Tackling the Wealth Gap: KKR’s Pete Stavros and a New Employee Ownership Model
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Can engagement models and employee ownership create shared prosperity and boost a company’s bottom line? On April 27, Pete Stavros, co-head of global private equity at KKR and founder and chairman of the nonprofit Ownership Works, spoke to students and others about the challenges and achievements of implementing broad-based ownership programs and engagement strategies aimed at improving the quality of life, and potentially generating wealth, for lower-income workers.
The event was co-sponsored by Stanford Graduate School of Business, Corporations and Society Initiative (CASI), and the Rock Center for Corporate Governance, a joint initiative between the Stanford Law School and GSB. CASI student leaders Elle Kang and Ryan Zepeda moderated the discussion, which was followed by a reception and continued conversation.
Stavros began by acknowledging that employee ownership as a business concept “is not an easy thing to pull off.” He said that he and his wife had initially launched Ownership Works in 2021 as a project they intended to keep small, but after a mention in the Wall Street Journal offers came flooding in to help.
“We got so many inbounds from people saying, if you're serious about this, we'd like to be a part of it as long as you acknowledge this is difficult. We'd like to go on the journey and see if we can figure this out.”
Stavros said nearly 100 organizations and people have signed up to partner with Ownership Works, including Wall Street banks, consulting firms, pension fund leaders, and even union leaders “who are around the table with us, many of whom are hugely critical of private equity, and skeptical of capitalism.”
“So, what excites me about it is, we've got a lot of people from different perspectives actually working together trying to figure this out.”
As Stavros explained, the idea of broad-based ownership stems from his personal journey. His father was a construction worker in Chicago for over 40 years. “Growing up the lessons around the dinner table were very much about what it was like to be an hourly worker. He learned from his father that the incentives of a company and its workers are often not aligned.
“You want more hours; you want overtime hours, and your employer wants exactly the opposite.” Hourly workers, his father said, “don't have a voice. You think you have all the best ideas because you're doing the work … but nobody listens to you.”
After college, Stavros ended up at a small investment firm where he worked on an employee stock options plan (ESOP). Stavros told the audience that ESOPs were a “technical tax structure that was created in the 1970s to encourage worker ownership. Basically you [the company] could stop paying federal income taxes if you shared all of the common equity ownership with workers. It has, unfortunately, not gained broad adoption in part because the law was poorly orchestrated.”
When Stavros moved into a leadership role as head of KKR’s Industrials private equity industry group 14 years ago, it allowed him to experiment with non-ESOP ways of sharing ownership broadly. He believed that there are many reasons why employee ownership models are critically needed, starting with the concentration of wealth at the top and the lack of wealth at the bottom half of the population. The driver of this, in his view, is that stock ownership is concentrated at the top income levels.
“It’s the ownership of appreciating assets in the form of stock.” He showed the audience a graph with government data and said, “the bottom half has $200 billion and the top 10% has $30 trillion.”
He also stated that increasing racial and gender equity is another benefit of broad-based ownership. “When I talk to leaders in the black community, they say, of course, we want more Black CEOs, but what you could do right now to help the Black [and] Hispanic communities, and women in the workforce, is to share ownership with everybody.”
Stavros spoke about his efforts to improve employee engagement with the ownership model and otherwise. He claimed that the lack of employee engagement in the U.S. is a huge problem that became worse after the COVID pandemic. He shared the findings from a 2022 Gallup survey that showed the share of unhappy workers rising.
“They are actively disengaged, so these are people throwing the proverbial wrenches in the machines trying to hurt the company that they work for because they hate it. There's a big opportunity, not that stock ownership alone is going to do it, but there's a big opportunity to change the dynamics inside of a workplace.”
Stavros’ focused next on financial literacy, which is another important issue addressed by the employee ownership model. He sees the lack of financial literacy as another huge problem facing the country and has been working for a long time on finding ways to improve people’s financial knowledge.
Stavros said one of the main reasons workers don’t bother to learn the fundamentals of finance is because they say they have no assets. They also cite too much debt and low credit scores as factors.
“We have found that if you share ownership, you can take that three to five percent that would engage with free financial counseling to 50 percent. So, this can be a breakthrough way to get people engaged on their future and on understanding basic financial concepts.”
The final reason why employee ownership models and engagement are needed is the high turnover rate plaguing many companies. “Sometimes it shocks people,” he said. “Forty percent of Americans quit their job every year, so an average company is replacing the entirety of their workforce every two and a half years. What a waste for the company, [and] a waste of human talent. People aren't advancing their skills; they're just bouncing around trying to find something better.”
Stavros was quick to point out that employee stock ownership is not going to fix all of our problems. However, he believes it could encourage people to get off the bench, re-enter the workforce, and potentially stay at the job while trying to build skills to advance. Stavros was emphatic that any employee ownership model must be combined with robust employee engagement efforts in order to succeed.
“You teach financial literacy as a foundation, you share information transparently, how decisions are made, how much money the company makes, how we make money, how what you do everyday ties into our value creation program.”
Another component of the model involves worker voice initiatives. Stavros said this strategy includes turning over a portion of the capital expenditure budget to the workers so they can decide how to invest it.
Stavros warned that a company must be serious about ownership and the amount of stock given needs to be significant. He stressed that the equity is not being purchased by the workers or given in exchange for fair wages or retirement plans, rather it is a free incremental benefit. Employees with low salaries are not allowed to invest their own money or take on financial risk. Employees “need to see a path, ideally, to making a year's worth of their income, but for sure if it’s less than six months then don't bother.”
Stavros shared two KKR case studies of companies that successfully adopted the employee ownership model. One was Ingersoll Rand, where over a decade, 16,000 people in 80 countries were made owners. The wealth creation translated into $800 million, the largest example of employee ownership to date. Another benefit he highlighted was that employee turnover, or the ‘quit rate,’ dropped dramatically. “We were hiring three thousand fewer people every year as a result of all these efforts, and the engagement survey results went from the twentieth percentile to the ninetieth.”
The second case study showcased C.H.I Overhead Doors, an Illinois garage door company with eight hundred employees. Stavros said that in 2015, KKR became the fourth private equity company to step in and buy the business. C.H.I. had high turnover, low engagement, and quality and safety issues. Stavros readily admitted that implementing a newly expanded employee ownership and engagement model proved challenging, but over time, worker morale, operational efficiencies, and productivity improved. That led to higher revenues and profits. Seven years later in May 2022, KKR sold C.H.I. for $3 billion, generating a 10 times return on its investment.
At C.H.I., hourly employees making approximately $50,000 per year received, on average, approximately $175,000 as a payout, in addition to $9,000 in dividends paid earlier in KKR’s ownership. The most tenured employees earning substantially more. “That was an exceptional outcome, Stavros told the audience. “More often it's 100% to 200% of income, so it’s a lot, but not that level.”
Stavros then gave a brief overview of Ownership Works. The non-profit’s mission is to provide hands-on resources and build a movement that will expand the employee and engagement ownership model to other industries and businesses. In real terms, the goal of Ownership Works is to create $20 billion of wealth for lower-income employees over the next decade. Stavros believes the old-fashioned domino effect will be the key to success, with early adopters spreading the word and attracting greater interest.
Stavros ended by saying he believes private equity firms have a role to play in expanding these models. “Private equity, for all of its issues, one very positive aspect is, it's such an efficient decision-making apparatus.” But he made it clear that employee ownership isn’t a catch-all solution for everyone.
“This is not going to solve all of our problems. The economy is not working for most people. This is tweaking a system that is broken.”
After the presentation, a lively discussion and debate ensued, sparked by questions from students, faculty, and other audience members. Topics ranged from potential drawbacks of employee ownership models to traditional restricted stock and vesting plans, employee engagement metrics, and scalability to other industries beyond industrials. In the end, Professor Admati and Stavros agreed that prioritizing employee engagement with employee ownership models is the most promising way to tackle the wage gap.