- Email: [email protected]
Entrepreneurial Spirit
Entrepreneurial
Spirit
D. Keith Denton
A
great deal of managerial discussion has centered on the need to empower employees and give them a sense of ownership and pride in their work. Options have included flattening organizational pyramids and using team management. Profit sharing and Employee Stock Option Plans (ESOPs) have all been tried with varying degrees of success. The common denominator-which many companies are seeking and a Few actually achieve-is the need to create an entrepreneurial spirit within the company. Such a spirit is a sense that one is working For oneself rather than just For someone else. Those with an entrepreneurial spirit Feel they have a stake in the business and can directly affect the success of that business. Doubtless, some people within just about every organization have this entrepreneurial spirit. Certain CEOs, vice presidents, and other “critical” players often get a sense that the Firm is their business. The trouble is, not enough people have this Feeling of ownership. Although a Few can lead, all must participate if organizations are to run effectively. IF it were possible to somehow empower all of the work Force with this entrepreneurial spirit, think what could be possible! Three companies that have made grand experiments in this area could hardly be any more different From one another. The First is PepsiCo, Inc., the giant corporation that owns Kentucky Fried Chicken, Pizza Hut, and Taco Bell. PepsiCo has begun an innovative journey it hopes will instill this entrepreneurial spirit, through a stock option program called “SharePower” that holds enormous potential. Large organizations have a great deal of inertia, and it takes greater efforts to make course corrections, but at least PepsiCo’s management has steered in the right direction with SharePower. Whereas PepsiCo’s journey is just beginning, two other corporations are Further along the path toward company-wide entrepreneurialism. The Chicago-based Hyatt Hotels Corporation disco+ ered gold in helping its employees set up their own Free-standing companies within the corporaEntrepreneurial
Spirit
tion. In three years’ time, Hyatt employees spun off half a dozen ventures in such areas as party catering, retirement apartment complexes, and sporting equipment rental I sh’ops. And the Springfield Remanufacturing Corporation of Springfield, Missouri, a small Firm (600 employees) that rebuilds engines and engine components, has been the subject of numerous articles, a television special called “Growing Your Business,” and at least two books. The Focus of attention is its approach toward employee involvement, sharing of inFormation, and the entrepreneurial spirit it is able to create among even the lowest level of employees. Like any great effort, it is not a program; it is a process, and the company’s efforts are constantly changing and transforming. In a moment, we will look at some of the most exciting and most recent transformations, but First let’s examine PepsiCo’s innovative approach.
Firms need to promote to employees the idea that the company is “theirs. M
SHAREPOWER
I
n the true spirit of entrepreneurialism, PepsiCo wanted to spread decision making to lower levels, create a greater sense of team spirit, and make it easier For employees to identify with the company and their work. Upper management had also hoped to induce employees to stay longer and increase their productivity. With all this in mind, SharePower was created. What is so unique about a stock option plan? After all, such plans have been around For years. As the name implies, stock options give an employee the option of purchasing company stock through some deferred program. In the past it was quite a status symbol. Many still see stock options as the ultimate symbol of having made it-and For good reason. Typically, options have 79
been offered exclusively to a company’s top executives. At one time, only the top 100 or so executives of a large corporation would be rewarded with the opportunity to purchase stock options. That is still the case in many large organizations, but recently these options have been offered to a wider range of employees-say, the company’s top 300 or 400 executives. So what is PepsiCo’s difference? Simply, it offers options to all 100,000 employees who work an average of at least 30 hours a week. Everyone from truck drivers to taco makers can participate. Background PepsiCo’s reason for creating SharePower was to have everyone feel the sense of ownership that top executives felt. The creation of SharePower began when Wayne Calloway, chairman and CEO of PepsiCo, challenged his personnel staff to come up with an idea that would “spread employee empowerment and ownership” to every level of the organization. He wanted a motivator that would reward longer service and be good for all shareholders. Over the next two years, the personnel department looked at several programs, but none were suited to its needs. Many seemed to be merely savings programs that did not provide incentives. Such programs required employees to set aside funds to benefit from “Compensation experts the program. Personnel warn others who might discovered that, at best, about two-thirds consider folio wing of employees actually -PepsiCo’s lead to participated in such programs. But PepsiCo make sure it is simply wanted a program for one part of an overall all its employees. Variempowerment plan. ” ous ESOPs were examined, but management felt they were primarily entitlement programs and not motivational. Furthermore, ESOPs did not reward long service. The idea of stock options for everyone in the corporation came to Charlie Rogers, the vice president of compensation and benefits, in the fall of 1988, while he was waiting at a traffic light. He knew stock options were reserved for a select few, but could not imagine why they would not work for everyone. When he got back to his office he assigned a benefits team to check out the possibility. Within months a stock option program called SharePower was developed and approved by the board of directors in March 1989. PepsiCo acquired the stock from the open market by borrowing funds. The acquisition apparently caused little or no dilution; top manag80
ers feel that any such dilution has been outweighed by the stock price’s gain over time. How Does It Work? Under ideal conditions, an employee earning $30,000 a year can make more than $387,000 over a 30-year career. This assumesthat stock prices increase 10 percent annually, which is not unexpected. By June 1989, PepsiCo’s stock price had increased at an annual average compound rate of 11.2 percent since the company’s fomiation in 1965. If the stock prices were to grow at an annual rate of 15 percent, the earnings of the person with the $30,000-a-year salary would jump from $387,000 to $1.2 million. Under the plan, every July 1, employees who work 30 hours a week and 1,000 hours a year are granted options totaling 10 percent of their compensation, including bonuses, overtime, and other extras for the previous year. The value of these options on July 1 is equal to 10 percent of the employee’s cash earnings. Employees have the right to buy company stock at the July 1 price anytime within the next 10 years. Because options let employees purchase shares at the July 1 price, they can profit from their efforts to make the company more profitable. Employees can exercise each annual grant at 20 percent per year. They do not have to have the cash in hand to make the purchase, and they can use the appreciation in stock value over time to buy stock. Like all stocks, PepsiCo’s price fluctuates daily, and it is always possible that the price might not increase. Of course, it could even fall. If that happens, employees-like stockholderswill not make a profit, but neither will they lose anything. PepsiCo management emphasizes that the amount employees receive will depend on everyone’s ability to increase the value of the stock and on how long each employee is willing to let the stock grow before selling it. Employees do not have to do anything to participate except continue to work for the company for at least one year. This allows time for the grants to be exercisable. As noted before, every year’s grant vests at 20 percent per year; after five years it is fully vested. SharePower has received very positive comments. However, there is a caveat that goes with it. Compensation experts warn others who might consider following PepsiCo’s lead to make sure it is simply one part of an overall empowerment plan. Michael Halloran, vice president of the consulting fii Towers Perrin, says it will not work unless top management is pushing teamwork. It is essential that options be part of the package, not the whole package. Such a stock option package cannot.grow unless it occurs within a participative and open environmentBusiness Horizons / May-June 1993
one in which equity, not inequity, tion of the company. CREATING
is the founda-
A BUSINE!%
0
ne of the most dynamic ways of creating equity is to help employees create their own company within the corporation. After two years as a switchboard operator and assistant housekeeping manager at the Hyatt Regency Chicago, John Allegretti was ready to quit. He hated the long wait for promotions and the repetition of his job. He realized the hotel business wasn’t for him, and he wanted a more challenging job, one in which he could somehow help the environment. But then, after a month of sending around his resume and interviewing at waste recycling facilities, a strange thing happened-John Allegretti ended up back at Hyatt doing what he wanted to do. Allegretti’s boss believed he showed promise and did not want to lose him. He asked Allegretti to head a project to reduce waste at the 2,000room hotel. Allegretti did so well at the job that the parent Hyatt corporation let him develop and run a new waste-consulting business called International Recycle Co., Inc. The company not only has several large Hyatt customers, but also has 24 other clients in eight states. Hyatt’s goal of keeping employees hyped has become a way of life for the corporation. Aspiring hoteliers must wait eight or more years to run even a small hotel, so Hyatt continues to expand its motivational efforts. Now it is helping employees with novel ideas outside the company’s core business to set up free-standing companies. In three years, employee suggestions prompted Hyatt to spin off half a dozen ventures in such areas as party catering, retirement apartment complexes, and sporting equipment rental shops. Like Allegretti, those who develop the ideas are usually the ones allowed to run them. As noted earlier, they receive start-up capital but do not get an equity stake. Hyatt sets up the ventures as separate companies and lets its corporate staff keep their focus on hotels. James E. Jones, then director of sales development for Hyatt, noticed that party planners were receiving hefty fees for some of the same services Hyatt could provide. He knew the corporation could do this, and if it had no desire to, he was ready to quit and do it himself. Because of his work at the hotel, Jones had gained wide contact with professional sports, a big source for event planners. So he prepared a business plan, sold the idea to Hyatt’s president, Darryl HartleyLeonard, and was given $780,000 start-up money. Through his new company, Hyatt’s party planner called Regency Productions, he secured a contract From the National Football League for the Entrepreneurial
Spirit
1991 Super Bowl, as well as one for catering the 1991 U.S. Open golf tournament. There are, of course, problems in helping employees set up companies within the company. Often proposals are made by employees who lack financial skills. In Jones’ case, he was weak on contingency planning, so the corporation sent him back to solidify the proposal rather than rejecting it out right. EQUALITY
IS EQUITY
0
ne company that has an emphasis on teamwork and equity for all employees, rather than just managers, is Springfield Remanufacturing Corporation (SRC). For this reason, it is further along the path toward entrepreneurialism than either PepsiCo or Hyatt. Good management starts at the top, and SRC is no exception. Jack Stack, the company’s CEO, epitomizes the dynamic executive who leads and still is able to listen. He has the utmost respect for the ability and intelligence of his employees, and he treats them as equals. In a series of several meetings with employees, Stack spent days talking to small groups of machinists. ianitors. and white%llar employees about the company and “Stack talks to employees what he felt was a need for a new about what he sees as entrepreneurial everyone’s need for a spirit. He also talked about changes that career path. He feels that were needed. These everyone has to have discussions occurred despite SRC’s profits opportunities to achieve. I* and its well-publiI cized success. Such discussions are what makes SRC unique. The company is constantly innovating. Anyone wanting a photograph of its success must settle for a moving picture. Stack talks to employees about what he sees as everyone’s need for a career path. He feels that everyone has to have opportunities to achieve. On the other hand, he thinks management often ends up saying “no” to those who want more. If everyone stays in the same spot and at the same pay grade, where does one go? Stack believes the answer to this problem and the problem of empowerment is for companies to get into the process of helping to build businesses within the corporation. Empowerment comes by giving people the authority to run their own business. For instance, if management provides a general foreman with the opportunity to run his own business within the parent corporation, it has the cascade effect of opening up other 81
positions. In addition, as people leave to start their own business, others must be brought in to take their places. When SRC employees start a new business, the corpation looks internally to see who is ready to replace those people. Stack believes it is SRC’s mission, in the next ten years, to create ten companies within the original company, all of which will be run by former SRC employees. He plans to put people in those SRC spin-off companies that he feels can succeed. To prepare them to run their own business, they will be taught how to fmance it and how to manage cash flow. He pointed out that this process of preparing people to run their own company even helps SRC’s management to better understand finance and what it takes to make a company work. Why Do It? In those early meetings with his employees, Stack told them, “You can get into your own company with very little capital and make a lot of money if you are willing to learn.” He emphasized that if they doubted his words they needed only look at SRC’sparent corporation. The management at SRCgot into this $40 million busi“The real question. was ness with $100,000 in whether SK had the cash, 20 percent of which was put up by people who wanted to Stack himself. They take advantage of the created SRCfrom almost nothing, and opportunity. M determined to make the company more profitable and support people who take risks by putting them into business for themselves. The rationale is to keep regenerating themselves. Stack believed that SRC’smanagement knew how to create this opportunity for entrepreneurialism. The real question was whether SRC had the people who wanted to take advantage of the opportunity. The first step, he told employees, was to want it. Second, he stressed, they must come in and tell management they wanted to do it. If the desire was there, SRC’smanagement would help assesswhat each employee needed to do to become stronger in any particular area. Then the company would bring in the people to help correct those weaknesses. The question Stack wanted each employee to ask was, “Do I have the leadership to be able to take a company and run it?” In closing out his meetings, Stack would narrow his eyes on the group and say, “The bottom line is that we believe in employee participation and think small is better than big, and that we are scared about how big we are becoming.”
I 82
Questions
and Answers
At meeting’s end, Stack faced the familiar question about what type of business he was considering establishing. He responded, “I would consider anything, but first you would have to put the financial to it.” He stressed that if a business proposal involved using SRC’sequipment or strict reliance on SRC’sparent corporation (except for sales), he would say no. On the other hand, if an employee wanted to, say, rebuild turbochargers and wanted to rent space to get into the charger business, the plan would definitely be considered. Of course, management would want to make sure the employee had the talent and training to succeed. If people were simply going to cart out things, then they would only be creating more paperwork and more nightmares. When SRCtalks about employees going into business, Stack said, what it wants is for those employees to get into a businesswith a product line and expand that line into other products. SRC does not want people to simply leave the parent corporation, or to be totally reliant on SRC for their business. Furthermore, the move has to make sense both for those leaving and for those staying. It has to be a win/win situation. To the question, “How much growth are you looking at in these start-up businesses?”Stack responded that SRCwas not looking for a certain amount of growth each year. What it really wanted was for the new start-ups not to run out of cash and not to destroy SRC from within. The first priority was security. The answer to the question “Do start-ups have to have anything to do with what SRC does now?” was a resounding “No!” Stack pointed out that if someone wanted to set up a barber shop, it had to compete with other opportunities. For instance, he had been contacted by one company that wanted SRCto package a “kit” that consisted of various automotive parts. Stack said, “That’s an opportunity! I know because we costed it, cash flowed it, and submitted it for quotation.” If it succeeded, SRC’sjob was to find someone who understood the business-cash flow, scheduling, how to turn inventories. According to Stack, that business alone was an $8 million opportunity. With that kind of deal, it would be difficult to consider, say, a liquor store. However, Stack reemphasized that there were no boundaries to what the company would consider. spill-offs Each of SRC’sspin-off ventures started inside the company. The heads of these ventures were employees fully vested in SRC’sESOP who cashed in their ESOP holdings to get the money to start Business
Horizons
/ May-June
1993
their ventures. They literally bought themselves a new job. And they started the ventures with no safety net from SRC. They took the same risks borne by anyone starting a new business. SRC did not guarantee them their old jobs back if their ventures failed. Does it take a special type of person to launch a venture like this? Much entrepreneurship literature gives us lists of personal traits that supposedly improve one’s chances of success in starting a new venture. This leads us to conclude that only certain personality types are likely to succeed as entrepreneurs. In practice, we can find many personality types among successful new venturers. SRC’s experience bears this out. Jim Avery set up and ran production in a plant in Willow Springs, a small town about 80 miles from Springfield, that remanufactured Oldsmobile diesel engines. Bev Willis went with him to set up the plant’s administrative services. During the experience, both got a taste of starting and running a separate operation. Avery never got it out of his system. Upon returning from the Willow Springs plant, he submitted several financial plans. One request was whether he might take water pumps out of the business and start his own product line. One day a customer asked SRC to build torque amplifiers. SRC managers thought about Avery’s previous request and wondered if he could produce this product. They reasoned that their plant had too little capacity for torque amplifiers. They also knew that these amplifiers could yield them only a small profit margin. Considering these facts, they gave Avery the project. Within six months he bought a building in a nearby small town, started a company called Avatar, and developed the product from ground zero. He did about $1.2 million of business last year and has yet to have a warranty claim. When Avatar began to grow, Avery needed help supervising his workers. He hired an experienced lead man from SRC to do this. By not replacing this man, SRC took $25,000 of overhead expense out of its core business. As Avatar continued to grow, Avery found his growing inventory becoming hard to manage. He went back to SRC and hired an inventory manager. SRC didn’t replace this man either; the result was another $25,000 in overhead saved. Bev Willis also wanted to start her own business. She held an MBA degree in accounting, but knew nothing about sales. SRC put her in charge of the customer service department for two years. Along came the opportunity to make and sell engine rebuilding kits, which requires no technical knowledge about engines. It simply requires taking items from a shelf and packing them into a box. The person who would manage such a business needed to have good sales, accounting, and Entrepreneurial Spirit
inventory management skills. This was perfect for Bev Willis. She started Newstream Enterprises, and began to run it profitably. Later she hired one of SRC’s engineers who specialized in packaging. The result was that SRC took two people out of its fKm and spun off a $6 million per year business. And because it didn’t replace the two employees, it cut $60,000 of overhead out of its core business. The rest of Newstream’s employees are temporaries paid $6 per hour. SRC owns 51 percent of Newstream. Engines, Plus is the only venture with managers who own an equity share. Eric Paulson owns 25 percent and SRC owns 75 percent. The arrangement was 80/20 until Paulson came up with an idea about how to better manage this fast“In practice, we can growing business. Paulson did $300,000 find many personality of business the first types among successful year, $750,000 the second, $10.2 million new venturers. SRC 3 the third, and expects experience bears this to do $12 million for out. M 1993. He operates two locations, one I that rebuilds oil coolers and exchanges rebuilt engines, and one that builds stationary power units. Paulson found two brothers to help him run each of his two locations. He asked SRC if he could buy another 5 percent of the business and sell it to his two managers. Now each of them owns 2.5 percent of the business. All SRC’s new venture managers are seeking equity positions in the businesses they run. For example, Jim Avery wants to own 20 percent of Avatar. SRC will negotiate a 100 percent equity sale with any venture whose entrepreneur is ready to buy. It will base the price on some multiple of the venture’s earnings, as is typical in business sales.
I
I
n closing out one of his numerous meetings with his employees, Jack Stack reflected on what is happening in corporate America. He said it does not matter whether the business is publishing books, making cars, or whatever: “We have all these really smart people. They all went through the right training programs and obtained positions of responsibility. They got to know their jobs better than anyone else and then-in the worst of all sins-they are not allowed to participate in terms of equity.” He feels we are likely to see a real demise of corporate America if current trends continue. In many older corporations there are two people on retirement for each one working. Costs are running rampant. Companies with that kind of overhead are not going to 83
be able to compete with a start-up company like SRC because of its small liability. Concerning those companies with more retired employees than working employees, Stack says we are going to see them trying to reduce ’ overhead and operate with fewer and fewer people. Companies that have 100,000 employees can incur millions of dollars in health care costs alone. Most companies do not make that kind of money. Competing against start-up companies with no such overhead is even more critical. SRC is preparing for the future by parting out its business. That is why Stack says it is going to continually make start-ups and create new companies. The advantage is flexibility and speed. And if the company is good at it, in 30 years or so it will not have to face the overhead and crises many corporations are already facing. 0
References James E. Ellis, “Feeling Stuck at Hyatt? Create a New Business,” Business Week, December 10, 1990, p. 195. “PepsiCo SharePower: We All Have a Stake,” PepsiCo, Inc., August-September 1989, p. 2. Tolie Solomon, “Pepsi Offers Stock Options To All, Not Just Honchos,” Wall Street Journal, June 28, 1989, p. Bl.
D. Keith Denton is a professor of management at Southwest Missouri State University, Springfield.
Business Horizons / May-June 1993
Spirit
D. Keith Denton
A
great deal of managerial discussion has centered on the need to empower employees and give them a sense of ownership and pride in their work. Options have included flattening organizational pyramids and using team management. Profit sharing and Employee Stock Option Plans (ESOPs) have all been tried with varying degrees of success. The common denominator-which many companies are seeking and a Few actually achieve-is the need to create an entrepreneurial spirit within the company. Such a spirit is a sense that one is working For oneself rather than just For someone else. Those with an entrepreneurial spirit Feel they have a stake in the business and can directly affect the success of that business. Doubtless, some people within just about every organization have this entrepreneurial spirit. Certain CEOs, vice presidents, and other “critical” players often get a sense that the Firm is their business. The trouble is, not enough people have this Feeling of ownership. Although a Few can lead, all must participate if organizations are to run effectively. IF it were possible to somehow empower all of the work Force with this entrepreneurial spirit, think what could be possible! Three companies that have made grand experiments in this area could hardly be any more different From one another. The First is PepsiCo, Inc., the giant corporation that owns Kentucky Fried Chicken, Pizza Hut, and Taco Bell. PepsiCo has begun an innovative journey it hopes will instill this entrepreneurial spirit, through a stock option program called “SharePower” that holds enormous potential. Large organizations have a great deal of inertia, and it takes greater efforts to make course corrections, but at least PepsiCo’s management has steered in the right direction with SharePower. Whereas PepsiCo’s journey is just beginning, two other corporations are Further along the path toward company-wide entrepreneurialism. The Chicago-based Hyatt Hotels Corporation disco+ ered gold in helping its employees set up their own Free-standing companies within the corporaEntrepreneurial
Spirit
tion. In three years’ time, Hyatt employees spun off half a dozen ventures in such areas as party catering, retirement apartment complexes, and sporting equipment rental I sh’ops. And the Springfield Remanufacturing Corporation of Springfield, Missouri, a small Firm (600 employees) that rebuilds engines and engine components, has been the subject of numerous articles, a television special called “Growing Your Business,” and at least two books. The Focus of attention is its approach toward employee involvement, sharing of inFormation, and the entrepreneurial spirit it is able to create among even the lowest level of employees. Like any great effort, it is not a program; it is a process, and the company’s efforts are constantly changing and transforming. In a moment, we will look at some of the most exciting and most recent transformations, but First let’s examine PepsiCo’s innovative approach.
Firms need to promote to employees the idea that the company is “theirs. M
SHAREPOWER
I
n the true spirit of entrepreneurialism, PepsiCo wanted to spread decision making to lower levels, create a greater sense of team spirit, and make it easier For employees to identify with the company and their work. Upper management had also hoped to induce employees to stay longer and increase their productivity. With all this in mind, SharePower was created. What is so unique about a stock option plan? After all, such plans have been around For years. As the name implies, stock options give an employee the option of purchasing company stock through some deferred program. In the past it was quite a status symbol. Many still see stock options as the ultimate symbol of having made it-and For good reason. Typically, options have 79
been offered exclusively to a company’s top executives. At one time, only the top 100 or so executives of a large corporation would be rewarded with the opportunity to purchase stock options. That is still the case in many large organizations, but recently these options have been offered to a wider range of employees-say, the company’s top 300 or 400 executives. So what is PepsiCo’s difference? Simply, it offers options to all 100,000 employees who work an average of at least 30 hours a week. Everyone from truck drivers to taco makers can participate. Background PepsiCo’s reason for creating SharePower was to have everyone feel the sense of ownership that top executives felt. The creation of SharePower began when Wayne Calloway, chairman and CEO of PepsiCo, challenged his personnel staff to come up with an idea that would “spread employee empowerment and ownership” to every level of the organization. He wanted a motivator that would reward longer service and be good for all shareholders. Over the next two years, the personnel department looked at several programs, but none were suited to its needs. Many seemed to be merely savings programs that did not provide incentives. Such programs required employees to set aside funds to benefit from “Compensation experts the program. Personnel warn others who might discovered that, at best, about two-thirds consider folio wing of employees actually -PepsiCo’s lead to participated in such programs. But PepsiCo make sure it is simply wanted a program for one part of an overall all its employees. Variempowerment plan. ” ous ESOPs were examined, but management felt they were primarily entitlement programs and not motivational. Furthermore, ESOPs did not reward long service. The idea of stock options for everyone in the corporation came to Charlie Rogers, the vice president of compensation and benefits, in the fall of 1988, while he was waiting at a traffic light. He knew stock options were reserved for a select few, but could not imagine why they would not work for everyone. When he got back to his office he assigned a benefits team to check out the possibility. Within months a stock option program called SharePower was developed and approved by the board of directors in March 1989. PepsiCo acquired the stock from the open market by borrowing funds. The acquisition apparently caused little or no dilution; top manag80
ers feel that any such dilution has been outweighed by the stock price’s gain over time. How Does It Work? Under ideal conditions, an employee earning $30,000 a year can make more than $387,000 over a 30-year career. This assumesthat stock prices increase 10 percent annually, which is not unexpected. By June 1989, PepsiCo’s stock price had increased at an annual average compound rate of 11.2 percent since the company’s fomiation in 1965. If the stock prices were to grow at an annual rate of 15 percent, the earnings of the person with the $30,000-a-year salary would jump from $387,000 to $1.2 million. Under the plan, every July 1, employees who work 30 hours a week and 1,000 hours a year are granted options totaling 10 percent of their compensation, including bonuses, overtime, and other extras for the previous year. The value of these options on July 1 is equal to 10 percent of the employee’s cash earnings. Employees have the right to buy company stock at the July 1 price anytime within the next 10 years. Because options let employees purchase shares at the July 1 price, they can profit from their efforts to make the company more profitable. Employees can exercise each annual grant at 20 percent per year. They do not have to have the cash in hand to make the purchase, and they can use the appreciation in stock value over time to buy stock. Like all stocks, PepsiCo’s price fluctuates daily, and it is always possible that the price might not increase. Of course, it could even fall. If that happens, employees-like stockholderswill not make a profit, but neither will they lose anything. PepsiCo management emphasizes that the amount employees receive will depend on everyone’s ability to increase the value of the stock and on how long each employee is willing to let the stock grow before selling it. Employees do not have to do anything to participate except continue to work for the company for at least one year. This allows time for the grants to be exercisable. As noted before, every year’s grant vests at 20 percent per year; after five years it is fully vested. SharePower has received very positive comments. However, there is a caveat that goes with it. Compensation experts warn others who might consider following PepsiCo’s lead to make sure it is simply one part of an overall empowerment plan. Michael Halloran, vice president of the consulting fii Towers Perrin, says it will not work unless top management is pushing teamwork. It is essential that options be part of the package, not the whole package. Such a stock option package cannot.grow unless it occurs within a participative and open environmentBusiness Horizons / May-June 1993
one in which equity, not inequity, tion of the company. CREATING
is the founda-
A BUSINE!%
0
ne of the most dynamic ways of creating equity is to help employees create their own company within the corporation. After two years as a switchboard operator and assistant housekeeping manager at the Hyatt Regency Chicago, John Allegretti was ready to quit. He hated the long wait for promotions and the repetition of his job. He realized the hotel business wasn’t for him, and he wanted a more challenging job, one in which he could somehow help the environment. But then, after a month of sending around his resume and interviewing at waste recycling facilities, a strange thing happened-John Allegretti ended up back at Hyatt doing what he wanted to do. Allegretti’s boss believed he showed promise and did not want to lose him. He asked Allegretti to head a project to reduce waste at the 2,000room hotel. Allegretti did so well at the job that the parent Hyatt corporation let him develop and run a new waste-consulting business called International Recycle Co., Inc. The company not only has several large Hyatt customers, but also has 24 other clients in eight states. Hyatt’s goal of keeping employees hyped has become a way of life for the corporation. Aspiring hoteliers must wait eight or more years to run even a small hotel, so Hyatt continues to expand its motivational efforts. Now it is helping employees with novel ideas outside the company’s core business to set up free-standing companies. In three years, employee suggestions prompted Hyatt to spin off half a dozen ventures in such areas as party catering, retirement apartment complexes, and sporting equipment rental shops. Like Allegretti, those who develop the ideas are usually the ones allowed to run them. As noted earlier, they receive start-up capital but do not get an equity stake. Hyatt sets up the ventures as separate companies and lets its corporate staff keep their focus on hotels. James E. Jones, then director of sales development for Hyatt, noticed that party planners were receiving hefty fees for some of the same services Hyatt could provide. He knew the corporation could do this, and if it had no desire to, he was ready to quit and do it himself. Because of his work at the hotel, Jones had gained wide contact with professional sports, a big source for event planners. So he prepared a business plan, sold the idea to Hyatt’s president, Darryl HartleyLeonard, and was given $780,000 start-up money. Through his new company, Hyatt’s party planner called Regency Productions, he secured a contract From the National Football League for the Entrepreneurial
Spirit
1991 Super Bowl, as well as one for catering the 1991 U.S. Open golf tournament. There are, of course, problems in helping employees set up companies within the company. Often proposals are made by employees who lack financial skills. In Jones’ case, he was weak on contingency planning, so the corporation sent him back to solidify the proposal rather than rejecting it out right. EQUALITY
IS EQUITY
0
ne company that has an emphasis on teamwork and equity for all employees, rather than just managers, is Springfield Remanufacturing Corporation (SRC). For this reason, it is further along the path toward entrepreneurialism than either PepsiCo or Hyatt. Good management starts at the top, and SRC is no exception. Jack Stack, the company’s CEO, epitomizes the dynamic executive who leads and still is able to listen. He has the utmost respect for the ability and intelligence of his employees, and he treats them as equals. In a series of several meetings with employees, Stack spent days talking to small groups of machinists. ianitors. and white%llar employees about the company and “Stack talks to employees what he felt was a need for a new about what he sees as entrepreneurial everyone’s need for a spirit. He also talked about changes that career path. He feels that were needed. These everyone has to have discussions occurred despite SRC’s profits opportunities to achieve. I* and its well-publiI cized success. Such discussions are what makes SRC unique. The company is constantly innovating. Anyone wanting a photograph of its success must settle for a moving picture. Stack talks to employees about what he sees as everyone’s need for a career path. He feels that everyone has to have opportunities to achieve. On the other hand, he thinks management often ends up saying “no” to those who want more. If everyone stays in the same spot and at the same pay grade, where does one go? Stack believes the answer to this problem and the problem of empowerment is for companies to get into the process of helping to build businesses within the corporation. Empowerment comes by giving people the authority to run their own business. For instance, if management provides a general foreman with the opportunity to run his own business within the parent corporation, it has the cascade effect of opening up other 81
positions. In addition, as people leave to start their own business, others must be brought in to take their places. When SRC employees start a new business, the corpation looks internally to see who is ready to replace those people. Stack believes it is SRC’s mission, in the next ten years, to create ten companies within the original company, all of which will be run by former SRC employees. He plans to put people in those SRC spin-off companies that he feels can succeed. To prepare them to run their own business, they will be taught how to fmance it and how to manage cash flow. He pointed out that this process of preparing people to run their own company even helps SRC’s management to better understand finance and what it takes to make a company work. Why Do It? In those early meetings with his employees, Stack told them, “You can get into your own company with very little capital and make a lot of money if you are willing to learn.” He emphasized that if they doubted his words they needed only look at SRC’sparent corporation. The management at SRCgot into this $40 million busi“The real question. was ness with $100,000 in whether SK had the cash, 20 percent of which was put up by people who wanted to Stack himself. They take advantage of the created SRCfrom almost nothing, and opportunity. M determined to make the company more profitable and support people who take risks by putting them into business for themselves. The rationale is to keep regenerating themselves. Stack believed that SRC’smanagement knew how to create this opportunity for entrepreneurialism. The real question was whether SRC had the people who wanted to take advantage of the opportunity. The first step, he told employees, was to want it. Second, he stressed, they must come in and tell management they wanted to do it. If the desire was there, SRC’smanagement would help assesswhat each employee needed to do to become stronger in any particular area. Then the company would bring in the people to help correct those weaknesses. The question Stack wanted each employee to ask was, “Do I have the leadership to be able to take a company and run it?” In closing out his meetings, Stack would narrow his eyes on the group and say, “The bottom line is that we believe in employee participation and think small is better than big, and that we are scared about how big we are becoming.”
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Questions
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At meeting’s end, Stack faced the familiar question about what type of business he was considering establishing. He responded, “I would consider anything, but first you would have to put the financial to it.” He stressed that if a business proposal involved using SRC’sequipment or strict reliance on SRC’sparent corporation (except for sales), he would say no. On the other hand, if an employee wanted to, say, rebuild turbochargers and wanted to rent space to get into the charger business, the plan would definitely be considered. Of course, management would want to make sure the employee had the talent and training to succeed. If people were simply going to cart out things, then they would only be creating more paperwork and more nightmares. When SRCtalks about employees going into business, Stack said, what it wants is for those employees to get into a businesswith a product line and expand that line into other products. SRC does not want people to simply leave the parent corporation, or to be totally reliant on SRC for their business. Furthermore, the move has to make sense both for those leaving and for those staying. It has to be a win/win situation. To the question, “How much growth are you looking at in these start-up businesses?”Stack responded that SRCwas not looking for a certain amount of growth each year. What it really wanted was for the new start-ups not to run out of cash and not to destroy SRC from within. The first priority was security. The answer to the question “Do start-ups have to have anything to do with what SRC does now?” was a resounding “No!” Stack pointed out that if someone wanted to set up a barber shop, it had to compete with other opportunities. For instance, he had been contacted by one company that wanted SRCto package a “kit” that consisted of various automotive parts. Stack said, “That’s an opportunity! I know because we costed it, cash flowed it, and submitted it for quotation.” If it succeeded, SRC’sjob was to find someone who understood the business-cash flow, scheduling, how to turn inventories. According to Stack, that business alone was an $8 million opportunity. With that kind of deal, it would be difficult to consider, say, a liquor store. However, Stack reemphasized that there were no boundaries to what the company would consider. spill-offs Each of SRC’sspin-off ventures started inside the company. The heads of these ventures were employees fully vested in SRC’sESOP who cashed in their ESOP holdings to get the money to start Business
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their ventures. They literally bought themselves a new job. And they started the ventures with no safety net from SRC. They took the same risks borne by anyone starting a new business. SRC did not guarantee them their old jobs back if their ventures failed. Does it take a special type of person to launch a venture like this? Much entrepreneurship literature gives us lists of personal traits that supposedly improve one’s chances of success in starting a new venture. This leads us to conclude that only certain personality types are likely to succeed as entrepreneurs. In practice, we can find many personality types among successful new venturers. SRC’s experience bears this out. Jim Avery set up and ran production in a plant in Willow Springs, a small town about 80 miles from Springfield, that remanufactured Oldsmobile diesel engines. Bev Willis went with him to set up the plant’s administrative services. During the experience, both got a taste of starting and running a separate operation. Avery never got it out of his system. Upon returning from the Willow Springs plant, he submitted several financial plans. One request was whether he might take water pumps out of the business and start his own product line. One day a customer asked SRC to build torque amplifiers. SRC managers thought about Avery’s previous request and wondered if he could produce this product. They reasoned that their plant had too little capacity for torque amplifiers. They also knew that these amplifiers could yield them only a small profit margin. Considering these facts, they gave Avery the project. Within six months he bought a building in a nearby small town, started a company called Avatar, and developed the product from ground zero. He did about $1.2 million of business last year and has yet to have a warranty claim. When Avatar began to grow, Avery needed help supervising his workers. He hired an experienced lead man from SRC to do this. By not replacing this man, SRC took $25,000 of overhead expense out of its core business. As Avatar continued to grow, Avery found his growing inventory becoming hard to manage. He went back to SRC and hired an inventory manager. SRC didn’t replace this man either; the result was another $25,000 in overhead saved. Bev Willis also wanted to start her own business. She held an MBA degree in accounting, but knew nothing about sales. SRC put her in charge of the customer service department for two years. Along came the opportunity to make and sell engine rebuilding kits, which requires no technical knowledge about engines. It simply requires taking items from a shelf and packing them into a box. The person who would manage such a business needed to have good sales, accounting, and Entrepreneurial Spirit
inventory management skills. This was perfect for Bev Willis. She started Newstream Enterprises, and began to run it profitably. Later she hired one of SRC’s engineers who specialized in packaging. The result was that SRC took two people out of its fKm and spun off a $6 million per year business. And because it didn’t replace the two employees, it cut $60,000 of overhead out of its core business. The rest of Newstream’s employees are temporaries paid $6 per hour. SRC owns 51 percent of Newstream. Engines, Plus is the only venture with managers who own an equity share. Eric Paulson owns 25 percent and SRC owns 75 percent. The arrangement was 80/20 until Paulson came up with an idea about how to better manage this fast“In practice, we can growing business. Paulson did $300,000 find many personality of business the first types among successful year, $750,000 the second, $10.2 million new venturers. SRC 3 the third, and expects experience bears this to do $12 million for out. M 1993. He operates two locations, one I that rebuilds oil coolers and exchanges rebuilt engines, and one that builds stationary power units. Paulson found two brothers to help him run each of his two locations. He asked SRC if he could buy another 5 percent of the business and sell it to his two managers. Now each of them owns 2.5 percent of the business. All SRC’s new venture managers are seeking equity positions in the businesses they run. For example, Jim Avery wants to own 20 percent of Avatar. SRC will negotiate a 100 percent equity sale with any venture whose entrepreneur is ready to buy. It will base the price on some multiple of the venture’s earnings, as is typical in business sales.
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n closing out one of his numerous meetings with his employees, Jack Stack reflected on what is happening in corporate America. He said it does not matter whether the business is publishing books, making cars, or whatever: “We have all these really smart people. They all went through the right training programs and obtained positions of responsibility. They got to know their jobs better than anyone else and then-in the worst of all sins-they are not allowed to participate in terms of equity.” He feels we are likely to see a real demise of corporate America if current trends continue. In many older corporations there are two people on retirement for each one working. Costs are running rampant. Companies with that kind of overhead are not going to 83
be able to compete with a start-up company like SRC because of its small liability. Concerning those companies with more retired employees than working employees, Stack says we are going to see them trying to reduce ’ overhead and operate with fewer and fewer people. Companies that have 100,000 employees can incur millions of dollars in health care costs alone. Most companies do not make that kind of money. Competing against start-up companies with no such overhead is even more critical. SRC is preparing for the future by parting out its business. That is why Stack says it is going to continually make start-ups and create new companies. The advantage is flexibility and speed. And if the company is good at it, in 30 years or so it will not have to face the overhead and crises many corporations are already facing. 0
References James E. Ellis, “Feeling Stuck at Hyatt? Create a New Business,” Business Week, December 10, 1990, p. 195. “PepsiCo SharePower: We All Have a Stake,” PepsiCo, Inc., August-September 1989, p. 2. Tolie Solomon, “Pepsi Offers Stock Options To All, Not Just Honchos,” Wall Street Journal, June 28, 1989, p. Bl.
D. Keith Denton is a professor of management at Southwest Missouri State University, Springfield.
Business Horizons / May-June 1993