By Paul Keegan
(Bloomberg Businessweek) – What’s the best way to combat wealth inequality, increase employee engagement and boost profits? Give workers an ownership stake, says Pete Stavros, co-head of US private equity at KKR & Co. Stavros recently started a nonprofit called Ownership Works to assist companies in creating employee equity plans, which he says help focus workers on a common mission. The interview has been edited for clarity and length.
Why is it important to get employees in on the action?
First, it builds wealth in the bottom of the economy. Two, it addresses racial and gender inequities, because pushing ownership broadly and deeply benefits people of color and women. Third, the government estimates that 60% to 65% of Americans are financially illiterate, so owning stock gives people a real opportunity to learn how money works.
What’s in it for the company?
There’s a big payoff, but it doesn’t happen overnight. When KKR invested in Ingersoll Rand Inc., a publicly traded pump manufacturer, it was a bit of a rudderless ship. Employee engagement was very low, and there was tremendous turnover. But over nine and a half years, when everyone got ownership, turnover dropped from 20% to below 3%—and that’s during the “great resignation.” Think about not having to recruit, hire and train 3,000 people every year. And employee engagement scores went from under 20% to 90%. These are tremendously powerful strategies when executed well.
If this approach works, why haven’t more companies tried it?
It’s very hard to do. If you’re starting from a place of 70% employee disengagement nationally, according to Gallup polls, and low financial literacy, that’s a tough chip to turn. This takes years of hard work—building trust, sharing information, teaching financial literacy and fundamentally changing the way these businesses operate.
How much stock should employees get?
To be meaningful, it needs to equal at least six months of their income and ideally 12 months, earned over a five-year period, assuming the business performs. And people don’t need to wait until retirement to get access to it. Hopefully, they will invest it wisely.
Should employee performance be taken into consideration?
The key question is whether your human resource and performance assessment system is good enough that your employees trust it. If so, tell employees that the extent to which they will participate depends on their performance. If the answer is no, you’ve got to revert to the team concept. We say, “If we all pull together and drive productivity and lead times and all that stuff, we will all benefit together.”
How does your approach differ from an employee stock ownership plan?
I’m a fan of the ESOP concept, but it has challenges. ESOP is a structure that says if you achieve 100% worker ownership as an S corporation, the company can pay no federal income taxes and, in most states, no state income taxes. But it’s complicated to execute and, in most cases, not practical for public company, or in a private equity context, so that market is limited.
What got you into this crusade?
My father earned $15, maybe $20 an hour operating a road grader for a construction company and always dreamed of profit sharing and having a real voice in the business. That stayed with me. About 11 years ago at KKR, we looked at our companies and said, “Is there a better way to engage the entirety of the workforce while delivering results for shareholders and better outcomes for workers?” We tried shared ownership and, after a lot of trial and error, learned how to make it work. We’ve done it now in the US about 30 times, involving 50,000 workers.
Why did you start Ownership Works?
We got a lot of calls from other firms saying, “Hey, this sounds exciting.” We helped the CEO of Harley-Davidson roll out this model last year when the company gave out stock grants. Ownership Works now has 60 partners representing an interesting cross section of the economy— investors, corporations, foundations, labor leaders, pension funds, groups that don’t normally talk to each other much.
How many private equity firms have joined?
We’ve announced more than 20, including TPG, Silver Lake, Warburg Pincus, Leonard Green, Berkshire Partners and Goldman Sachs. When a private equity firm says, “I’m gonna try this and if it works, I’m gonna roll this out throughout my entire portfolio,” that’s when you can really scale this. Just the top 20 private equity firms probably have 5 million employees in their portfolio. If each employee earns $50,000 in equity wealth, that’s a quarter of a trillion dollars, basically doubling the wealth of the entire bottom half of the country.
