- April 25, 2023
by Charles G. Tharp | April 18, 2023
In 2023, company leaders will have to address new regulations and laws in three areas — noncompete clauses, pay transparency, and human capital disclosures — that have far-reaching implications that company leaders may not have fully grasped. How these changes will play out is far from clear, but the time to start thinking about them is now. The author presents several ways to view the coming changes as an opportunity to think deeply about their talent strategy and turn these regulatory developments to their advantage.
While layoffs in Silicon Valley and elsewhere dominate headlines, the reality is that many companies today still find themselves in a fierce war for talent. A spate of new laws and regulations — many of which are intended to make the workplace fairer for employees — may make the situation even more challenging for employers.
Three such developments — the Federal Trade Commission’s proposed ban on noncompete clauses in employment contracts, pay transparency legislation in many local jurisdictions, and new human capital disclosures mandated by the Securities and Exchange Commission — have far-reaching implications that company leaders may not have fully grasped. How these changes will play out is far from clear, but the time to start thinking about them is now. Here’s how leaders can adopt a growth mindset by viewing the coming changes as an opportunity to think deeply about their talent strategy and turn these regulatory developments to their advantage.
A Ban on Noncompete Clauses
The FTC’s proposed rule would ban the use of noncompete clauses as “an unfair method of competition.” The agency’s rationale for the proposed ban — which it estimates will increase workers’ earnings by $250 billion to $296 billion per year — is that these clauses are unfair both to workers, who are prevented from pursuing other opportunities, and employers, who can’t hire the workers bound by noncompetes.
The FTC Notice of Proposed Rulemaking was issued on January 5, 2023, and the 60-day period for public comment closed on March 10, 2023. Once a final rule is published in the Federal Register, companies will have 180 days to comply.
While some research suggests that banning noncompetes might enhance overall innovation in an industry sector or region, things look different from the point of view of individual employers. For them, the elimination of noncompete restrictions might make it more difficult to protect the investment they have made in employee training and development. Absent noncompete clauses, a competitor may find it easier to poach talent and reap the benefit of your company’s investment in a worker’s experience and development. Without this ability to protect investments in employees, employers will have to devote increased attention to providing career opportunities, ensuring an inclusive and welcoming culture, and exploring additional ways to enhance the employee value proposition to strengthen employee retention.
The impact of a noncompete ban may pose the greatest risk with higher-level employees and those with specialized skills who have knowledge of intellectual property, customers, and business strategy that would make them attractive to competitors. In an effort to increase employee engagement, many companies share key operating results and strategy information with employees below the senior management level. With the increased risk of employees being recruited away by competitors, companies may be more selective as to the types of non-public information that is shared broadly with employees. In the face of this competitive risk, leaders should reinforce how employees in high-value roles connect to the overall mission and strategy of the company.
Pay Equity Legislation
Colorado (2019), New York state (2023), California (2023), Washington (2023), and a handful of municipalities like New York City (2022), have passed laws requiring that employers list salary ranges for both external candidates and internal promotion opportunities. The rationale for increased pay transparency is to enhance employee bargaining and to help address gender wage inequality, but these laws also have significant impacts on your company’s talent strategy.
For instance, exposing information about your company’s pay strategy could better enable competitors to set pay levels in order to poach your talent. Of course, pay transparency cuts both ways: You’ll also see your competitors’ pay levels in states with these laws. While it’s too early to tell if the new transparency rules will increase employee churn and impose additional retention and recruiting costs on employers, it’s not too early to reassess the non-monetary aspects of employment with your company that could make it a more attractive place to work — work-life balance, opportunities for development, an equitable and vibrant culture, and the like.
There are signs that pay transparency is already stoking internal tensions. The labor shortage brought on by the pandemic and its continuing aftershocks has forced many employers to pay a premium for new employees. Longstanding employees, learning that new recruits are being paid far more for the same job, may quit or do the bare minimum of work in their jobs. The simplest solution is to make sure that the pay of long-time loyal employees doesn’t fall behind the market rate for their jobs. Yes, that means increased human capital costs, but retaining a skilled, motivated employee is far less expensive than searching for a replacement and suffering the opportunity cost to the company of a key position that goes unfilled for a long period of time.
Proposed Human Capital Rules
“Investors want to better understand one of the most critical assets of a company: its people,” SEC Chair Gary Gensler tweeted in 2021. He has directed the SEC staff to develop requirements that publicly traded companies disclose expenditures on skills training and development, workforce composition, turnover, diversity, compensation, and benefits. The SEC has targeted April 2023 as the date for the proposed human capital disclosure rules.
The SEC’s increased focus on human capital disclosure is influenced in part by investor and academic pressure. One assessment suggests that approximately 90% of the value of S&P 500 companies derives from intangibles, human capital being one of the most important.
The human capital management disclosure will be included in the 10-K, which currently requires disclosure only of the total number of employees. While many companies have integrated human resource information systems, they may not currently be tracking some of the information the SEC is expected to request, such as total number of contractors or total spend on all forms of employee training across the company. Consolidating and tracking such data may require additional resources and expense.
Companies should review their current approach to tracking of employee information and begin to prepare for the possibility that additional data will need to be collected and audited for the annual financial disclosure. Further, since disclosure of employee information could pose a competitive threat to the retention of key talent, companies should determine whether additional steps are needed to enhance retention.
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Because these three developments will apply equally to all companies, leaders may be tempted to relegate them to the compliance team. That would be a mistake. Company culture and providing purposeful work in support of a compelling mission is what really creates competitive advantage when it comes to talent acquisition and retention. Forward-thinking leaders will devote increased attention to these aspects of the employee experience that are hard for competitors to replicate.
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