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Are companies more successful when employees are stakeholders?

Pete Stavros KKR co-head of Americas private equity join's Yahoo Finance's On The Move to discuss KKR's portfolio company Ingersoll Rand's awarding $150 million equity grant to nearly 16,000 global employees.

Video Transcript

JULIE HYMAN: Well, a recent survey from employment advisory firm Willis Towers Watson found that 2/3 of employers still plan to offer bonuses in the coming year. Overall though, companies have reduced their projections for pay raises next year compared to what they had planned a few months ago. Let's talk about that employee engagement.

We're joined by Pete Stavros. He is KKR co-head of Americas Private Equity. And we're having him on to talk about this because at Ingersoll Rand, which is a company in KKR's portfolio, they recently awarded $150 million in equity grants to about 16,000 global employees. Pete, thanks for joining us. Why did you make this call, especially at a time like this?

PETE STAVROS: Well, we believe that broad-based ownership is a source of driving employee engagement, so we-- this $150-million grant that we did last week is actually on top of a $100-million grant we did at our IPO in 2017. And these grants exclude senior management, so this is primarily for the benefit of hourly employees.

And if you add up those two grants and look at where the stock price is today, which is up 85% since the IPO, it's about $335 million dollars and per employee, for someone who's been with us since the IPO, it approaches 100% of their annual income. So you can just imagine, in terms of why would you do that, the impact it has on employee morale, employee engagement, employee retention, and then company performance in terms of getting employees aligned on the mission, which is, you know, around productivity, quality, and really serving customers. So we think it's just a better way to run a business.

JULIA LA ROCHE: Pete, hello. It's Julia La Roche, and my students at the University of North Carolina business journalism course covered this story from Ingersoll Rand. And I would just like to step back for a second. I think you're chairman there-- and you also have an interesting role at KKR on the private-equity side. You said you all gave the equity before the IPO. I would just like to get a better understanding. What is kind of the structure typically for companies, private companies and public companies, because it seems like this is a great way for people to actually grow wealth? And if we're talking about the big theme of stakeholder capitalism, it certainly plays into that. Would love to unpack that with you.

PETE STAVROS: Sure. So, if you look at whether it's a public company or private company, typically 1 to 2% of employees have ownership. And so if you look at Ingersoll Rand, it used to be called Gardner Denver. When we acquired the company in 2013 there were 6,000 employees at the time, and 86 executives had ownership in the company, and that was it. And that's, again, very typical. It's in that 1 to 2% range.

And so, again, what we're trying to do is broaden ownership to drive engagement. But to your point, there is a stakeholder capitalism impact here, and if you think about wealth, income, and wealth and income inequality, this is-- it's not the solution, but I do think this can be a part of the solution. The facts are well-known around wages stagnating, particularly for blue-collar employees now for decades.

And it's also well known that capital continues to become more productive, and it continues to be concentrated in the hands of fewer and fewer people. And so you've got most of America trying to get by just on wages alone, and it's not working. And most of the solutions out there that I've seen tend to try and make poverty easier to bear, so food stamps and things of that sort as opposed to trying to more broadly distribute wealth-creation opportunities, which I think that this can do.

So this is not a new idea, broad-based ownership. This was a hot topic in the 1970s. And-- but maybe it's an idea whose time has finally come.

ADAM SHAPIRO: Pete, I am curious because private equity sometimes gets a bad rap. I mean, you mentioned the merger, and there were layoffs as part of that because PE looks for efficiencies, which is a code word sometimes for layoffs. But you experienced this as a kid with your dad. That's where you got the idea for this, right?

PETE STAVROS: That's right. My dad was an hourly employee with a construction company in Chicago. He operated a road grader for 40 years. And I just saw firsthand the lack of alignment and the conflict between hourly employees and management. When you're an hourly employee, what you want are more hours. And the company wants cost and quality and on-time delivery and customer service. And so there's no alignment. In fact, by the way, companies wanting lower costs can mean they want fewer hours.

So my dad and his colleagues fought with management all the time over hours. You know, would they get paid in the hour drive to the job site? Would they get paid in the hour drive home? Would they get paid for their lunch hour? And there was no discussion of what really mattered to the company's success, and my dad would talk about that all the time. And he really pushed for profit sharing. You know, was unfortunately not able to get that through, but that's kind of where this started for me on a personal level.

And then, you know, as an adult, as a graduate student in my second year in business school, I had the freedom to study, you know, kind of whatever interested me. And I spent much of the year studying broad-based ownership and different structures of how to deploy it. Could it be relevant today? How could it be deployed, and what could it mean for all the different stakeholders? And then when I-- at KKR over a decade ago I got the chance to lead the manufacturing group, the industrials group, and that was the first chance to really put it into action.

- Pete, I want to get back to what you said earlier about the importance of employee morale because it seems like that's a conversation that a lot of executives are having right now at a time when the work environment has shifted so dramatically in such a short period of time. You've got companies that are paying for child care, companies that are offering extra wellness days. I'm curious from your standpoint how you have seen the thinking in leadership shift as a result of what we've gone through over the last several months.

PETE STAVROS: Yeah, I think there has been a shift, although honestly I think there is a cohort out there that's always really wanted to operate in this way and maybe has not had the freedom to do it. As a public company it can be hard to just tell your shareholders one day, hey, I'm doing a big equity grant, and I think we're going to get results from it. We've got data to support it, but, you know, let me show you, you know, going forward how this is going to make a difference at the company.

It does take some courage, particularly for a public-company leader, to do that, and if you look at the CEO of Ingersoll Rand, one of the best CEOs I've ever worked with, Vicente Reynal, one of the things that he and I talked about was how are we going to show shareholders that this is also going to benefit them. And so after the IPO we actually picked one financial metric, which was networking capital, and we said this is something that all of our employees touch in some way. If you think about inventory in a plant, accounts receivable, accounts payable, most employees touch one of those in some way throughout their day.

And so we trained all 6,000 employees on how to drive networking capital down and ended up freeing up hundreds of millions of dollars of cash to reinvest in the business. And so that was really one of our early proof points around what engagement can mean. But there's also just the logical side of it. If you get employee-engagement scores increasing over time and retention increasing, employee turnover going down, absenteeism going down, of course, that's going to benefit the company. But I agree. Today-- this is a moment where more and more people want to operate in a different way. And I'm hoping this can be a part of a solution.

JULIE HYMAN: Thank you very much. Pete Stavros is KKR co-head of Americas Private Equity. Appreciate it.

PETE STAVROS: Thank you.