You know that moment when everyone tears up while watching “It’s a Wonderful Life”? That moment when all the characters in fictional Bedford Falls rally around George Bailey’s family just when all hope appeared lost? It’s one of the most enduring scenes in the film, and, most importantly, it’s not about just one individual setting the record straight. It’s about an entire community coming together and setting straight an injustice long overdue for correction.
Sure, this sort of plot element also earned director Frank Capra’s films the somewhat derisive moniker of “Capra-corn,” since these moments of downright feel-good coming-togetherness are a little corny. But they’re still great.
They have another name, too: Psychologists call it “positive empathy.” It’s the joy we take in the joy of others. Think of it as the opposite of schadenfreude. In Buddhism, it’s called “mudita.” And it has kept “It’s a Wonderful Life” on heavy rotation virtually every holiday season since 1946.
You likely wouldn’t think of “positive empathy” in the same sentence as KKR, those legendary barbarians at the gate. It took a specific moment for me to make the connection, one in which the strategy of the firm’s industrials team filtered down to individual employees in a very personal way. To correct what they see as misaligned incentives between management and blue-collar workers, the industrials team shifted its approach to use a simplified management buyout structure that makes all employees part owners of the business. Employees who chose to co-invest could see life-changing returns, and watching them react to the news is as affecting as that scene in “It’s a Wonderful Life.” But you needn’t trust me on this one. Watch it unfold for yourself.
Naturally, I wanted to catch up with Pete Stavros, head of the firm’s industrials unit, to find out more about how the initiative positively impacts these employees’ lives. Stavros is one of the chief architects behind KKR’s equity sharing model for hourly wage workers across its US portfolio of manufacturers.
Stavros (pictured) is based out of KKR’s New York offices. In addition to heading the firm’s global industrials practice, he is a member of the Investment Committee within its Private Equity platform in the Americas.
The interview below has been edited for length and clarity.
PitchBook: What is unique about KKR’s Industrials Team’s approach to employee engagement?
Pete Stavros: I think there are three things that are unique about our approach.
First, our broad-based employee ownership model extends to every employee at our portfolio companies. This includes, importantly, all hourly workers, which tend to make up the majority of the workforce at a manufacturing company.
Second, we use this ownership model as a mechanism by which to engage people beyond the management team as business partners. This allows us to have a dialogue with the employees about our value creation plan, what their individual contribution can be to that journey, how we will track progress and so on.
Third, our aspiration is to create a more inspired workforce. We feel strongly that this cannot just be about ownership; otherwise, this is purely a compensation matter. We work with our companies to make a significant commitment to their communities, so people feel proud to work for their employer. We also invest heavily in our employees, so they feel genuinely cared for.
This is all complicated and difficult to implement, and probably more complicated than it sounds. This is a work in progress; we are continuously working to figure out how to most effectively accomplish these goals.
How did the engagement model come about? Are there plans, either short- or long-term, to roll it out to other practices, or is it only a model deployed within the industrials portfolio?
This is something I personally have been thinking about for many years. My dad was an hourly worker at a construction company, and I saw firsthand the lack of alignment, engagement and inspiration among employees at that level of an organization. In business school, I spent a lot of time studying ESOPs (employee stock ownership plans), which is a somewhat arcane but tax-advantaged way to spread ownership among all employees. In 2011, we acquired a company that had a hard time retaining hourly workers, and we recognized an opportunity for improvement in labor relations. That is when we started to experiment with some of these concepts, and, from there, worked to formalize our approach to deploy at our other and future companies.
We are committed to utilizing this strategy at all of our US industrial companies. We will also use it in other industry sectors, business units and regions where it makes sense, but we realize it may not be appropriate for every situation.
If isolated to industrials, what inclusion criteria do you deploy to select from the companies within the portfolio? If being experimented with elsewhere, are those criteria the same, and, if not, what’s different and why?
We expect to be using this approach at all of our US Industrials portfolio companies. One thing that is unique about industrials is that our companies tend to have a very large number of hourly workers who are absolutely critical to the success of the company but sometimes may not feel valued. These are the people working in the plants, for example, so they play a large role in determining product quality, on-time delivery, productivity and other things critical to the end result or product. Considering our entire investment thesis often rests on improving these key metrics like productivity and quality, there is no question that these critical employees need to be engaged.
To contrast it with another sector, consider technology. Often, these are high-growth businesses where the investment thesis is much more about getting the overarching trend right, as opposed to transforming the operations of the company. Also, these companies tend to have a small number of highly compensated employees—software engineers and salespeople, for example—so you’re probably starting from a much higher point in terms of engagement and people feeling valued.
Looking to the workforce, what are some of your favorite stories of how employees have responded?
My best memories are certainly of the dividends and investment exits when hourly workers received large payments. We’ve gotten hundreds of emails and letters from employees whose lives have been positively impacted.
It’s also extremely rewarding to see changed behavior in our companies because of these efforts. We measure and track engagement in a variety of ways, but the anecdotal evidence is also powerful, such as a line worker raising her hand to make productivity improvement suggestions for the first time or a truck driver highlighting issues with our route scheduling system.
It is worth noting that, at the outset, there is a fair bit of confusion over the whole program in addition to a healthy dose of skepticism, particularly in instances where the company had been owned by private equity firms before. We now have about eight years of experience and lots of compelling video footage, testimonials and documented results, which has helped to break down some of this skepticism. However, sometimes employees are starting from a place of very low morale and trust, so it may take years before they believe you are actually looking out for their best interests.
On balance, how have the companies where you’ve rolled this out improved and what do you think explains these improvements, not least as the upticks in safety and performance are impressive?
The performance of these investments has been strong, both financially and operationally. We’ve invested nearly $4 billion of equity in investments utilizing this approach and the current value is worth more than 3x that amount. From an operational standpoint, we’ve been able to meaningfully improve the performance of the businesses, oftentimes in a truly transformational manner. Figuring out how much of that comes from a culture change and greater engagement is extremely difficult. We are not able to measure performance against a “control” set of companies that are identical in every respect but for these engagement strategies. We are working with Harvard Business School right now to bring an objective, analytical approach to exactly this question.
How did you determine the structure of the initiative vis-à-vis the duration of employment at the portfolio company and the like?
This is something we continue to experiment with and is typically customized to the situation or company at hand. One question is what amount of equity, in aggregate, should be allocated to the hourly workers. Should it be a fixed amount set up front, or should they have the potential to earn more if the operating performance is exceptional? Another question is how that aggregate amount of equity should be allocated among employees. Should you do it solely by tenure or should it be more meritocratic, and, if so, how do you measure merit for an individual worker on a manufacturing line without creating politics?
There are other complexities, such as how an IPO impacts the whole program—should the hourly workers all be allowed to sell their shares, or should there be some sort of retention requirement? The beauty of being in private equity is that we are able to experiment and try many different things in relation to these questions because we are constantly buying new companies. That moment of a change in ownership is a golden opportunity to try new things because people are expecting change.
How would you characterize the feedback from companies you’ve wanted to partner with?
Executives at target companies are certainly curious, but they are often equally skeptical. To address this apprehension, we created a KKR Industrials LinkedIn page where we post things like videos from our companies, related and relevant press interviews, public talks and transcripts, and other information and resources about our approach. I think that has started to help bring greater clarity and credibility to our employee engagement and broad-based ownership model.
What are the biggest challenges with respect specifically to the broad-based ownership?
We talk often about four challenges that are top of mind when beginning to implement this program with a new company. First, how to get everyone to understand and value the equity program. Many of our employees have little interest or formal training in finance, and some have never owned stock before. Second, how to build excitement among employees regarding an equity payoff that is many years away. Keep in mind that a significant portion of hourly workers live paycheck to paycheck, so they have immediate financial concerns. Third, how to make an hourly worker in a manufacturing plant feel like he or she can actually impact the ultimate outcome. Sometimes that worker might be a part of one of many manufacturing lines in one of many plants. Fourth, how to have the broader program make the job more meaningful and not solely another form of compensation. To help address these issues, we have developed many strategies and tactics, which we continue to enhance and refine.
Does Industrials expect to enjoy an advantage when bidding on new targets with the equity structure in play? i.e., Does a prospective buyout by KKR have an advantage over another bid at a comparable price point with the initiative in place, all things otherwise being equal?
While we haven’t seen and don’t expect this to trump another bidder’s higher price, we do believe we have a deal-sourcing advantage because CEOs who might not have thought about a private equity firm as a partner often have a different view when they learn more about this model.
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