One thing that stuck with Pete Stavros from the dinner-table conversations of his youth was that capitalism seemed fundamentally broken for his father, who earned an hourly wage working construction. The incentive was not there for Stavros’ dad and his peers to try to make their company succeed: Instead, when the company wouldn’t pay them for their lunch hour, they intentionally scheduled deliveries to show up midday, when there wasn’t anyone working to receive them, sabotaging the project.
“Top management have to be willing to give up a small slice of the pie now for a much bigger pie down the road.”
“That’s what I remember from growing up, this constant conflict and fight over hours,” recounts Stavros, a partner at private equity firm KKR, in a new series of Harvard Business School case studies that detail his radical experiment at an Illinois garage door company to give blue-collar workers like his father a share of the profits and get them to think like owners. The case studies, written by HBS Professor Dennis Campbell and assistant professor Ethan Rouen, describe the sea change in motivation that happens when employees feel that their work matters and can share in the rewards their improved performance creates.
“There exists tremendous low-hanging fruit in creating shared value for employees and companies,” says Rouen. “The logistics are not hard; it’s the will. Top management have to be willing to give up a small slice of the pie now for a much bigger pie down the road.”
When KKR bought CHI Overhead Doors in 2015, it offered a test case for an idea Stavros had been toying with since he was a student at HBS. He made every employee an owner, promising each a payout of at least $15,000 if the company met its targets when sold. Convincing employees was hard; distrust and antipathy, having bounced from one private equity owner to another four times, ran deep. The strategy demanded that Stavros deeply engage with the operations to discover pain points, like inefficient delivery routes and wasted scrap metal, and convince workers to care about improving them.
When KKR sold CHI in 2022 for 10 times the equity it had invested, it amounted to the company’s most successful deal in more than two decades—and a payout of $360 million to its 800 employees. It was validation that changing the mindset of employees yielded brisk financial returns—and an antidote to the “quiet quitting” seen across many office spaces and factory floors. It also lit a pathway for companies looking to meet societal calls for a more just economy.
“What if every company in United States gave employees meaningful ownership stakes?” Rouen asks. “It would tremendously increase wealth at the bottom of the pyramid.”
When companies incentivize hostility
From his humble beginnings, Stavros studied at Duke University and found his way into private equity after graduating. One day, while sending wire transfers to equity owners of an investment the firm was exiting, Stavros noticed that the company’s CEO was unemotional despite hearing on the phone that he would get millions of dollars. In contrast, the assistant treasurer, receiving a much smaller payout, told Stavros how his life would be changed by the money.
“I realized that broader ownership could be important,” Stavros recalls in the case.
Stavros pored over employee engagement data, and observed that the relationships between companies and their employees were often hostile and tense. Hourly wage pay caused workers to be “actively disengaged” from their jobs, like old stories of workers throwing wrenches into machinery. The incentives were not aligned: Companies wanted faster, more productive work, while workers sought more hours and a chance to earn overtime pay.
“My colleagues and I actively tried to hamper the success of the firm because we were so frustrated, and the best way to do that was stealing time.”
Rouen recalls his own early career working hourly shifts in retail, with its disincentive to work too quickly. He remembers that, “My colleagues and I actively tried to hamper the success of the firm because we were so frustrated, and the best way to do that was stealing time.”
The cycle wasn’t working for anyone. Workers quit before progressing in their careers. Companies lost workers’ knowledge and experiences and had to invest in hiring new people. Adding to the feeling of powerlessness, junior employees weren’t included in conversations about companies’ directions.
Employee ownership: An idea meets its moment
Stavros believed that enfranchising workers as owners would lead to higher productivity and morale—and build wealth in blue-collar communities. But, early versions of the idea met mixed results.
Stock options or employee stock ownership programs, tied to how the market is performing as a whole, may not hold much value when an employee goes to exercise them, Rouen says. They also can be complicated to administer from legal and tax perspectives. Employees are skeptical of programs that trade wages or benefits for unknown future rewards.
“With options, you are giving your employees a riskier lottery ticket,” says Rouen.
When KKR bought CHI Overhead Doors in 2015, the company saw potential to test a new employee engagement idea because the company’s made-to-order approach could become much more productive, and quickly, by tweaking productivity, wasting less, and boosting safety.
A first employee survey indicated KKR had its work cut out for it—with only 30 percent of the employees responding, morale was low and employees believed the survey would have no impact. Injuries were high, with 14 percent of employees sustaining a reportable injury each year. The new plan wouldn’t work if the workers didn’t care and didn’t feel like the owners cared about them.
Stavros and chief executive Dave Bangert dove in personally. “If people see me driving around in a truck or working in a factory all week, that sends a message,” Stavros says in the case. “Yes, this builds engagement, but for us, it also builds a much deeper understanding of what the heck is actually happening in the business.”
KKR offered CHI managers, customer-facing employees, and truck drivers a chance to buy equity. It also provided a pooled equity investment for all factory-floor employees. The company set up financial literacy workshops and tied dividends to ongoing financial performance.
What makes an ownership mindset?
But the payout seemed far off for many, and previous private equity promises had been cheap.
Stavros and Bangert wrung their hands over scrap metal waste—a controllable variable that would make a big difference to costs that they needed shop workers vested in controlling. They tied its reduction to dividends, but that “didn’t move the needle one bit,” Bangert recalls in the case. Employees “still felt that the dividend was far off in the distance” and “removed from their day-to-day job.”
An innovative move started to turn the tide. KKR set aside $1 million a year for capital improvements that the employees could choose. Workers wanted an air-conditioned factory—an almost unheard-of investment in an open-floor uninsulated plant. But KKR agreed. And showing workers they cared didn’t just boost morale, it also lowered injury rates and increased summer productivity.
“This was one of the first changes we made that resulted in even skeptical people—for example, those who thought the safety rules were bad and didn’t trust the bonuses—coming up to us and saying, ‘Hey, this has made a big difference, thank you,” Bangert says in the case.
“To get employees to engage with the day-to-day job is not just about how we pay employees, but how employees relate to companies.”
The scrap metal dilemma similarly required a deft solution. Every week for a quarter, the company bought lunch for the team that reduced scrap the most; at the end of the quarter, the winning team got a trophy. “It’s not just, ‘you’re an owner, go work harder,’” explains Rouen. “To get employees to engage with the day-to-day job is not just about how we pay employees, but how employees relate to companies.”
Employees started changing their behaviors to go out of their way to help CHI achieve its objectives, understanding that doing so helped them, too. When Stavros accompanied Larry Beal, a truck driver who had invested $5,000 in ownership, on his delivery route, Beal told him, “Before I was an owner, all I cared about was miles, because I am paid $.40 a mile. You could have had me driving in circles for all I cared.” Beal pointed out that as an owner, he could see that his route wasn’t profitable, often sending him way out of his way for a single delivery, an observation that Stavros was able to use to make scheduling more efficient.
Little changes like that made for big improvements—profit margins increased from 20 percent to 35 percent. Some of the solutions, like Beal’s, helped drive significant cost savings.
When KKR sold CHI for $3 billion in 2022, cautious applause met Stavros when he took the factory floor on a blistering hot day to break the news to employees. Factory workers still didn’t believe they were going to share in the wealth. But, when Stavros started to announce the payouts—even workers who had just started would go home with $20,000—euphoria broke out, with some workers falling to the floor in tears of joy. The longest-serving employees earned up to $800,000; One worker cried out, “My kids are going to college.”
How to create an ownership culture
Rouen explains that it’s not actually that difficult logistically to build an ownership model. He flags a couple important considerations for executives looking to model KKR’s success, which the private-equity firm is now using broadly. In addition, a non-profit Stavros founded called Ownership Works is developing the tools to help companies adopt this model. “Up until now, no one has tried to roll it out at such a scale,” Rouen says.
Is your company suited to this approach? It’s not just in manufacturing where an ownership mindset can drive results and build wealth, says Rouen. He says it may actually be easier to create an ownership mindset at human-capital intensive companies like pharmaceuticals and technology.
Rouen cautions that the model works best in fast-growing companies, where employees can receive a sizeable payout, and in situations where a sale in the not-too-distant future can translate into wealth. Public companies and non-profits might not be right for an ownership model.
Do your managers motivate? In an ownership mindset, managers aren’t wardens—their job is to motivate employees, not to supervise or discipline them. Rouen suggests that adding managers may increase expenses in the short term, but, if done right, can lead to long-term savings.
“In manufacturing, it is so easy to track the productivity of employees,” Rouen says. “One manager can monitor the activity of 30 people but cannot easily motivate all 30.”
Do you have authentic executive support? Managers have to change the playbook by sharing some earnings up front and being committed to the idea of growing a bigger pie for everyone. They may have to involve themselves in deeply understanding the day-to-day of the business to be able to follow and restructure the incentives. “It requires significant and authentic investment from the top,” Rouen says.
Can you pair it with real wealth creation? KKR worked with Goldman Sachs and Ernst & Young to increase financial literacy among workers getting payouts and made the workshops mandatory.
“Our goal from the beginning was to build wealth for this community,” says Bangert in the case. “What we don’t want to see is the parking lot full of new pickup trucks.”
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Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.
Image: iStockphoto/Phynart Studio