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Benefits Leverage Hiring and Retention Efforts

November 1, 1992
Related Topics: Benefit Design and Communication, Retention, Featured Article
Howard Schultz can't forget his past. The memory of it doesn't haunt him, however. Instead, it inspires him.

Raised in Brooklyn, New York, this man, who today is president and CEO of Seattle-based Starbucks Coffee Company, the largest specialty coffee roaster and retailer in North America, lived most of his young life in the projects. Schultz remembers his father working in a series of different jobs, such as driving a bus and a cab, and working in factories. He worked hard but never accumulated a great deal of money.

In fact, not once did Schultz's father earn more than $20,000 in one year. All of his hard work never was valued.

In 1988, his father died from cancer, leaving his mother with nothing—no pension, no life insurance and no savings. Fortunately, Schultz and his siblings were able to insulate her from what could have been disaster. The experience, however, left a lasting imprint on Schultz's mind, as he imagined the fear his parents must have felt at their lack of financial security.

Today, Schultz's ambition is to minimize that fear for the nearly 2,000 people employed by Starbucks, two-thirds of whom are part-time workers. Believing in the value of every employee, Schultz offers a benefit plan for all workers, including the part-timers, that consists of not only insurance but also a 401(k) plan and an innovative stock option program called Bean Stock.

Offering any benefits at all to part-time workers is unusual. Offering these employees ownership in the company through stock options is practically unheard of. When the Bean Stock plan was implemented in August 1991, Starbucks became the only private company to offer stock options unilaterally to all employees.

"What Starbucks is doing is remarkable and unique," Corey Rosen of the National Center for Employee Ownership says. The National Center for Employee Ownership is a nonprofit, information-giving organization. "We don't know of any companies, besides large, public organizations, that offer stock options to all of their employees. This is especially rare in the retail industry," Rosen says.

When the Bean Stock plan was implemented in 1991, Starbucks became the only private company offering stock options to all employees.

M. Colette Nies, West region communications practice leader based in the Seattle office of Towers Perrin, the consulting firm that Starbucks hired to design an employee communications package for Bean Stock agrees, "As far as we know, Starbucks is only the second company to offer stock to all levels of employees," says Nies. "We were impressed by how conscious Starbucks is of the employees and with its desire to share the profits."

The Brooklyn boy inside Schultz is behind that desire to make everyone into a partner. Addressing his employees at an open forum last August, Schultz related the disappointment he had been feeling, ever since joining Starbucks in 1982, that there wasn't a common thread of ownership throughout the company. "The last few years at Starbucks have been personally satisfying," Schultz explained at the meeting, "but I've struggled with the problem that the wealth and success of Starbucks was affecting only a few. So I've worked with the board to develop a mechanism that would make it possible for everyone to reap the benefits. Everybody will have a stake in financial rewards. We're all equal," he added.

Schultz takes equality seriously. According to Bradley Honeycutt, Starbucks' compensation and benefits manager, Schultz receives the same benefits that everybody else does.

Benefits extend beyond basic health insurance.
Part of what Starbucks offers is medical and dental insurance. Both are available after 90 days to employees who work 20 hours a week or more.

The health insurance costs the enrolled employees $100 per year, and it pays for 80% of their medical costs less than $1,250 and 100% of all charges that excede that amount. There's no charge for the dental insurance, which covers cleaning and X rays at 100%. Basic services, such as fillings, are covered at 80%, and major work, such as dentures, bridges or root canals, are covered at 50%. Disability and life insurance also are included in the package.

Employees may join a 401(k) plan after one year with Starbucks. The company matches employees' contributions at 25 cents on the dollar. At any given time, enrollment in the benefits includes approximately two-thirds of all workers, according to Honeycutt.

Other benefits include vacation and holiday pay and discounts on Starbucks merchandise—such as coffee cups and T-shirts. They also receive a free pound of Starbucks coffee each week for their personal use.

In early 1990, the human resources department surveyed employees, asking them to rank benefit choices. Employees named vision care and preventive care as the two highest priorities. As a result, Starbucks added both these care plans to the benefits package in July 1990.

The company pays 100% for vision care, which includes a contribution of $70 toward lenses every year and toward frames every other year. The preventive care benefit, added to the medical insurance, covers $300 per year for such preventive care as annual physicals, flu shots and baby care. As is the case with the other insurance plans, employees become eligible for these benefits after 90 days on the payroll.

The benefit ranked as a third priority by the employees in the survey was having ownership in the company—a concept that fit nicely with Schultz's own philosophy. According to Honeycutt, employee ownership had been a long-term dream of Schultz's, which he had talked for years about implementing. Knowing now that it also was something employees wanted, Starbucks began a process to turn Schultz's dream of a stock-option program for employees into reality.

There were no models for the stock-option plan.
Development began in December 1990 by a small group including: Emily Ericsen, vice president of human resources; Ron Lawrence, vice president of finance; Orin Smith, CFO; and Honeycutt. The four developers engaged in research to begin the process.

The crew telephoned 30 different organizations and hunted through business libraries, but were unable to find any models. Using the little information they could find, the Starbucks crew developed its own company stock plan design in-house.

The plan they developed makes anyone who has been employed from April 1 to the end of the fiscal year in September, and who works 20 hours per week or longer, eligible for stock options. If still employed in January when the company distributes options, the eligible individuals receive awards based on their annual salaries, the grant price of stock and the profitability of Starbucks.

The company's target is to grant employees 10% of their salary every year in options. In its first year, Starbucks was able to grant 12%. When the grants were made in October, 723 of 1,100 employees received options.

Those employees who didn't receive options weren't yet eligible. The options vest in five years, at which time the employees may exercise or exchange them for stock purchases at grant prices (the market value of the common stock as set on the first day of the fiscal year). Considering the fact that share prices increased nearly 70% between June (when the company went public) and September, this could prove to be a lucrative program for employees.

The plan went into effect in August 1991 after it had been approved by the board of directors in May. To help workers understand how the stock program works, Starbucks paid New York City-based Towers Perrin $60,000 to design an initial piece of literature to explain the program.

Considering that share prices increased nearly 70% between June and September, this could prove to be lucrative for employees.

In keeping with Starbucks marketing tradition of creating a specific logo for each type of coffee, Nies and her staff designed a Bean Stock logo consistent with the logos found on Starbucks' bags of coffee. Gracing the cover of a three-page, fold-out brochure, a coffee bag sporting the logo introduces the program, accompanied by the slogan, "Partners... in Growth."

Inside the brochure, charts and illustrations help explain the program and illustrate how the worth of the options can grow through time. The back page contains a glossary of terms, such as stock, stock option, vesting and grant price.

"Because we were dealing with a work force that didn't know much about stocks, and much less about stock options, we went through an educational process explaining the terms to them," says Honeycutt.

Along with the brochure, Nies designed a portfolio—a folder that had a pocket in which employees could keep their literature on the program. For the package, the International Association of Business Communications recognized Towers Perrin for one of its Excellence in Employee Communications awards.

Although Towers Perrin's involvement in the program was limited to the design of the initial literature, Bean Stock communications are ongoing. "We distribute a quarterly Bean Stock report, which has the answers to some of the questions that employees have asked and provides additional detail on the technical information about the plan," says Honeycutt. In addition, the human resources department set up a Bean Stock hot line to provide answers for individuals who have questions.

Currently a machine answers the hot line, and the questioning employees must leave a message and wait for a return phone call. Honeycutt says the company hopes to have a live person answer the calls next year. The Bean Stock plan has been incorporated into the company's open forums, which are held quarterly in each region. During these forums, finances and profitability are discussed by members of senior management, who also answer the questions of employees.

Success of Starbucks makes the benefits program possible.
Having this support by top management is one of the factors that enables the company to offer not only Bean Stock but the entire benefits program to all employees, according to Honeycutt. The company's growth is another. In the five years since Schultz acquired the business from its original three owners, the company has grown from 11 stores in the Seattle and Vancouver, British Columbia, areas to more than 140 stores in Washington, Oregon, British Columbia, Illinois, California and Colorado. In addition to its retail outlets, Starbucks supplies coffee to more than one-third of the finer Seattle-area restaurants, and to Horizon Air (a subsidiary of Alaska Airlines), the Washington State Ferry system and various sports arenas. Starbucks also has a national mail-order service.

"Customer service has reached the point at which we really can differentiate Starbucks from the competition," says Larry Gluth, who is a regional manager in Southern California. "It's really hard to teach, however. Either you have it in you or you don't. We hope that by attracting a slightly higher caliber employee, we'll have those people who have it in them," he explains.

Most of Starbucks' workers are at least partially college-educated and are in their mid-twenties, says Honeycutt. The fast-food or fast-service industry, on the other hand, employs more high-school-age people. At least part of the reason Starbucks attracts a higher-caliber part-time employee than the fast-food or fast-service industries is that it offers them the benefits package. When he was interviewing prospective employees for a new Starbucks store in Torrance, California, Randy Fisher, a Starbucks store manager, discovered that many of the applicants who had worked in retail or food service in the past or were working their way through college keyed in to the benefits as an advantage right away.

The benefit plan gives Starbucks a competitive advantage.
Honeycutt agrees that the benefits do serve as an essential recruitment tool. Employees from various regions have commented to her that they work at Starbucks for the benefits. Some of the employees, she says, work two part-time jobs and choose Starbucks as one of them because of the benefits program.

Recruitment isn't the only area that can be enhanced by offering the benefits, however. Benefits contribute as well to the retention of employees, who will stay to receive the benefits and make money from the stock. Turnover figures prove this point. Turnover at the coffee retailer is around 60%, compared with the average turn-over rate for the retail industry, which is between 150% and 300%, according to Honeycutt. She says that for the fast food industry, it's even higher—at approximately 400%.

Shannon Seilsopour doesn't need to be told about the turnover rate at retail food outlets: She knows them well. As a college student, she has worked in cafes and similar establishments for years, never staying for an extended period of time at any one place. Now she works at Starbucks and is planning on staying indefinitely, putting school on hold.

Seilsopour says that the benefits package was definitely a major part of what attracted her to Starbucks. She came to the coffee company last March looking for part-time work and expected Starbucks to offer her the usual pay package for the industry: minimum wage and no benefits. "I went for the job interview, and I was told about the benefits. I thought that was ideal—to work part-time and get benefits," says Seilsopour. A higher-than-usual starting pay rate also impressed her. Seilsopour became a part of Starbucks' team, going to work as a part-time retail clerk at the Laguna Beach, California, store when it opened in April. It wasn't long, however, before Starbucks promoted her to lead clerk, and she moved into full time.

By September, she had been accepted into Starbucks' manager training program. "I didn't have any experience in management; I just moved up," says Seilsopour " I hadn't planned to. I had planned just to do my school thing and work part-time to pay my rent and get my food. I'm studying to be an anthropologist, but I'm getting sidetracked because I'm happy with the company. The benefits are good, the stock options are there, and I feel it will be a big plus for me to grow with this company. I'm really excited. Maybe I'll become a taster, or go into marketing, or who knows? Howard, move over!" she says.

I went for the job interview and heard about the benefits. I thought that it was ideal to work part-time and get benefits.

Seilsopour's enthusiasm for the company is reflected in her work and her eye toward customer service. Of course, this becomes a benefit for both Starbucks and Seilsopour. "Employees who see the opportunity in the company and recognize the advantage of the benefits program also see how, if they increase customer service, it's going to help them in the end," says Tim Townsend, Seilsopour's manager in Laguna Beach. Because the best coffee and the best customer service are all that Starbucks has to offer, customer service is a big part of employee training, and employees are taught to recognize that what they do can increase the value of Starbucks, as well as their own worth.

To keep this idea fresh in the workers' minds, Starbucks has initiated the Bravo Award program, in which managers or employees can nominate co-workers whom they see doing something to increase sales, savings or the quality of customer service. Nominated employees receive a Bravo certificate and a Bravo pin that they can wear to work. Since the program began in May, the human resources department has handed out approximately 600 awards.

Starbucks' manager, Terri Henry, recently nominated one of her employees from the Newport Beach, California, store for a Bravo Award. The employee was part of a small group of workers from the store who were working an event at a fine arts center, serving taster-cups of coffee. One customer who was offered a sample by the employee was obviously familiar with Starbucks and said that she could sure use a Latte. (Starbucks' Caffé Latte is a drink comprised of a shot of espresso, steamed milk and a foamed-milk topping.) Needing at that time to go back to the store to pick up more coffee anyway, the worker had a Latte made up for the customer and brought it to her. "It was totally unexpected," says Henry.

If benefits for part-timers can increase recruitment, retention and customer service quality, why don't more companies offer them? According to Honeycutt, the insurance carriers, Blue Cross and Blue Shield, had no problems in implementing these plans, because the standard insurance contracts specify that they'll allow for employees working a minimum of 20 hours per week. She also says that the cost per employee for the benefits nearly equals the $550 cost of recruiting and training a new employee.

Rosen suggests that most companies that have many part-time employees don't look at the overall picture. They know that they aren't required to offer benefits to their part-timers, so they don't take on the added expense. The prevailing wisdom, he says, is that part-time employees won't stay. "It then becomes self-fulfilling," says Rosen, "because people don't stay."

Rosen believes that certain businesses, such as clothing retailers and supermarkets, could benefit from offering part-time employees a program similar to Starbucks'. "Part-time employees might stay if provided with the right kind of benefits," he says. "I think that, as we look back, Starbucks will be a trendsetter, a model that people will follow."

Personnel Journal, November 1992, Vol. 71, No. 11, pp. 91-97.

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