Meaning
Financial consideration provided to an individual ensures the validity of a restrictive covenant that prevents them from working for a competitor for a set duration. Providing non-compete compensation is a requirement in many jurisdictions where the restriction of trade is otherwise prohibited without a clear benefit to the worker. This payment usually occurs in monthly installments throughout the restricted period.
Covenant Validity
Agreements that lack this payment are often found unenforceable by courts which value the right to earn a living. Ensuring non-compete compensation is part of the contract protects the proprietary trade secrets of the firm. Validity is tested when a former employee attempts to join a rival production plant.
Economic Exchange
The firm pays for the silence and the absence of the individual from the market in exchange for protecting its client base. If the non-compete compensation is too low, a judge might strike down the entire restriction as unreasonable. The rate is typically a percentage of the final salary and must be sufficient to support the individual while they are barred from their primary field of expertise.
This exchange represents a proactive cost to maintain market share and capability.
Risk Mitigation
This cost is weighed against the potential loss of revenue if a key manager joins a direct rival. Non-compete compensation serves to stabilize the competitive landscape after a senior departure.
