More Firms Giving a Stake to Employees

Employees of major companies have complained in recent years that they have been working harder while getting a shrinking share of the expanding pie of corporate wealth.

That now appears to be changing.

Many management experts say that this week’s announcement by Levi Strauss & Co. that it will reward its entire work force for meeting specific growth targets through 2001 reflects a new corporate mind-set that business success means giving the worker a tangible stake in corporate profits.

Throughout American industry, more corporations are considering or instituting stock option plans and other bonus programs aimed at aligning the interests of not just top managers, but also huge portions of the work force, with the interests of shareholders or other corporate owners.

Of course, nobody suggests that employees are about to displace shareholders as the corporate constituency most likely to be coddled by management. Companies seeking to cut costs still look first to the labor force, either by cutting employment outright or by “outsourcing” more production to outside workers who don’t get as much in wages or fringe benefits as regular full-timers.

Nor are rank-and-file employees in line to receive the rich option payouts still enjoyed by top executives and even middle managers at top U.S. companies.

But recent management surveys indicate that more workers are being offered a piece of the pie.

About 3% of the top 1,000 publicly held companies in the nation make some grant of options or restricted stock to all employees, according to a survey by the newsletter Executive Compensation Reports; 56 more have board authorizations to do so but have not implemented programs, according to the newsletter.

Of the programs in effect, half have been implemented since 1994. Only one predates 1989. (The exception is the egalitarian and successful Hewlett-Packard, whose option program was established in 1957.)

Other surveys indicate that many more companies grant stock or stock options broadly through their organizations, even if not to everybody. Between 8.5% and 13% of top U.S. corporations have made such grants to at least 60% of their workers in recent years.

“You just didn’t see this in the 1980s,” says Corey Rosen, director of the Oakland-based National Center for Employee Ownership, who adds that the number of corporations asking for help in devising such plans has burgeoned.

These steps are applauded by management experts who say workers should be viewed as investors in their own right in the corporation. “With stock options,” says Margaret M. Blair, a senior fellow at the Brookings Institution, “the system aligns the interests of the employees with the shareholders.”

Employee options programs take several forms. The simplest versions grant workers a given number of shares if they remain at the company for a certain period of time. Because the option price is generally set at the time of the original grant, the employees pocket whatever gain has been racked up in the interim.

(In other words, a five-year, 10-share option granted in 1993, when the stock price is $25, would enable an employee to buy 10 shares for $25 each if he or she is still with the company in 1998. If by then the price is $75, the employee’s gain is $50 per share, or $500.)

More elaborate programs require corporate performance or share price to clear certain hurdles for the options to kick in, theoretically giving the work force and management a shared goal.

At San Francisco-based AirTouch Communications, all full-time employees hired between 1993 and the end of 1997 are awarded restricted stock worth up to roughly 10% of their salary, based on a share price of $23, the price at the time of the company’s initial public offering in April 1994.

The employees, however, don’t get ownership until the price doubles to $46, or until April 1, 2004, whichever comes first. (AirTouch closed Friday at $29.75 in New York Stock Exchange trading, down 25 cents.)

The expansion of share ownership to wider groups of workers is at least partially a reaction to intense criticism of corporations for focusing heavily--many say excessively--on maximizing shareholder profits at the expense of most other participants in the corporate culture.

Throughout the 1990s, critics observe, companies turned out record profits and rewarded shareholders with historic gains. But employees suffered mass layoffs and corporate philanthropy shriveled.

It was once considered “un-American . . . for a business not to share the benefits of its success” with its workers and communities, said Labor Secretary Robert B. Reich in a speech in Washington earlier this year. That mind-set expired when global competition transformed American companies “from comfortable and stable rivals into bloodletting gladiators.”

This led to the rending of an “implicit social compact between corporations, their employees and communities,” Reich said.

That has in turn engendered a widespread--and politically explosive--public questioning of the very role of the corporation in society. The widening gap between shareholder wealth and the well-being of others within the corporate circle is a major reason many Americans feel cast off by change and financially insecure in the midst of a booming economy.

To be sure, many corporate CEOs contend that cutbacks that appear heartless and shortsighted are often necessary to ensure the survival of what had been poorly managed enterprises. Many business leaders also believe that their devotion to shareholder interests is natural and proper, given the shareholders’ “ownership” of the corporation.

“The responsibility of the CEO is to deliver shareholder value. Period,” said Alfred J. Dunlap, who as chairman of Scott Paper Co. tripled the price of Scott shares in one year while firing nearly 11,000 workers. “It’s the shareholders who own the corporation. They take all the risk.”

But a number of management experts say that is too narrow a view of the ownership of a public corporation. While shareholders contribute money, many other “stakeholders” make investments of equivalent value.

Such stakeholders include employees who may have devoted their lives to a company; communities that have provided plant sites with schools, libraries, sewer systems and tax exemptions; and even the air, water, flora and fauna that make up the environment.

This theory of stakeholder rights is gradually spreading among corporate boards. At Eastman Kodak, for example, the board of directors dictated that as much as 35% of CEO George Fisher’s annual bonus would be based on such factors as Kodak’s rank in customer and employee satisfaction surveys, improvements in product defect rates, and reductions in health, safety and environmental violations.

Other firms have thrived by placing employee and customer satisfaction at the center of their corporate culture.

Howard Schultz, founder and chairman of Starbucks Coffee, contends that his company’s 60% annual growth--which has brought it from 11 stores to 900 in eight years--is directly traceable to programs that give every worker, full- or part-time, an equity stake in the company as well as health and retirement benefits.

Those benefits, Schultz said in an interview, “are such a significant component of what we stand for that without them we would not have realized the success we have.”

But many experts feel that a broader distribution of wealth can be justified by more than simply business reasons.

“There’s a moral dimension to this,” says Sandra Waddock, an associate professor of management at Boston College who studies the social performance of corporations. “It may be that for the right we in society give companies to exist, we need to assign additional responsibilities to them to create healthy communities and healthy employees.”

The golden era of corporate citizenship may have been the 1960s and 1970s, when the antiwar, civil rights and ecology movements spotlighted the social ramifications of corporate decisions.

The upshot was a surge in corporate social consciousness. Corporations with unsavory public records strived to identify themselves with social and cultural uplift.

Cigarette maker Philip Morris opened art galleries in Manhattan, and Mobil Corp. financed public television’s “Masterpiece Theatre.” Philanthropic gifts by industry more than doubled between 1975 and 1990 to 2.3% of pretax profits, meaning that total charitable giving tended to keep rising year to year even during recessions.

This trend ended, however, with the takeover wars of the 1980s.

Corporate raiders swept down on any company with a lagging stock price, often breaking up their prey to squeeze every drop of immediate value out of what had formerly been a functioning enterprise.

The raiders pronounced themselves “shareholder advocates,” blaming complacent managers for the under-performance of their stocks. American corporations broke up, slimmed down, and consolidated as never before.

Work forces and wages were among the principal victims. The annual growth in wages and benefits hit record lows. Last year’s gain of 2.9% was the smallest since the government started keeping statistics in the mid-1980s.

Investments in the community were also downsized. Corporate philanthropy plummeted once it became viewed as the squandering of the shareholder’s money on ego-glorification for executives. Charitable contributions slid back to an average 1% of corporate pre-tax income in 1994, a level previously reached in 1975.

The cumulative effect of these changes, some critics say, was to disenfranchise the same stakeholders whose interests had been promoted during the years of social consciousness.

“The balance of power is out of whack, having swung too far toward share owners,” says Richard H. Koppes, general counsel of the California Public Employees Retirement System.

For all that, management experts say there remains considerable hostility in corporate America toward truly broad stock grant programs for workers. Most surveys show a sharp drop-off in broad-based grants among larger corporations.

Moreover, companies implementing the most progressive employee benefit plans tend to fall into two categories.

There are service and retail companies like Starbucks Coffee, PepsiCo and Patagonia whose fortunes depend heavily on sunny interactions between workers and customers. (PepsiCo, whose Taco Bell, Pizza Hut and KFC restaurant chains account for 37% of its sales, gives all full-time workers stock options worth 10% of their prior-year salaries.)

The second category is high technology, where more than 50% of firms give employees stock options, according to a 1993 survey by San Jose-based ShareData Inc.

That is partially an artifact of the industry’s roots in thinly financed start-up companies that paid their workers in stock as a way to conserve cash.

Still, more companies and industries are coming around to the idea that better treatment of workers, customers and communities and a broader distribution of corporate wealth promotes, rather than stunts, long-term growth.

“It is good business to take care of your people,” says Starbucks’ Schultz, “and at the end of the day it’s the right thing to do.”