Alabama’s banking market remains dynamic and fluid. Competition for top talent is fierce, and proven performers are bombarded with attractive offers from competitors. Any bank that has developed a team of lenders that consistently generates new and recurring revenue knows how difficult retention can be. This article will discuss strategies for discouraging competitors from poaching talent, discouraging employees from defecting, and incentivizing employees to invest in your organization for the long term.
Non-compete and non-solicitation agreements can be useful tools to protect an employer’s legitimate business interests in its customer relationships and its confidential/proprietary information. These agreements protect an employer’s investment in customer relationships by giving a former employer time to forge a relationship between its customer and a new employee without interference by the former employee. Without this protection, it is much easier for a new employer to realize an immediate benefit by recruiting talent from its competitor. For this reason, banks are typically advised to seek these agreements with any employee who has access to confidential or proprietary information, or who has meaningful contact with your customers.
Non-solicitation and non-compete agreements can be paired with each other, along with other restrictive covenants such as confidentiality provisions, to make it more difficult for an employee to move customer relationships to their new employer. Non-solicitation agreements allow an employer to contractually limit an employee’s post-employment activities, by preventing former employees from soliciting their prior employer’s customers for the benefit of a new employer for a defined period of time. Non-compete agreements, which are harder to enforce, prohibit an employee from accepting employment with a competitor for a defined period of time after terminating their employment.
Although these agreements can be valuable tools, they are not perfect solutions. The post-employment restrictions must be “reasonable” in scope and time, which means a court may later disagree with an employer’s definition of “reasonable.” (Even if a court ultimately deems a provision unreasonable, however, the specter of litigation expenses can deter competitors from recruiting employees subject to restrictive covenants.) In addition, if an employer has employment agreements containing restrictive covenants, it has to enforce those agreements or risk waiving them. Therefore, if the bank has employment agreements in place with an employee whom the employer does not perceive as a risk to transfer significant customer relationships leaves to work for a competitor, the employer may still have to spend some amount of time and/or money ensuring compliance. For these reasons, it’s important to draft and enforce such agreements wisely, or the burdens can outweigh the benefits.
Deferred Compensation Agreements
Deferred compensation agreements can take several forms. They must comply with federal tax and labor laws. Broadly speaking, deferred compensation agreements incentivize employees to stay with their employer so they remain eligible to receive future compensation, in exchange for compliance with certain restrictions set forth in the agreement. (Such as promises not to compete, not to solicit customers, to comply with employer’s policies and procedures, and/or to remain employed for a given period of time.) By increasing the cost of recruiting, these arrangements can also dissuade competitors from poaching employees.
One benefit deferred compensation agreements have over restrictive covenants is that they can be targeted. Although the cost of preparing deferred compensation agreements can be higher than simple restrictive covenants, employers can justify the expense by limiting their application to true high performers whose departure would sufficiently impact the organization. That allows employers to avoid the cost of enforcing restrictive covenants against low performing employees who leave to work for competitors.
Maintaining a successful team is much easier than creating one. Once a bank has assembled a team that produces results, allowing competitors to lure that team away and receive an immediate benefit is risky. With competition for talent so high, employers need a well-reasoned retention strategy to maintain and further a culture of success and growth.
Chris Bottcher is a partner and the managing member of McGlinchey Stafford’s Birmingham office. He is recognized in the 2020 edition of The Best Lawyers in America. Chris represents financial institutions in a wide range of business, corporate, and commercial litigation, including business disputes, fraud claims, counseling partners and shareholders in litigation and dissolution proceedings, as well as trade secrets, non-competition agreements, and the enforcement of restrictive covenants. He can be reached at CBottcher@mcglinchey.com or (205) 725-6401.