Managing Employees Isolated From Within and Across Industries
Nobody likes to feel trapped. But employees benefit in certain ways when two factors combine to pin them in place, making it harder for them to exit their organizations with intellectual and social capital. New research co-authored by Evan Starr at the University of Maryland’s Robert H. Smith School of Business shows that employees tethered to their firms by noncompete clauses and nontransferable skills receive more on-the-job training and often get hired with less experience.
“Firms are more willing to invest in professional development when they don’t have to worry about their talent walking out the door,” Starr says. “Their focus shifts from buying talent to making talent.”
Prior research has explored the effects of noncompete clauses and nontransferable skills separately. Starr’s research, co-authored with Martin Ganco from the University of Wisconsin and Benjamin A. Campbell from The Ohio State University, looks at the combined effects of both constraints. "Frictions do not exist in isolation," Starr says.
In jurisdictions where noncompete clauses are enforceable, the contracts limit employee mobility within the same industry. Nontransferable skills, meanwhile, limit employee mobility to outside industries. People with nontransferable skills might include aerospace engineers or tradespeople such as welders — as opposed to someone like a web designer who could work in any industry.
"Workers who have limited opportunities across industries and limited opportunities within their chosen industry are less likely to consider outside job offers and less likely to be recruited by other firms, thus increasing the likelihood that they stay at their current employer," Starr says.
The longer tenures force firms to hire inexperienced workers and develop them internally. "In the presence of such complementary frictions, the importance of high quality recruitment and training regimes are magnified," Starr says.
This is because the mobility frictions work in both directions. Firms cannot wait for their rivals to develop talent and then swoop in like the New York Yankees and sign the best free agents to lucrative contracts. Instead, human capital managers must shift their focus to recruiting and developing entry-level talent — like a baseball team that signs a Double-A pitcher who will need years of coaching before reaching the Big Leagues.
"It's a double-edged sword," Starr says. “On one hand, your rivals cannot bid up the wages of important employees. On the other hand, you cannot hire targeted employees away from other firms."
The research, based on data from the U.S. Census Bureau’s Survey of Income and Program Participation, also explores competing forces that put downward and upward pressure on wages when within-industry and cross-industry frictions work together to limit mobility.
Limited mobility means less competition for talent, so firms can pay lower wages without worrying about losing their best employees in bidding wars. But limited mobility also results in better training, which leads to increased productivity.
“The productivity gains could be tied to wages for several reasons even when a credible threat of mobility is lacking,” the authors write. “For instance, the firm may be willing to share a portion of the productivity gains to provide incentives for subsequent productivity growth.”
Training also leads to increased opportunities for promotions, which typically come with higher pay. Overall, the authors find that the competing forces mostly cancel each other out — although wages marginally increase when workers face cross-industry and within-industry mobility frictions.
Read more: Strategic Human Capital Management in the Context of Cross-Industry and Within-Industry Mobility Frictions is featured in Strategic Management Journal.