The $175K Factory Worker: What Happens When Employees Own Stock

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Given private equity’s reach (1 in 25 work for a business owned by a PE firm), the industry has the power to shape work culture at scale, for better or for worse. And ironically, that’s exactly why Pete Stavros, co-head of global private equity for KKR, thinks he’s in a unique position to bring employee ownership to the mainstream.

Pete’s goal? To dramatically expand the number of Employee Stock Ownership Plans (ESOPs) that grant ownership shares to workers: “Imagine how different our economy and our country would be if workers owned a slice of every company in America.”

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Mentioned in the Episode

• Expanding ESOPs

• Clip from Barbarians at the Gate (YouTube)

• 12m people work at PE firms (New York Times)

• On CHI Overhead Doors, a KKR success story

• Kelly Corrigan Wonders: Going Deep with Pete Stavros

• The Economic Effects of Private Equity Buyouts (Harvard Business School)

• Private Equity’s Unlikely Champion (60 Minutes)

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Transcript

Pete Stavros:

We talk about it as the right thing to do that also happens to be good business. And the reason we order it that way gets back to that example of, hey, there’s two companies, same industry, very similar businesses. We give ownership programs and the same tools to both. And one great things happen culturally and financially, and the other one, culturally things kind of go sideways.

The one who says, if I turn some dials, how much more productivity can I get? I mean, the world is so lacking in authentic leadership and genuineness. I mean, people will smell that a mile away and it just doesn’t work. The leader who starts with that orientation of like, I’m just doing this because I want to lift up my people, is the one who changes the culture. If it comes from that place in someone’s heart and not like I could grind a little more out of this company if I do this, then we’d see their engagement scores spike and the quit rates drop, and that’s when the culture shifts and great things happen.

Katie:

When I first learned about Pete Stavros, the KKR executive making headlines for employee ownership plans, my guard was up. For one thing, the timing was coincidental. We had just done a deep dive on private equity with a former DOJ prosecutor, and if you’ve heard that episode, the takeaways were not all that favorable to the PE firms. And KKR just so happens to be one of the largest private equity firms in the world, memorialized by the 1989 book and later 1993 movie Barbarians at the Gate, the Fall of RJR Nabisco, about a particularly dramatic KKR leveraged buyout…

[Barbarians at the Gate Clip]

Katie:

But as you probably know, private equity firms are typically in the business of trimming headcount. So a KKR guy interested in promoting more robust employee benefits packages seems more than a little ironic to me. Regardless, the consensus of his critics and fans alike is that Pete is nothing if not earnest, about his interest in making employee ownership plans more common. And as one of the people at the head of a firm with something like $600 billion in their control, he’s not a bad guy to have on your side.

Of course, Pete’s efforts are a lot larger than private equity. He’s founded two separate organizations that are also working on rolling this out, but his role at KKR gave him the first path to implementation. Pete started working on building up these sorts of plans at KKR in 2011. He’s implemented this model at more than 50 portfolio companies now impacting around a hundred thousand employees globally. For a sense of scale, about 12 million people work for companies owned by private equity firms. So it’s a good start, but there is still a long way to go.

One of the most highly publicized success stories of this approach was that of CHI Overhead Doors, a company with 800 employees in a rural Illinois town.

CHI Overhead Clip:

The payouts are a function of tenure and salary. Because Jameson is in her 18th year at CHI, she’ll be bringing home 5.5 times her annual salary.

Words cannot explain how my mind was going, it just in a hundred directions.

Employees received envelopes with their bonus details. On average, hourly workers received $175,000.

Katie:

When KKR sold, CHI’s employees received an average payout of, as you just heard, $175,000 each with some of the most tenured plant employees receiving as much as $400,000. The median income in Arthur, Illinois is less than $60,000 per year. So this was certainly a life-changing event for these people—that’s around $140 million distributed to employees.

KKR had sold CHI Overhead Doors to a company called Nucor for around $3 billion, which was 10 x their original investment. And when Pete finished telling the firm’s employees about their payouts, he said, we want this to be the new normal for business that everyone participates when things go well. This story is in many ways an unalloyed success, especially when compared to how other highly publicized PE deals have gone, but I still feel conflicted about it. $140 million to the business’s employees is a ton, but it’s still just around 5% of the overall sale price. Private equity firm CEOs regularly make a hundred million dollars alone in annual compensation.

Still, maybe this represents a step in the right direction. After all, even if it’s not radical enough to meaningfully address labor’s declining share of income, it seems to be pushing employee ownership into the mainstream in a way that lends it more legitimacy beyond just being a nice thing to do. After all, if even the big bad PE firms think it’s good for the bottom line, maybe other businesses will follow suit.

I want to talk to Pete today about these complexities. I want to ask him what he thinks about these critiques and I want to know why he became interested in employee ownership as a concept. Because in the US, employee stock ownership programs or ESOPs are the only significant form of employee ownership that exists today. Formally established in 1974 as part of the Employee Retirement Income Security Act or ERISA, ESOPs were intended to distribute shares of a company to its employees that vest over time according to things like tenure or your salary; it’s a way for workers to benefit from the capital appreciation of the business that they are working to make more valuable rather than from their wages alone.

Now, this is different from a worker cooperative where workers buy a share of membership in order to become direct owners with a voice in the firm’s decisions. That arrangement is considered the most democratic workplace, and ESOPs do not typically involve that level of direct input or decision-making power. It’s also important not to confuse ESOPs with ESPPs or employee stock purchase plans, which allow employees to purchase company stock at a discounted rate. ESOPs just grant you the shares, no purchase necessary. The challenge is that ESOPs can be complicated and expensive to administer, so most companies simply don’t bother, and the ones that do often have to hire third-party firms to handle the heavy lifting of administration record keeping and the valuations that have to be done. So if you’re a business owner who doesn’t really have a strong view one way or another about the proper way to structure the ownership of your business, the question likely comes down to whether or not you believe it’s going to be worth it to you. Will the boost to morale and retention be worth all the additional cost and complexity?

And when you’re answering questions about whether ESOPs will be effective in that way, it can be helpful to remember how all investing works. Anyone who invests knows that assets can go up in value, but they can also go down. And in that respect, just as using your wages to invest in an index fund, the slow and boring way is an exercise in delayed gratification. So too can the promise of an ESOP, which means it’s not necessarily as motivating as a higher wage right now depending on the financial position that you’re currently in. One person who was offered an ESOP told the New York Times that it didn’t seem to affect the people he managed. “Most people understand it. And when they realized there was no way to track or plan it or anything, it didn’t change anyone’s day-to-day performance.”

This isn’t altogether surprising. Does the slow creeping balance in your 401(k) motivate your day-to-day performance? I mean, probably not, but someday you’re certainly going to be glad you have it. And that’s why the introduction of a private equity timeline makes this conversation all the more interesting because most PE firms are trying to sell between three and seven years. That is a blip compared to most investment horizons.

So enjoy this conversation with Pete Stavros right after a quick break.

Pete, thanks for being here. I’m really excited to talk to you today. So you first came to my attention a couple of years ago. It was actually my godmother sent me an episode of Kelly Corrigan’s podcast and she was like, you should listen to this. I think you would like this guy. So I want to start with a deep cut to that interview that you did because in that conversation you referenced a session of congress in 1974 where they essentially predicted the situation that we are in now, one in which capital is expanding at a much faster rate than wages are. And so you’re seeing this pretty dramatic divergence between the haves and the have nots, we’ll say.

[Pete Stavros Clip]:

Congress predicted it. So if you go back even before 1989, in 1974 as a part of something called the ERISA Act, Congress had a sub part of that law which encouraged worker ownership. It’s called an ESOP. It’s one of the more misunderstood terms in American business. People think, oh yeah, no, every company’s got an ESOP. It’s a stock option plan, it’s an employee stock ownership plan. It’s a defined term in the tax code and in ERISA, and basically I’m way oversimplifying.

Kelly Corrigan:

Good. We like it that way.

Pete Stavros:

If you share a meaningful amount of stock ownership with workers in this tax structure, which is complicated, you pay no federal income taxes as a company forever, tax-free company forever.

Kelly Corrigan:

So somebody was like, this is going to work. The Pete Stavros plan will work. Somebody said it in 1974 and put it into the tax code.

Pete Stavros:

And if you read all the congressional testimony, they were predicting everything that’s happened, which is workers are barely getting by on their wages and if they don’t have savings, they can’t invest in capital, and capital is getting more and more productive with technology. And so this is going to explode. I know we all love to complain about the government, but there were a lot of smart people in 1974 saying, we have to do something. This is not going to be the country we want.

Katie:

So I struggled through the archives of the congressional library trying to find the actual minutes from this meeting so that I could reference it specifically. But I do want to talk to you about this because that was the first time they’d ever heard that ESOPs were introduced with the specific intention of curbing a trend that it seems like they saw coming 50 years ago. And I’m curious if you perceive that in retrospect as an admission that ownership is really the only way to thrive in a modern economy?

Pete Stavros:

I think it is. I think it’s incredibly hard to get ahead without owning. In our ownership programs, which are not ESOPs, we’re trying to deliver about a hundred percent of someone’s annual earnings in stock over a five or so year period of time as a free and incremental benefits. So they’re not purchasing the stock, it’s free to them and they’re not giving up any other benefits. It’s hard to do that in wages. You’d have to give someone a year one right off the bat, 20% wage increase, which I’m sure few companies are willing or able to do.

And then with ownership, the equity, the upside’s uncapped. So if the company does really well, you may earn 500% of your wages in stock. Now, it’s not a guarantee the company has to perform and there’s risk to it. It’s not a guaranteed payoff. But I do think that without ownership, it’s hard to replicate that kind of financial result.

And ownership to me is more of an ethos. It’s not just about the money, but it’s about giving workers a voice, having a different type of culture where people feel included and trusted and respected. So I think that also speaks to thriving in today’s economy. It’s not just the money, but are you working in a culture where you’re respected and you’re, as I say, included and trusted and you get access to the financial information? You’re really a part of the team. So I think both of those speak to thriving.

Katie:

I do want to understand a little bit more about the technical vehicle that is being used to accomplish this. I think that that’s something that’s relatively easy to pay lip service to, if you’re a business like, oh, we’re a family, you’re part of the team, your voice matters. But it’s a different thing entirely to be granting equity to people. And even beyond that for that equity to have decision making, influence carried along with it.

So in the private equity world, specifically, when a PE firm buys a company, the idea is that they would grant some shares of ownership to the employees of that company. And then when that PE firm sells the company later, the employees receive a payout as their shares are sold as well. Am I mostly getting that right?

Pete Stavros:

That’s right. Now, if we were to take the company public as opposed to selling it, so if we were to re-list it on an exchange like the New York Stock Exchange or the Nasdaq, then workers would get tradeable shares. So that’s what we did. For example, with Ingersoll Rand, by the time we exited, I think we had 18,000 workers around the world with tradeable stock. So it’s not always that we sell the stock and they get cash. We also might take the company public, but you mostly got it right.

Katie:

How often does that happen versus a private sale?

Pete Stavros:

It’s much more common to sell a company then to take it public.

Katie:

Okay, I figured. And are ESOPs actually the vehicle that is being used to accomplish this? It sounds like they were more so the inspiration for a different mechanism that’s being used. It sounds like ESOPs are pretty complicated to administer.

Pete Stavros:

That’s right. That’s right. And ESOPs are really fundamentally a tax structure. There’s a tax incentive that comes with giving workers ownership. And so our model, we avoid all the complexity. As you note, it’s a part of the ERISA Act. There’s lots of regulation and legislation around it, and it comes with a lot of litigation risk. If God forbid something goes wrong. Our model sits outside of all that but does not come with a tax incentive. So for us, we really need to prove out the business case without a tax incentive.

Katie:

When you are pitching this to businesses, I know you founded an organization called Ownership Works in 2021, and then you launched a group called Expanding ESOPs, I think in 2024, which is a nonprofit that teaches executives how to deploy this model. When you’re pitching this to businesses, how much of the challenge then has been just knowledge sharing around like, hey, this is a thing you can do and here’s how you implement it versus actually having to convince these businesses that this is a good idea that they should be doing this?

Pete Stavros:

I would say it’s both. It is contrary to conventional wisdom that you’re going to share stock ownership with all employees. And I’d say there’s a pretty deep seated belief that workers will never understand ownership. If they don’t understand it, they won’t value it. If they don’t value it, then you can’t possibly get a return on the investment. Ownership should really be concentrated in the hands of just the few people at the top of a company who really move the needle.

There’s a whole list of things that are immediate objections, and then as you note, it’s hard to do. Just even administering these programs is difficult enough. But then if you’re going to get a return on the investment you’re making in frontline workers, you are going to have to do all this culture building when you open up the financials to the workforce. Keeping in mind more than 60% of Americans are deemed to be financially illiterate, based on government surveys, there’s going to have to be a whole series of educational efforts that go to together with these efforts to build an ownership culture.

It’s not like you just give stock. People are suddenly happy and less likely to quit. All of this work takes years, which is a whole ‘nother set of objections of like, gosh, I’m going to give this stock, do all this work for years. And then the really unfortunate part is it doesn’t always work, is sometimes you do with the best of intentions. I could show you two companies in the same industry. Let’s say we own both of them and we give the CEOs the same tools, the same ownership program, and one of them will have a really dramatic shift in the culture and the other one, nothing will happen. As you can imagine, we’re going through a lot of work to understand why that is. It’s an investment. It’s not a guaranteed payoff.

Katie:

Do you have any hunches?

Pete Stavros:

We do. Initially we thought surely it had to do with the size of the company, how many employees there were and how globally distributed they were. So it’s much harder to do this. I mentioned Ingersoll Rand, that company operates in 80 countries, hundreds of sites. So time zones, even just legal structures, local tax issues, like if you grant someone in Belgium stock, they get taxed on it even though they don’t get the cash. That’s this idea of dry income.

We thought it’s those kinds of things, technicalities. And in reality, none of that has been true. It hasn’t mattered the industry, the size of the company, how it’s distributed. I’d argue that some of those things make it harder to implement this program, but what we started to notice was—because we’ve done this now 70 times with 70 companies close to 200,000 frontline folks—that there were categories of CEOs who did a better job of creating these cultures.

And the categories were women, female leaders did a better job with this. People of deep religious belief, immigrants, CEOs who grew up poor. And I was at a conference talking about this and I mentioned empathy being a common ingredient. So I think the New York Times or someone wrote a little blurb on it, and a professor at Stanford who studies empathy called me, named Jamil Zaki, he said, someone forwarded me this story in the Times explaining what you’re thinking. And so I said, well, I noticed these categories of people. They seem to be more empathic as a general matter, and maybe empathy is the key ingredient where CEOs, they care so deeply about their people that they’ll fight through all the complexity, they’ll push through all the hard work, they’ll put the years into it and they’ll change the culture.

And so he said, well, let’s assume you’re right. What’s your strategy? Is your strategy to only hire immigrant CEOs? And I said, well, we don’t even understand this yet. And he said, well, let me measure the empathy of your CEOs. We can measure empathy. There’s a test that you’re given where as an example, they put up on the screen different people’s faces, but you only see their eyes and you’re asked to assess their emotional state. And a more empathic person can more easily assess whether someone’s frightened or fearful or angry or frustrated. And then you answer a series of questions about yourself and your leadership style. There’s three different types of empathy. So we’ll get scores for each of them. Then we’ll get a composite empathy score for all your CEOs. And then if you give me your data on each of the company’s engagement scores and quit rates, we’ll run a regression analysis and I’ll be able to tell you whether or not empathy is a key ingredient.

So he came in, did all this work, ran these regressions, and sure enough, it’s like a blowout correlation. It’s way beyond what the benchmark correlation for this is 0.2 something, and this was double that, two and a half times that. So now the question is can we move the empathy of these leaders and then see a consequential movement in the employee experience? So how do you move empathy? You give people different lived experiences.

So CEOs are going into their local communities and they are seeing what it’s like to live the life of a frontline worker. So opening up low dollar amount checking and savings accounts, see what that is like get payday loans, all the things that frontline folks are dealing with. He’s also setting up these thing called empathy gyms where he has CEOs come out to Stanford with him and he puts them through the exercises. We’re also having our CEOs do frontline work. So if you’re in a manufacturing business, you work in the factory floor, all sorts of stuff. This is going to take us years, but that’s what we’re working on.

Katie:

Wow. It’s so wild to me. You could have given me a hundred guesses of like what’s KKR up to, empathy gyms for CEOs would not have been at the top of that list. But it is interesting because there was a leaked Zoom call with Jamie Dimon, and I’m thinking about this because you mentioned low dollar value checking accounts. One of our listeners sent it to us and was like, he sounds so angry about the fact that people don’t want to be back in the office five days a week.

But when you become that wealthy and you have that level of access and resources and you have full-time staffs that are managing the rest of your life for you, it is so easy to lose touch with just the average person’s experience of keeping the wheels on day to day and the average experience of what it takes to work a nine to five and have a family and commute and do all these things. And so it’s really interesting to think about the fact that there could be a statistically significant correlation between leaders who understand how to get people to buy in to an ownership culture and see the importance of it and the ones who don’t even given the same skills.

Pete Stavros:

Yeah, well, as I say, we got a lot more work to do. But yeah, there’s these different components of empathy and we’ll also be studying, which are the most important. One of them is the ability to take someone else’s perspective, which is what you’re talking about. But another one, which I’ve also found to be anecdotally important is someone who just catches other people’s feelings easily. So CEOs who they just feel it like when one of their people is hurting or if their people are struggling. So then the research, we’ll get into which of these matter the most and then how we can train for it. But I think the dynamic you’re talking about I think is everywhere. In the old days when business was less global and smaller, your employees were in your community, they were your community.

So if you were a manufacturer making whatever, garage doors, you walked into town, and if you fired people or if you treated them poorly, like you had to wear that in town. Now corporate headquarters are in an urban area in some far off land, in flyover country as people refer to it today as like that’s where the manufacturing plants are and where the real work is done. So I think that lack of connection I think is everywhere.

Katie:

We will get right back to it after a quick break.

It seems like this has been something that’s interested you for a long time, and maybe it’s because you are just an empathetic person, or maybe it’s because your upbringing was more average, more normal, but it came to my attention in my research for this episode that you wrote your business school thesis about this. So it’s clear that you’ve been thinking about this for a long time. Why were you concerned about the role that ownership structures played in businesses even back then?

Pete Stavros:

Well, so employee ownership was something my dad actually talked about. So my dad was a construction worker, earned an hourly wage, and had a really horrible relationship with his employer, not just him, but his whole union. So it was just constant conflict and fighting. And in fact, my dad who just turned 86, and if you believe it or not, there’s such a lack of available labor. My dad still occasionally works construction. He operates a road grader. I know, it’s crazy, but they can’t find people, which gets into this whole point about this is good for business and good for the economy. If we don’t get more people off the sidelines wanting to work, like the economy’s not going to work.

So my dad, his complaints about the job were that of course he couldn’t build wealth on an hourly wage. That was a problem, but I would say maybe even more than that was there was no alignment. They were never on the same page. As an hourly worker, you always want more hours and your employer is always trying to constrain your hours while getting the same amount of productivity. And so my dad just growing up would always talk about how screwed up this was. Why do we have half of America earning an hourly wage? Wouldn’t it make more sense for people to, if not be salaried, have ownership or profit sharing or some reason to care? Because if you don’t, an hourly worker is going to do everything that they can to not have their hours go down because their paycheck’s going to go down. So there’s an incentive to not be productive.

That was growing up a lot about this idea at a high level. And then I wandered into investing. I didn’t even want to go to Wall Street. That was the only job I got was in an investment bank coming out of college because I was a chemistry major. And then at the last minute decided I’d spent a lot of time in the lab and didn’t like it. I got to go get a business job, and I only got one job offer, which was at a firm called Solomon Brothers, which is not around anymore.

And so at Solomon Brothers, when I was all of a year into it, the guy who ran the mergers department where I worked said, hey, you should go work at an investment firm. I know these people, they started a firm in the eighties. They’re looking for their first ever analyst class. This was in the mid-nineties and why don’t you go interview with ’em? And I did and I got a job, and that was kind of how I got into that was a private equity firm.

So the two first projects that I worked on, one was an ESOP. So there was a company in Rochester, New York called Gleason Corporation that made machine tools, and it was an old ESOP. And so I had never heard of an ESOP, and this was before I went back to business school, and this really ignited my interest in ESOPs, which is why I published that paper almost 25 years ago on this idea at Gleason Corporation, frontline factory workers executive assistants had million dollar stock accounts, people who had been there for much of their career. And so I had never seen anything like that, and I was totally fascinated by it.

The other early project they had me work on was they were selling a company that made semiconductor equipment. It was a company called Clark Schwebel, and they were selling the business. So when you sell a company, you have to have a young person like me at the time basically oversee all the wire transfers. So a company gets sold for $500 million, it pays off its remaining obligations, and then whatever’s left gets sent out to all the owners and a bunch of the owners were employees. I was confirming these wire transfers for this sale, and I’ll never forget just the dynamic of more senior folks who were making a lot of money not being that, let’s say, emotionally moved by the whole thing.

And when you got down to mid-level folks, so there was an assistant treasurer, as I recall, who was getting a fraction of what the CEO O was getting, but was so emotionally moved. I mean, he’d literally lost the ability to speak on the phone and had to leave a voicemail afterwards about how much it meant to his life. This meant college for his kids. I mean, it was really, really meaningful. So in that moment, it’s like, geez, what if everybody owned? How big of a impact could it have? And then how much could it do for the company? This guy on the phone was like, I never thought I’d work for such a great company. It was just such a big deal.

So those were a couple of things along the way before business school that then led me in business school. It’s an opportunity to explore your interests, and that was mine. So I grabbed the finance professor I had and asked if I could go spend my second year really studying this, and that’s what I did.

Katie:

It’s interesting hearing you talk about that and tell that story. It kind of calls to mind for me, I started my career at Southwest Airlines sort of toward the tail end of Southwest’s golden years, I guess you could say. And it’s been really, really sad now to watch activist investors get inside that company and change the way that it’s run. I think I was very spoiled working there. It was a huge corporation, but the culture was amazing. And part of it was because the founder had so believed in this idea that employees should come first, customers should come second and your shareholders should come third. And it really set the tone in that business. There was profit sharing, there was stuff like that, but it was also just a sense that not only are we in this together, but this company is really here for us and really cares about the customers. And there was a level of buy-in. I think that in the other large corporations I’ve worked in the year since it wasn’t there. And so I was kind of surprised then later on that, oh, everywhere isn’t like this.

And so I sit back and I think there is a bit of an irony here because a lot of the contradictory or conflicting incentives, these tensions inherent in these arrangements are in many ways typical to capitalism from the standpoint of capital and labor are always kind of intention with one another. And you work for a private equity firm, which is like capital, right? I am sure. I’m not telling you anything that you don’t know. The American public does not feel super favorably about the industry of private equity at this point.

And so I think that there is an interesting question to ask here that fans of what you’re doing and fans of this mission that you’re on, say like, hey, this is a realistic way to create wealth for rank-and-file workers that they would not be able to build on their paychecks alone. But then critics look at this and say, well, any positive effects that you can get from doing this and throwing a little equity at these workers is going to pale in comparison to the jobs that are going to be lost as the dynamics of private equity unfold further in our economy. And I’m curious what you make of that critique, if you think that that’s fair and how that lands with you from the position that you’re in.

Pete Stavros:

With private equity, the opportunity that I see is a PE firm is responsible for so many companies and so many workers that scaling something is much easier with that type of decision-making and governance. So in other words, if I can convince a private equity firm to join this effort and do employee ownership, that might be 500,000 workers.

And it might be one person who can make that decision as opposed to going, and I’ve done this as well, but going to individual CEOs when I spent time with Harley Davidson working with them on worker ownership with their union, that took a lot of time. We might’ve been at that for a year and it was 4,000 people, which is great. I don’t mean to diminish it, but in less time you might be able to impact the half a million people.

On the PE critiques, I’m sure that there’s been some mistakes. I’m sure there’s some bad actors. I wouldn’t be in the industry if I thought what the New York Times likes to run sometimes were true of like, yeah, these firms just buy a company, strip it to the bones and then sell the pieces. That’s not realistic. It just would never work either. Like the idea that you come in and just gut a company, well then it’s not worth anything. Who’s going to pay you for it? Really the only way to build value over time is to make the company better.

I’ll give you an example that we always get criticized for is Toys R Us. We invested in Toys R Us with a real estate firm and another investment firm, and the company went bankrupt and over the period of time, we made the mistake of trying to save it. So Amazon was starting to kill the toy industry. Amazon and Walmart had both decided it was going to be a lost leader for them, the toy category. And basically over the time period that we owned it, every toy company went bankrupt. And if you look at the destruction of retail and you look at Sears and JCPenney and Kmart and Bed, Bath, and Beyond and Brooks Brothers, there’s just this litany of companies that have gone bankrupt, but we did it for all the other ones. No one talks about who are the shareholders and what happened. It’s just, oh, well Amazon killed it. So as I say, there starts to build this narrative that I think is not, I just don’t think is true. Not to say there haven’t been mistakes made, but I think the broader story is just overdone.

Katie:

It is probably true that private equity bears what I’ll call maybe a disproportionate level of angst when there are other factors in a capitalist economy that are probably just as much to blame. But it does feel like there is something specific about the PE model that enables a firm through debt financing through the fees, through these other mechanisms to make money even if the business is not doing well. Do you think that that’s an unfair assessment?

Pete Stavros:

I do. I mean, the vast majority of the way a PE firm gets paid is incentive fees based on the profits of the business. So again, there aren’t like a bunch of saints in the private equity industry. I’m not trying to say that, but if everything was written was true, we wouldn’t have way more demand for our style of investing than we have room for the last two funds we’ve raised in the us, were massively oversubscribed.

A huge source of our money is labor pension money. So it’s just like state pension boards would not be investing billions of dollars with us if we were turning around and our whole model was to fire workers, we wouldn’t have CEOs lining up to work with us. It’s just not reality.

Katie:

Okay. I do think the pension element is an interesting wrinkle, that so many pension funds are invested with PE firms. And there is, again, to me, my whole thing is be hard on systems, not people, right? There aren’t evil individual actors that are going around trying to make the world worse, but ultimately incentives structures will over time, shape outcomes. And I think PE is sometimes an easy one to pick on because I think that there are some very public examples of things going very poorly.

But it’s interesting to get to talk to somebody like you because for everything that I’ve learned about you from every interview I’ve heard you do, the little bit that we’ve gotten to talk, you strike me as extremely sincere in your belief and in your desire to build worker ownership. And I think when I’ve heard you talk about things like the Great Risk Shift, for example by Jacob Hacker, this book that outlines the way in which American corporations used to kind of operate like their own welfare states and where other countries, a Denmark might have an actual welfare state, the US used to have these big corporations that would really take care of its people, but that over the last generation, there’s been this big shift from the broad shoulders of government to individuals.

You fascinate me because you are a private equity guy who’s talking to CBS talking about how the social contract is broken. So I want to understand, to you, what that means. What does it mean that the social contract is broken? Like diagnose this for us?

Pete Stavros:

To me, it means that I think the contract was if you work hard and play by the rules, you can have a good life. Meaning you can own a home, you can have a dignified retirement, your kids can get a good education, and all of that’s just not the case anymore. So Jacob Hacker talks about how we’ve gone from, and it wasn’t always relying on the big shoulders of government, it was a lot of it was your employer, so your employment was relatively consistent. So there was loyalty. There’s another great book called The End of Loyalty.

My dad stayed at his job for 45 years and didn’t even like his employer, but that was just the way it was. You stayed for your career, you got a defined benefit pension plan, which my dad has. You have gold-plated healthcare, meaning you don’t have these crazy high deductible plans where you’re out of pocket for thousands of dollars before you get any protection. That’s where we are. We’ve gone from lifetime employment, great healthcare defined benefit pension plan, to bare bones healthcare plan. If you even have healthcare. Defined contribution plan, so you’re on your own. And you’re an at-risk employee, we’ll see how it goes. So that’s what Hacker’s talking about.

On top of that, you have asset prices have exploded while wages have not. So people talk about real wage growth, which has been a problem, but real wage growth relative to asset prices is an even bigger problem. So my parents bought our house, I think it was maybe $80,000 or $90,000. That house has probably gone up fivefold and wages have not done that. College tuition to a great private school used to be like $15,000 a year when I was a kid, and now it’s $100k. So asset price, and look at what’s gone to the stock market relative to wages, cost of education, that’s what I mean. It’s just the whole thing seems broken.

Katie:

I think a simple way to describe what’s happened is that if you are somebody who’s earning millions and millions of dollars a year, if you are a very highly paid employee or owner of a business, the tippy top, you can’t spend all of that money. You’re going to spend a small fraction of it and what are you going to do with the rest? Well, you’re going to use it to buy assets.

And so it becomes really, really clear how without intervention, without some sort of backstop or mechanism that can prevent that cycle from continuing, it’ll only ever get worse. That’s not going to correct itself on its own. And when I think about realistic solutions, I think the first thing that I jumped to is a wealth tax. I don’t know how you implement a wealth tax, but I think that that’s necessary.

But the second thing is you have to find a way for regular people through their labor to build equity in something. And this seems like an interesting way to do it. And again, it’s, anything that makes this more mainstream to me is a good thing. I have a feeling that I have a more radical approach than you do, but I do think that anything that puts that on the map and gets it in people’s heads, I’m like, well, hey, if a guy at KKR really high up wants to take this on and wants to make this his thing, and if he has all this control and all this power and all this influence, that’s a great thing.

And I’m curious as you are moving forward, and I can see how this would be something where you’re walking a fine line because you’re in business, so you have to sell people on the idea that this is going to be good for the bottom line. This is going to be good for business, but for you, is worker ownership more of an ethical question?

Pete Stavros:

We talk about it either internally or at Ownership Works, that nonprofit, we talk about it as the right thing to do that also happens to be good business. And the reason we order it that way gets back to that example of, hey, there’s two companies, same industry, very similar businesses. We give ownership programs and the same tools to both. And one great things happen culturally and financially, and the other one culturally, things kind of go sideways.

The leader who starts with that orientation of like, I’m just doing this because I want to lift up my people, is the one who changes, the one who says, if I turn some dials, how much more productivity can I get? I mean, the world is so lacking in authentic leadership and genuineness. I mean, people will smell that a mile away and it just doesn’t work. So if it doesn’t come from that genuine intention of I want to help the leader of the company just won’t have any success with it.

So I don’t know if I would say it’s an ethical thing, it makes it sound like I think my ethics are higher than someone else’s, but I do think it’s the right thing to do. Everyone should participate and if it comes from that place in someone’s heart and not like I could grind a little more out of this company if I do this, then they end up getting all the results come their way anyway, even though that’s not really their intention. And so we’d see their engagement scores spike and the quit rates drop, and that’s when the culture shifts and great things happen.

Katie:

How are decisions made about how the equity is distributed? How is that decision made of how much are the workers going to get versus the investors versus the, how does that happen?

Pete Stavros:

So we do a bottoms up build, where we will take a payroll run. So let’s say a company has 10,000 people. There’ll be a big Excel file with everyone’s income, and we’ll say if we wanted to show folks a path to make a hundred percent of their income over, let’s say, five years, what’s that dollar amount? And then we have our projections of what the growth and equity value should be. So it allows us to back into in five years, how much do people need to own to get to that a hundred percent, if I’m making sense. So it’s very much a bottoms up build.

Katie:

Okay, so it’s based on the wages that they’re already being paid.

Pete Stavros:

That’s right.

Katie:

That’s kind of the original foundation for the equation.

Pete Stavros:

Well, to be honest, we would be looking out five years and what their wages would be in five years, so you could inflate their wages five years forward, and then you’d say, how much equity would we need to get people to be able to show them a hundred percent of their income in five years?

Katie:

It’s interesting when you talk about incentives too and the importance of understanding what this really means because to your point, I’m sure most people in the moment, particularly if you’re not a very highly paid person, and if things are already a little tight for you, you would almost certainly prefer the 20% wage increase upfront or the one-time cash bonus.

But as I was reflecting on how the communication of the value of this over time is so critical to implementation, there’s something sort of similar in the personal finance world with helping people understand even just basic compounding and how investing in an index fund for 15 years is very boring, but at the end of the 15 or 20 years, you’re like, oh, I’m really happy I did that. Now I have a huge amount of money. But it kind of defies intuition. It’s not immediately tangible necessarily how valuable that’s going to be, but it is interesting in this respect because the PE timelines tend to be a lot more abbreviated than 20 or 30 year investing timeline. You have a closer in chance of getting a payout. Part of it is just the fact that our economic system for the average person really forces you to think in biweekly paycheck increments.

Pete Stavros:

Yeah, Expanding ESOPs, what we are trying to do is open up that law from 51 years ago, from 1974, and make ESOPs easier to form. The goal would be like every company’s got an ESOP, but we would also like to see workers getting some access to some of the money sooner. So if you’re a 25-year-old factory floor employee and the company’s an ESOP and you can’t access any of it until you’re 62 years old, it’s nice that it’s there, but it’s not that tangible to your point, and you have problems now. It would be nice if people could access some of the ESOP money sooner.

The other reason to do that is our economy has become so competitive and things are changing so quickly with technology. I’m not sure it’s a good idea for an individual to be in an ESOP and to hold onto that stock for 35 years. Not that many companies are going to survive in 35 year increments. Everything’s going to change as we know over time with ai, and there’s going to be probably mind blowing technologies in the next 35 years. So allowing people to diversify much earlier I think would be better for ESOP. There are other things we’re looking to change with the law. That’d be one of them.

Katie:

In a traditional ESOP, is the company a hundred percent employee owned?

Pete Stavros:

When Congress passed the original law 51 years ago? No, that was not the idea. The idea was that workers would own a piece of everything. There’s no company that couldn’t be an ESOP, and there’d be a portion that was set aside for workers. In the nineties, there was a change to the tax code that allowed for this quite complicated a hundred percent model where if a family owns a business, they can convert it to an ESOP that’s a hundred percent worker owned.

Now, one of the questions I often get when I’m explaining this to people is they say, well, how could that be? Because we all know in today’s economy, workers don’t have any money, so how are they buying a hundred percent of the company from the family? And there’s a lot of financial engineering that goes into it, but the family gets paid in two ways for their company.

One, a loan gets taken out against the company just like a leveraged buyout. And then for the rest of the purchase price, the family takes an IOU, effectively like a note they will be paid in the future. With that note, actually often gets attached ownership because again, if the workers are going to own all of it, it’s not feasible. They don’t have the money to buy it. So the family takes back this seller note that has not only an rate attached to it, but some warrants, some equity. And so at the outset of the formation of any kind of ESOP, it’s really almost never a hundred percent worker ownership. But if the workers can pay off the bank debt and then pay off the seller note over time 20 years out, they could become a hundred percent owners. That’s possible, and that has happened a number of times.

Katie:

All of these different ways of structuring it. I was reading about worker co-ops as well, and that sounded sort of similar from the standpoint of the workers have to buy their shares. It’s not just given to them, but my understanding of the way that ESOPs work today is that the shares are just given to employees and almost like vest over time. Is that not true?

Pete Stavros:

In my mind, it is true. It’s not how the government looks at it. An economist would say that there’s no free lunch. So if workers are given ESOP stock, they’re giving something else up—

Katie:

Oh, they’re being paid less.

Pete Stavros:

Being paid less, less 401(k) match, no 401(k), whatever. There’s something they’re giving up.

That’s not been my experience. I’ve not seen ESOPs effectively charging workers by taking other things away, in part because it wouldn’t work. Back to the point about workers saying, I’m not going to give up wages or benefits for something 35 years from now, but that’s not how the government looks at it. So they do look at it, which is why there’s been a lot of litigation where the government has coming and said, hey, wait a minute. The price at which workers are being granted stock is unfair. We need to look closely at the valuation because in our mind, it’s a part of their overall compensation package, and we need to be sure that when the family’s getting the tax benefits associated with converting to an ESOP that the workers are getting granted shares at a fair value. It’s a whole mess, and this is one of the things we’re trying to fix.

Katie:

Okay, interesting. Something that occurred to me throughout this conversation was, and particularly when you mentioned a company that’s around today may not be around 35 years from now—you don’t want to pitch your wagon to, that’s a lot of concentration risk for the average person, and it’s why we generally advise people against buying a bunch of company stock, even if they have an ESPP where they can get a discount. We usually say, well, you want to diversify because you don’t want your source of income and your investments to be wrapped up in the same thing in case something happens to it. There’s some famous examples like an Enron where people whose entire retirements were an Enron stock lost everything.

And that also feels kind of like a challenge for, I’ll say the average person who may not have a lot of extra money left over from their wages to be investing in other things, diversifying a portfolio to where yes, asset ownership brings upside, but it also brings risk, and it also brings the chance that if you just own one thing, that one thing could eventually become worthless. And I don’t know what we do about that. I don’t know if that’s just kind of the nature of the beast, if that’s like you got to take the bad with the good, or if that’s something that you guys have thought about differently.

Pete Stavros:

I think that’s why ownership, whether it’s in an ESOP or in our model that we do outside of the ESOP construct, it’s got to be free and incremental. So if it’s free and they’re not trading off wages or benefits or 401(k) or anything else, they’re not worse off. Yes, it’s a concentrated bet on their own employer, but then if you also give them diversification rights sooner, so in a private equity context, 5, 6, 7 years. And then with changes we want to make to the ESOP laws, similarly, they would be able to always sell some percentage of their vested equity so they’re not waiting decades.

 I think if you do those two things, free and incremental, and give people diversification rights much earlier than they have today in an ESOP model as an example, then I think it’s fine and it gives the company the potential to change their culture.

I’ve had people say, why don’t you guys give stock to employees, but have it be a diversified basket of holdings, maybe all of your portfolio, if you guys own 200 companies, they get a slice of everything. It removes all of the benefits of the potential culture shift where you’re trying to get people to understand the business, care about the business, understand the financials, understand how they can contribute to the company’s goals. You’re losing all of that. So as they say, if it’s free and incremental and they can diversify, I think it’s fine.

Katie:

That makes sense. At first, I was like, oh, yeah, that’s really smart. But you’re right. The entire intention of think like an owner, be an owner, have equity. You see the value of what you get is based on the work that you’re doing, that it does dilute that. Well, thank you so much for joining me.

Pete Stavros:

I appreciate your interest and your enthusiasm from employee ownership.

Katie:

That is all for this week, and we will see you next week right here on The Money with Katie Show.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.