stand up for risky (but great) ideas or for what’s right.
  4. Employees willing to leave to follow their dream and passion make good investments. As inventors leave to follow their dream, buy in at the start. They are more dedicated and motivated and you still get a part of the upside.
  5. Keep managers on their toes. A cranky inventor with what seems to be a half-baked idea is easy to dismiss when you think they can’t escape.
  6. Take upstart threats more seriously. Sometimes a company will try to maximize short-term cash-flow by putting off innovations that could change their business models. Control of talent makes them more likely to feel safe pursuing this path.

Now there are plenty of reasons why a company would want to contain their employees with non-competes, the two most potent being protecting IP and managing customer relationships. I’m curious how the benefits outweigh the costs. While I’ve found some research that looks at this I would certainly appreciate anything you may be able to add via comments or email. I’ll be following up.

What does limited employee mobility have to do with Health Care?

I think health care insurance, as currently regulated, is becoming a larger threat to employee movement than non-compete agreements. At least a judge can determine a non-compete is unreasonable, there are few backstops to being denied insurance.  If access to insurance can be refused in ways that are out of the control of the insured then decisions to move and take employment risks are damaged. Start a company? Work for a small firm? Take a risky stand?  Risking health insurance coverage has been and is a growing factor in decisions about how to behave at work. Unfortunately solving this becomes a regulation problem where government may need to take a stand for the individual over the large organization.

As a side note, current regulations are even delaying genetic research because of concerns that research subjects could be denied insurance based on information uncovered as part of the research. Even with the benefit of recent legislation there is serious concern: (Disclosure: A client is in the biotech/genetics field and must grapple with these issues.)

[These genetic studies]  …”will not (and indeed should not) materialize until insurance companies cannot deny coverage for pre-existing conditions and cannot drop or limit coverage for the seriously ill. After all, genetic testing performed during treatment for one disease could turn up susceptibility to a whole host of other diseases; susceptibility to diseases that may induce insurance companies to look back through your forms for clerical errors. “ Genomics Law Report

I started thinking about limits thanks to Robert Hruzek’s “What Did I Learn From Limits” project over at MiddleZoneMusings.com and as you can see it took me in rather an unexpected direction.

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12 Responses to Non-Competes, Health Insurance and Other Ugly Limits To Innovation

  1. Pingback: Depersonalizing your personal management philosophy | Managing Leadership | Managing Leadership

  2. Emily says:

    Very interesting point regarding the link between employee mobility and healthcare. I enjoyed reading your article. Thanks for the information!

  3. Brad Shorr says:

    Hi Fred, While I’m generally sympathetic to work environment free of non-compete contracts, Ive had some experience on the company side of things and can report that there are times when these contracts provide legitimate protection to a corporation. When we discuss these things, I think most of us – and the courts – have a pro-employee, anti-corporation bias. However, there are employees who will act unethically to promote their own interests in ways that do serious harm to the companies they work for.
    .-= Brad Shorr´s last blog ..Elevate Your Mood with Food =-.

    • Hi Brad, There is no question that it is one way for a company to deal with an employee who is working against a companies interests or unethically. But I’ve begun wondering if this approach is even very effective at that. But could a non-compete actually establish an environment that encourages behavior that discourages innovation? If I feel secure that a salesperson can’t run off with my customer list and attack me with insider knowledge do I short change customer relations? Do I undervalue my sales person? I’m not sure. I do know that it is an unreliable covenant due to the factors you mention. In fact, an employee’s natural loyalty to a firm that treats them reasonably is a companies best protection overall.

  4. Wow, you weren’t kidding when you said this month’s WILF topic took you in a different direction, Fred!

    Good discussion, though. I think along the same lines as Brad, there’s definitely a use for ’em, if only to limit the unscrupulous.

  5. kay plantes says:

    Fred, many have questions why UW Madisonm #2 in the nation in earning federal research grants (if they’d accepted federal defense department grants they’d be #1) did not develop the rich tech community found in Boston and San Diego/San Francisco. The reason was non-competes the Wisconsin Legislature imposed on faculty–start a business and you lose your tenure position. Once this law was changed, we became a young Silicon Valley, but now we lack the scale that has become a competitive advantage for the regions with the head start. (Proximity to talent has become a key location driver and so the large are getting larger.)

    I fully believe we are moving from a world in which tight boundaries and divide and conquer approaches are giving way to one in which success will require open and transparent and fluid boundaries. Your arguments are completely aligned with this.

    • Hi Kay, I hadn’t heard about Wisconsin’s challenges here. The reversal in policy will be interesting to look at and who knows what technology the next growth curve may be founded on. While different communities may get a piece of the Silicon Valley action, just as automotive mfg was spread world wide by Detroit, the key element is preparing to catch the next wave not the last one. Very exciting. Thank you for the info to follow up on!

  6. Pingback: Middle Zone Musings » All Entries: What I Learned From Limits

  7. Andrew says:

    Fred,

    I’m afraid that I am not particularly familar with the way health care functions in America (so please excuse my ignorance), but from what I can gather, most people who receive health care do so through schemes funded by their employer – is that correct?

    If so, I can certainly see how a degree of anxiety with regard to changes in health care arrangements or entitlements would cause some ‘would be leavers for greener pastures’ to think twice about leaving, and how that would constrain the natural process of the flow of labor and ideas which results when innovative employees feel sufficiently confident so as to make bold career moves.

    The points you raise are very interesting. I have always seen how freedom of inflow of labor benefits companies which encourage innovation, but had never really thought a great deal about the benefits which companies might derive from freedom of labor outflow in this regard. Restrictive covenants certainly have their share of advantages (as you rightly acknowledge) for employers, but I can certainly see from your discussion how their overuse might unduly stifle creativity.
    .-= Andrew´s last blog ..Google books – let a wonderful innovation go full steam ahead =-.

    • Hi Andrew, In the U.S. most health insurance is provided via employer plans. The larger the employer the more secure the benefit is, although this has been changing with the current financial crises. At many companies employees pay only a small portion of their health insurance cost – much labor unrest is currently around the issue of what percentage of health insurance costs will be paid for by the employee. If you do not work for a large company then the odds go down that insurance will be available through your employer at which point insurance companies can refuse to insure you for a whole host of reasons. In total, things are pretty messed up.