03/ 14/ 2002
Companies both large and small, and in virtually every type of business, have gone through the unfortunate experience of having a key employee leave and start his or her own company. This is often painful to owners and management of the original company -- both because the former employee may have been trusted and liked, and because the new business often becomes an immediate and direct competitor. Sometimes the employee takes information about customers, suppliers and even operational procedures that carbon-copy yours.
Is there any way to completely prevent employees from leaving and starting their own companies? Not really. In fact, it's the American way that someone works in a business until knowing enough to start their own. But there are definite steps and even legal procedures that a company can take to encourage key employees to stay. In today's Workshop, Jeffrey Moses explains how to retain your employees.
Trusted, long-term employees often know almost as much about the industry as the owners of the company. A high percentage of these employees will have little interest in taking the trouble to leave and start their own business, but there will always be a certain percentage who have an entrepreneurial spirit and want to become their own boss.
To help prevent these employees from leaving, you have to pour cement over your relationship with them. By that I mean you need to make their financial situation with your company so attractive that they will be reluctant to take the risk (and it's always a risk to start a new company) of leaving and going out on their own. This financial "cement" can be in the form of stock options, retirement plans with matching employee funds, long-term and performance bonus incentives, pay raises, added perks and benefits and in some cases even partial ownership.
The worst thing an owner of a successful business can do is to maintain total control in the areas of both finances and responsibility. The area of finances was spoken of in the previous point, but employees who are highly competent also usually need to feel that they are progressing to a point in their careers where adequate responsibility is being assigned to them. Key employees need some degree of autonomy, and they need to feel that they are working up to their full potentials. Without this, your most valuable employees may feel justified in leaving and starting their own companies.
A legal remedy to avoid this situation is a non-competition agreement, in which employees sign a statement declaring that they will not start another company within a stated amount of time after leaving their employment with your company. The amount of time can vary from two to five years, with two years being the most common. Such agreements have proven to hold up well in the courts. Along the same line, employees have been found liable for use of proprietary customer and supplier lists of former employees, even after the non-competitive time period has expired. Some courts have also ruled against individuals who have set up operations similar to those of former employees, when the operations are based on proprietary systems. Enforcing non-competitive agreements often involves litigation, with the associated expense and aggravation -- but such agreements are a practical way to discourage employees from leaving and entering into direct competition with you.
Another aspect to consider, although much rarer, is a hostile takeover from within your own company. This can be accomplished only when stock is involved, either publicly traded or privately held by you, board members and employees. If you own less than 51 percent of all outstanding stock, you could be at risk for a hostile internal takeover. To avoid this extremely painful occurrence, maintain ownership or control of the majority of stock at all times.
Good books on the subject of retaining key employees (these and others on the subject can be found through the large online booksellers, or at your favorite local bookstore):
- Keeping Your Valuable Employees: Retention Strategies for Your Organization's Most Important Resource, Suzanne Dibble, about $30.
- Keeping Good People: Strategies for Solving the #1 Problem Facing Business Today, Roger E. Herman, about $22.
