During boon times, management energy is rarely spent worrying about violations of top-level employment agreements when hiring new executives. But when a downturn comes, companies are watching their backs.
Consider Starbucks Corp.’s well-publicized lawsuit against a former division head for breaching a noncompetition agreement to join rival coffee chain Dunkin’ Brands Inc. The ex-Starbucks executive, Paul Twohig, agreed to settle out of court, paying his former employer $500,000 and subsequently delaying his start date, Starbucks disclosed.
“Market share is so important that I think people are anxious to take those steps,” says Dennis L. Monroe, CEO of Parasole Restaurant Holdings in Edina, Minnesota, and chairman of the Minneapolis-based law firm Krass Monroe. “There’s no question it’s on the increase.”
Recruiting top talent from rival companies has long been standard industry practice. But in today’s protective environment, determining whether or not to poach a C-suite executive from a competitor means closely weighing whether the benefits of the move outweigh a defensive backlash, says Ron Stockman, president and CEO of the Naperville, Illinois–based headhunting firm National Restaurant Search.
“It’s highly beneficial obviously to have someone who knows the space, who knows what works,” Stockman says. He says the executive benches at so-called “academy companies” with proven track records in their niche become particularly attractive during difficult economic times.
Beyond experience, industry veterans bring along valuable connections within the field, including contacts that could eventually be brought onto the management team. In addition, there are longstanding relationships with vendors, bankers, and other resources that can make them worth fighting for.
When Bradley Blum, former CEO of both Olive Garden and Burger King Corp., was recruited in December 2008 to head Romano’s Macaroni Grill by venture capital firm Golden Gate Capital Partners, his knowledge of the Italian food segment allowed Macaroni Grill to quickly leverage vendor contracts that helped to improve food quality and lower costs, directly benefiting the bottom line, Stockman says.
On the downside, companies on the hunt must be wary of becoming star struck by executives who look great on paper but are a mismatch in their new environment because of cultural differences such as management style. And contractual barriers such as the noncompete on which Starbucks built its recent case can hinder or derail a deal, leading to costly litigation.
“I look to do it on the front end of the process rather than the back,” says Stockman, who advocates attorney review of existing contracts before the start of serious hiring negotiations. Emerging chains, he says, often get into trouble by trying to limit their legal expenses when they recruit.
Joyce Mazero, who heads the restaurant, foodservice, and retail practice group for the Dallas-based law firm Haynes and Boone, agrees that being informed early on is the best way for a hiring company to make an intelligent decision about whether an executive-level candidate is worth pursuing.
She says all the various components must be weighed, noting that every company has its own tolerance to risk. In the end, companies must assess whether the short-term financial sacrifice may be worth the long-term gains that the hire brings to the company.
Understanding the legal barriers to an executive hire is becoming more important as restaurant companies have become more protective of proprietary information. This comes amid increasing competition and higher levels of turnover in recent years, says Carl Crosby Lehmann, a partner and employment attorney specializing in hospitality with Gray Plant Mooty in Minneapolis.
“I think we’re seeing noncompetes and other restrictive covenants become more standard in employment agreements,” he says. “Businesses are becoming more serious about identifying the various aspects of their businesses that are confidential, that contain proprietary information, and are taking the steps necessary to protect them.”
The effectiveness of noncompete agreements, which among other stipulations often call for sideline periods of a year or more before an executive can work for a direct competitor or start a business in the same sector, vary from state to state, Lehmann says. In addition, they do not carry over from one jurisdiction to another.
When those contracts prove difficult to enforce, the defensive company may instead rely on trade secret law, attempting to prove that the exiting employee is taking competitive information such as customer lists and secret recipes to the new company.
Management experts say one way to limit bad blood is for the departing executive to maintain a positive rapport with the soon-to-be-former employer well before leaving. That means resisting the urge to cast blame and emphasizing that the decision to move on is about a career opportunity rather than problems with the current employer.
“They need to be very verbal about what has been positive for them at the company,” says Susan Fawcett, an executive coach focusing on hospitality clients with Talent Revolution in Lexington, Kentucky. “They really need to value what they have gotten, to verbally wish for the company to succeed and do very well. No one wants to think you’re leaving a company because it’s terrible.”
On the flip side, companies protecting their flanks should be aware of signals that could translate to an executive’s preparation for exit, such as changes in behavior, including less frequent appearances in the office, detachment from the business, or the sale, purchase, or transfer of large assets such as homes and cars, says Haynes and Boone’s Mazero. She adds that social networking sites can now offer clues about an executive’s plans for the future.
“It’s a big red flag,” Mazero says. “You can see who they’re linked up with and who their friends are.”
Perhaps one of the simplest ways for companies to protect against executive flight is to show appreciation for management that has been stressed by cost cuts, downsizing, and the pressure to do more with less. Avoid the mindset that a down market limits executives’ ability for mobility, says Susan Steinbrecher, founder and CEO of the Hurst, Texas–based executive coaching firm Steinbrecher & Associates.
“This is the time that communication absolutely needs to be increased,” Steinbrecher says. “Really show that you’re listening, that you understand, that you care—any way you can say thank you is meaningful.”