Technology’s growing importance across every industry means companies are focused more than ever on cultivating strong IT leadership. Growth-hungry CEOs are calling on their CIOs to shepherd digital transformations, the better to win customers or at least improve business operations. That’s great for the CIOs, right? Perhaps, but IT’s heightened importance also means that companies are taking extraordinary measures to protect their CIOs, whom they view as strategic assets who can quickly become liabilities in the hands of competitors.
Former IBM CIO Jeff Smith learned this the hard way after he left the company for a senior role at Amazon Web Services in May. Exiting Big Blue, a relative upstart in public cloud services, for the 800-pound market gorilla known as AWS, did not sit well with Smith’s former superiors, who sued him for violating a one-year, non-compete covenant and demanding he repay $1.7 million in stock bonuses. You can read the suit in its entirety here.
Smith’s story is cautionary tale writ large for senior IT leaders when it comes to noncompete agreements, both in the negotiation phase when signing to a new job and navigating them when leaving.
Noncompetes pose risks for strategic CIOs
Executive recruiters surveyed by CIO.com say you can expect to see more such lawsuits as technology’s value to enterprises continues to grow.
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IT is no longer simply a back-office function full of client-server management and ERP implementations, says Gerry McNamara, the global managing director of executive recruiter Korn Ferry’s CIO practice. Enterprise CIOs are being called on to support if not build outright new revenue-generating digital products and services. Some CIOs are granted seats at the C-suite table, as their value extends beyond technology right to the heart of corporate strategy. As such, companies are loath to let strategic CIOs go without a fight.
IBM, for example, argued that Smith was one of the company’s most senior executives with “knowledge of IBM’s most closely guarded product development plans.” Specifically, IBM argues that Smith was familiar with cloud technology it planned to launch in 2018. The issue underscores the lengths to which companies will go to hold onto top talent.
“Companies want to tie up those who are leading tech strategy,” McNamara says. “They know the strategy because they’re more and more part of that business discussion. They are at the table with the CEO, the COO and everybody else. So what we’re seeing is more sophistication in the contracts that these executives have and they’re being treated like every other functional leader now.”
What this means is CIOs need to protect themselves better against the kind of suits Smith is facing. It may sound a bit paranoid and while you may not have a job hopper’s track record, you never know when a more lucrative opportunity may cross your path.
6 tips for negotiating CIO noncompete agreements
1. Solicit counsel to pore over your employment contract(s)
You’ve slam-dunked the interview for that hot new job and are looking at the job contract. Get a labor lawyer to scrutinize the nuts and bolts of employment contracts from both the prospective employer and your existing employer to help you navigate any potential rough waters, says Jeffrey London, a partner who helps companies design compensation packages at Arnold & Porter Kaye Scholer LLP. Be sure to negotiate noncompete provisions up front as you’re entering a new company, London says. “That is when you are at your strongest and that is the time to negotiate the limitations of the noncompete” clause.
2. Get financial shelter
A CIO who goes to a competitor runs the risk of courting litigation. London says you should ask the general counsel of a perspective new employer to not only look over the contract of the company you plan to exit but see if the they will give you financial cover in the event of a lawsuit. “As a CIO going in, you want to make sure your new company will indemnify you if there is any litigation,” London says.
3. Beware geographic pitfalls
Determine whether the noncompete terms align with the state in which the company is headquartered (as is most often the case) or the state in which you actually do your work, says Brian Tobin, senior client partner in the executive governance group at the Korn Ferry Hay Group consultancy. The difference can help you decide how hard it will be to extricate yourself from your current employer without exposing yourself to litigation.
“When you see a noncompete you have to ask what the governing law is,” Tobin says. “Is it in the state where you are doing work? Is it the state where the company is headquartered? And what is the governing law there? Is it favorable to me or favorable to the company?” California doesn’t enforce noncompetes, providing a huge boon to workers in the tech industry who have the relative freedom to go from, say, Google to Facebook — and sometimes back. Massachusetts and New York, not so much.
4. Limit the noncompete scope
It’s common for prospective employers to list competitors that they don’t want you working for should you leave, typically up to a year after your departure. But it’s also common for an employer to sneak in a clause that reads like “or any other competitor.” That is egregiously broad and begs for negotiation. You need to make sure this list is both as narrow and specific as possible to keep future job opportunities open, says McNamara. “You can’t just sign this thing willy nilly,” he says. “You have got to have somebody to defend you and negotiate this point because if things don’t work out you want to be able to make a living and go where you want to go.”
5. Limit the duration
In the digital era, agreeing to any noncompete covenant that spans more than a year is too long. Technology is moving so fast that a year for a CIO goes by in a blink. A lot happens and a lot changes. Companies will try to stretch the noncompetes to ensure their chances of getting key products to market, or to tie up certain customers. But if you wait longer than a year, you may miss opportunities. Shoot for a six-month clause and hope for the best.
6. Show me the money
Companies use noncompete clauses to gain future leverage. You can create your own leverage by asking for money up front in the event the company’s noncompete requires you to sit out a year. “If IBM or some company wants something then it is of value,” McNamara says. “So if you’re to ask me to stay off limits for a year after I leave from these 5, 6 or 10 companies, then you’re going to have to pay me. I’m willing to sign it but you’ve got to give me something if you’re going to ask me to stay on the sideline.”
To be clear, noncompete suits against CIOs aren’t yet common. But they are most likely going to proliferate between tech companies who compete directly against each other, such as in the case of IBM and AWS, says Chris Patrick, global CIO practice leader at executive recruiter Egon Zehnder. “Where I’d expect to see it more explicitly is in tech companies or those with a product or service if not owned by CIO or CTO it’s driven, enabled or supported by that person and therefore they’re very close to the end consumer as well,” Patrick says. He says tech companies are also increasingly concerned about losing customer relationships their CIOs have cultivated. AWS, for example, has hired a small squadron of former CIOs to evangelize about its cloud products to, ahem, CIOs.
“This is somewhat virgin territory for CIOs because it’s something they haven’t had to worry about in the past,” Patrick says. “But it’s something they have to be much more aware of.”
Hopefully none of you will have to go through what IBM’s Smith has. Chances are it won’t come to that as all parties stand too much to lose from letting courts resolve the matter through litigation, says London. CIOs don’t want to be responsible for paying financial penalties and court fees out of pocket should they lose. Conversely, it is especially bad if companies lose such court cases because it sets a precedent that existing employees can leave at will — damn the noncompetes.
“You don’t want to be in a position to lose because if you lose, you’ve basically told your employees that it’s fair game to leave,” London says.