Strategic Restraint : Why Companies Do Not Use Noncompete Agreements When They Can?

Extant work in strategic management has focused on the role of various legal levers when managing human capital. Companies use such levers to improve employee retention and prevent leakage of knowledge to rivals. Specifically, noncompete agreements (NCAs), contracts that prevent employees from joining competitors, have received much of the attention in the literature. NCAs have been conceptualized as being advantageous to employer firms and the implicit assumption is that firms use NCAs when they can. However, most workers in the US are not bound by an NCA. We develop a theoretical framework explaining that firms experience both costs and benefits associated with the use of restrictive practices such as the NCAs and that these costs and benefits may vary even for rivals within the same industry. Utilizing a unique survey dataset developed in collaboration with Payscale.com, we examine the heterogeneity in the firms’ actual use of NCAs conditional on industry and state. We find that the nonuse of NCAs is more common among firms that rely more heavily on talent relative to rivals and are also not industry leaders, and such firms are more likely not to use NCAs to attract skilled employees. The study provides evidence that some firms may differentiate strategically by opting out of using restrictive practices toward human capital, even when such practices are legal and used by competing firms