The Chinese also hate non-compete agreements

Recently, the topic of "non-compete agreements in the United States" has become a bit of a fire.

On April 23, 2024 local time, the U.S. Federal Trade Commission (FTC) issued a rule prohibiting companies and employees from entering into non-compete agreements, which is expected to be implemented in four months.

For a time, it attracted many people to complain and discuss.

Some people say that it should have been canceled a long time ago, and the world's workers have been working hard for a long time, and they have accidentally bankrupted their families while working; Some people complained, I really don't know what is the use of letting an ordinary employee sign this thing; Some people also say that if the direction of canceling the non-compete agreement is really correct, should we also cancel it? All sorts of voices seem to be trying to tell us:

The Chinese also hate non-compete agreements.

So, what is a non-compete agreement? Why is the United States banning it? Why do we hate it so much? Shall we simply ban it?

So, I'll tell you a story, and you'll understand.

Suppose there are two competing Internet companies.

A strong family, annual revenue is climbing to new highs, the boss is called: Da Zhuang. Although one is okay, it is much worse than the previous one, and the boss is called: Xiaoqiang.

So, if you were an engineer, which company would you choose to go for?

I think that the result of the choice is most likely to be a strong company. Because the more you earn, it is also conducive to future development.

Even if you go to Xiaoqiang's company at the beginning, you are likely to try to jump over it after the business level improves.

This is normal, and most people probably choose it that way.

However, if things really develop like this, Xiaoqiang will start to get anxious.

Yes, my company is a little smaller, and there is no obvious advantage over Dazhuang, but I also want to develop, and I also have to retain talents.

So what to do?

So, Xiaoqiang grabbed you and said Big brother, you can't go.

Look, otherwise, let's sign an agreement.

After you leave me, you can't start a business for two years, and you can't go to a company that competes with us, such as Da Zhuang.

However, I am not asking you in vain. I will compensate you every month for the time limit, what do you think? If not, let's discuss it again.

Excuse me, will you agree?

Here, the agreement that Xiaoqiang asks you to sign is the "non-compete agreement".

It is generally an agreement signed between a company and its employees in order to protect its trade secrets and customer resources.

Generally speaking, an effective non-compete agreement has the following characteristics:

1) It is generally used for senior managers and senior technical personnel, as well as some personnel with confidentiality obligations.

2) Generally restricted: After the dissolution or termination of the labor contract, within a certain period of time (such as two years), you cannot start your own business or go to other units with competitive relationships.

3) During the restriction period, the worker must be paid severance and there is a minimum standard. For example, it must not be less than 30% of the average salary for the previous 12 months, and it must not be lower than the local minimum wage.

I see.

Then, this non-compete agreement sounds quite reasonable, which is equivalent to spending money to buy your time.

Xiaoqiang's company also has more opportunities to develop, even if the employee leaves, at least he will not go to the big strong company immediately. Moreover, it is quite in line with the spirit of the contract to talk about it in advance.

So why cancel?

Because this non-compete agreement, although it seems to be in line with the spirit of the contract, in fact, it is contrary to another "bigger thing".

This bigger thing is called: total social value.

What do you mean? I'll give you an example.

Let's say you're a senior technician with an aptitude of 5.

In a strong company, you can create 5 times the value of your ability value, which is: 5×5=25.

In a small company, you can create 4 times the value of your ability value, which is: 5×4=20.

If you also sign a non-compete agreement with Xiaoqiang, then even if you leave Xiaoqiang's company, most of you will have to engage in other industries in the future, and there is a high probability that you will not be as good as your old bank.

When the time comes, the value you create, not to mention 25, whether it can reach 20 is still a question.

So, in essence, the non-compete agreement is preventing the total social value of "your" from becoming 25.

Because, it prevents you, "flowing" to the theoretically most efficient place, preventing you from maximizing your social value.

This is contrary to the "Coase theorem".

"Coase's theorem" is that when the transaction cost in a market is low enough, resources will always flow to the most efficient use to maximize value.

What's more, if the non-compete agreement, once it starts to sink in large numbers, or even abuse, it will cause more serious consequences.

For example, it is clear that the original intention of the non-compete agreement is to target those senior managers and senior technical personnel.

However, some companies will also allow low- and middle-income employees to sign a non-compete agreement.

Just like some netizens complained: I don't even know what secrets a production line worker has to leak......

In this way, once an employee has the idea of leaving, they will immediately find that the cost of leaving is too high.

Or, not to work for a few years, and the compensation is pitifully small. Or, pay a large amount of liquidated damages, and the savings that you have worked hard for several years are suddenly gone.

A seemingly fair agreement can make individuals very passive. The total amount of "flow" will also decline as a result.

At this point, you may understand why the Federal Trade Commission (FTC) announced a ban on it.

All right. To sum it up.

At first, in order to protect their trade secrets and customer resources, companies chose to sign non-compete agreements with employees to bind them. However, non-compete agreements prevent the normal flow of resources and hinder the maximization of total social value. In addition, once an enterprise abuses the non-compete agreement, it will further hinder the development of employees, and at the same time, it is not conducive to the innovation and development of the enterprise.

So, what about further back? Will China's version of the non-compete ban also come?

It's not clear. We'll see. What do you think? Do you think China should ban non-compete agreements? We look forward to you in the comment area, say your thoughts, or retweet them, and discuss them with your partners.

If you want to ban it, there must be many details that need to be paid attention to, and situations that need to be considered. The abused non-compete agreement is likely to be only one of the small points that affect the innovation and development of enterprises.

But at least, people who work diligently shouldn't be burdened with more.