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1995 Service Optimas Award ProfileBRPepsiCo Inc

June 1, 1995
Related Topics: Compensation Design and Communication, Variable Pay, Service, Featured Article
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When truck driver Buck Robuck set out to deliver pizza ingredients, he deliberately ignored the computer-generated map his company had supplied him, bypassing the map's highlighted interstates for back roads and side streets. Rather than disciplining Robuck for insubordination, however, his employer, PepsiCo Inc., praised him. Robuck, in choosing the route he knew would save him time and his company money, acted just the way the Purchase, New York-based company wants each of its nearly 500,000 workers in 195 countries to act—like a business owner.

"The ownership mentality is critical to the success of our business," says J. Roger King, senior vice president of personnel for PepsiCo, which includes such businesses as the Pepsi-Cola Co., Frito-Lay Inc., Taco Bell Worldwide, Kentucky Fried Chicken Corp. and Pizza Hut Worldwide. "Because we're selling small items one piece at a time, each employee must play a role in the quality of the selling of the product." To do that, King says, requires that they take ownership of their jobs. And for them to take ownership, the company must "trust them to do that and have a way of motivating them to do that."

The motivation comes in the form of SharePower, the first broad-based stock-option program to be offered by a large company. SharePower came out of a challenge nearly 10 years ago from Chairman and CEO Wayne Calloway to the HR department: Find a way to give everyone in the company an equity position in PepsiCo so that they think and act like owners and are rewarded like owners. The program not only has met Calloway's goals, but has become an integral part of PepsiCo's culture.

HR focused on creating an ownership mentality.
Today there are hundreds of companies, large and small, that offer broad-based stock-option programs affecting between 1 and 2 million workers, according to Corey Rosen, executive director of The National Center for Employee Ownership in Oakland, California. But in the late '80s, when PepsiCo's human resources department set out to meet Calloway's challenge, this approach simply wasn't being used at all in large firms. Stock options were an executive perk, not motivation to lower-level workers.

So the HR professionals began looking into various popular, equity-based programs. They started by investigating Employee Stock Ownership Programs (ESOPs), probably the most commonly used approach at the time within big companies. "But the more we talked with other companies and learned about why they put the ESOPs in place, we found that there were two things in common, both of which didn't meet the challenge," says Charlie Rogers, who was vice president of compensation and benefits for PepsiCo at the time. For one, says Rogers, who today is senior vice president of human resources at Taco Bell, the motivation for putting in the ESOPs usually was financially driven. As a qualified plan, an ESOP provides a company tax benefits and also provides a way to use equity to replace debt.

In addition, HR found that when these other companies put ESOP programs in, to pay for the ESOPs, they generally reduced other benefit programs that they had provided their employees. "That, again, wasn't consistent with the challenge that Wayne had given us," says Rogers. "He didn't want to take anything away from our employees. He wanted to add something to what they already had. So the ESOP programs, although they were popular, really didn't fit our objectives."

Another way some large companies were providing equity to their employees was by attaching stock grants to 401(k) plans. Companies would match with stock the contributions employees made. "That gave employees some ownership in the company, but it didn't provide universal coverage because only those people who contributed to the program would get a grant," says Rogers. "So using the 401(k) plan as a vehicle didn't make sense for us either."

The HR department spent approximately a year investigating these two types of programs and thinking about alternatives to them. Nothing seemed quite right to satisfy the challenge.

Then, one day on his way into work, in the fall of 1988, as he sat at a stoplight, Rogers had an idea: Why not give everyone in the company stock options? "I literally sat through one whole change of the traffic light as I contemplated this," says Rogers. The idea seemed so obvious, and yet because no large companies had ever done anything like this, Rogers thought there must be a reason for not doing it. "I sat dialing through all the possible reasons, all of the rules and regulations and other things that surround a stock-option program, and I couldn't come up with a good answer as to why it hadn't or couldn't be done. I knew that in the Silicon Valley and in some startup companies it was common to grant stock options on a wide scale, so I couldn't think of any legal reason why it couldn't be done."

When he got to work, Rogers threw the idea to King, who he says had a similar reaction to his own. It seemed there must be a reason why a broadly distributed stock-option plan wouldn't work.

To find out, Rogers put together an exploratory team consisting of people from the benefits department, the financial area and the legal department. "We spent about a month and a half sorting out what the barriers were to offering stock options to everyone in the company," Rogers says. "As we walked through it what we found was that in fact, there wasn't any reason that a company PepsiCo's size couldn't grant stock options to employees."

Having determined that it could be done, the team began discussing whether or not the program actually would meet Calloway's goals. Administratively, stock options can appear complex to people who aren't familiar with them. So would the employees understand what a stock option is, and would the options motivate them to think like owners? "We knew that the stock-option plan would deliver tremendous capital accumulations over time so employees would benefit like owners, but would they think like owners?" Rogers says the team questioned.

After asking a number of employees what they thought and getting "tremendous response," according to Rogers, the team determined that, yes, this program would meet Calloway's goals. The last thing to do, then, was an analysis of what needed to be done to put the program in place universally across the company and to get approval.

Rogers and King presented the idea to Calloway at the end of January 1989. "He was ecstatic," says Rogers. "He really felt the program would accomplish the objectives he wanted to accomplish." The program then was presented to the board of directors in March, approved, and rolled out as SharePower in June.

Stock options provide employees ownership with low risk to the company.
Here's how SharePower works. Each July, the company grants options to all eligible workers. All domestic, salaried employees who work at least 30 hours per week, were employed on December 31st of the preceding year and are still employed on the grant date are eligible for stock options. For domestic hourly restaurant employees to be eligible, they must have been employed for at least one year as of December 31, and have worked a minimum of 1,500 hours during that year. Restaurant employees make up nearly 60% of the company's worldwide work force. Criteria for full-time foreign workers vary.

The amount of the options granted is 10% of the employee's earnings the previous year. So, for example, if an employee received a salary of $30,000 last year, he or she would receive $3,000 worth of stock options this July. If the stock were worth $30 at that time, the employee would thus receive options for 100 shares.

The options vest 20% per year starting in the following year. So, 20%, or 20, of the options granted this July can be exercised in July of 1996, 40 in July 1997, and so on. In the year 2000, or five years from when the options were granted, the 100 options would be vested and exercisable. The employee would have 10 years from the grant date to exercise the options.

There are two ways in which the employee can exercise his or her options. In a cash exercise, the employee directly pays for the options at the grant price. Some shares are sold to cover taxes and fees and the remaining shares, plus any unused cash, are deposited in the employee's brokerage account at Merrill Lynch.

In a cashless exercise, the employee contacts Merrill Lynch and tells them to exercise the options. No cash payment is made: Merrill Lynch exercises the options and purchases shares on behalf of the employee. Merrill Lynch then sells enough shares to pay for the shares at the grant price, plus tax withholding and commissions. The remaining shares and any cash are deposited in the employee's brokerage account.

Because the employee continues to receive options each year, and the stock price, ideally, will continue to rise, that can mean a sizeable nest egg for a long-term employee. Assuming a constant annual salary of $30,000 during a 30-year period and a starting price of $30 a share, the gains would be $205,000. If a 6% salary growth is assumed, the value after 30 years would be $357,000.

According to Angela Wright, manager of pension plans and SharePower, the total number of employees who have received grants since the program began in 1989 is 130,000. That's a fairly high percentage considering that many part-timers are students and only work for a short period of time; the company is in a growth mode (it added nearly 50,000 people last year), and people must be on board at least a year to be eligible; and, despite PepsiCo's efforts to offer the program to all employees worldwide, the program is only in place in 47 countries because of regulatory, tax and cultural barriers.

Of the people who have received options, most really use them for long-term investment. Wright says that only 10% of the options issued have been exercised, and that includes those of people who have left the company and are asked to exercise their options.

According to Rosen, the only risk to the company offering the options is the expense of providing the stock if the price goes up. If, for example, hordes of employees decide to cash in $30 options when the price of stock is $60, PepsiCo will have to either print more shares or purchase some $60 stock and eat the difference in price.

But, "That's the whole idea, that the stock will go up," Rosen says. "PepsiCo's response is if stock goes up, shareholders are going to be happy anyway."

PepsiCo claims that the plan will have virtually no dilutive effect on shares as it plans to purchase the shares required from time to time in the open market.

A program is only as good as an employee's understanding of it.
The HR and executive staff of PepsiCo knew after designing the program that it was a good one. But as the company drew near to rolling it out, the HR staff asked the same question it had while researching whether the program would work: How should it communicate to employees so that they understand the program itself, as well as the intent and the reasons behind it? "We had to communicate to people not only in the United States but also outside," Rogers says. "In some cases, people didn't even know what stock was."

Indeed, if the company wanted the program to be successful, it needed an effective communications process that would educate as well as motivate employees. Comments Kim Manser Hoffman, principal of the Dallas office of William M. Mercer: "Employee ownership programs can be tremendously motivational employee-benefit programs, but only if they are communicated effectively. The key to that is having the employees perceive that the program is valuable. Employees' productivity may increase only with the understanding of the ownership aspect. A company, therefore, is best served if it's committed to marketing the concept of employee ownership to its employees."

To market its program, PepsiCo assembled another team that comprised the CEO of PepsiCola Co., some general managers and some of the company's marketing and communications experts. The team put together a communications strategy that Rogers describes as quite different than traditional employee-benefit communications. "It was much clearer, simpler, more straightforward," he says. "Bringing our general managers and marketing people into the development of the communications piece added value."

The communications strategy included meetings held across the world led mostly by senior managers. The company put together meeting leader guides for these managers that included questions and answers, and handout materials. It also produced a video that explained the concept. "We wanted to make sure that the message was carried consistently around the world," Rogers says.

What made this communications process rather unique was that it was conducted in stages. Because the stock options didn't vest for one year, the communications team decided to focus on the broad objectives of the program to start with, in an attempt to help workers understand how this was an ownership program and how they would benefit from it. That gave the team time to develop the communications materials around the administrative processes for the program and to phase them in over a period of time. "So, over the course of a year, people heard a lot about SharePower, but they learned it in bite-sized pieces," says Rogers.

Communications didn't stop once people understood the program, either. Wright says that there's always a big event around grant time to emphasize SharePower's goals. Last year in the corporate headquarters, for example, the company put together an exhibit in the lobby—PepsiCo Past and Future—highlighting past accomplishments and future goals.

Wright says that the intent is to continually communicate. That's why, although the program is administered by Merrill Lynch, which has a customer-service unit that handles employees' questions, every location of every business has SharePower leaders who are experts in both the mechanics and the philosophy of SharePower. They have SharePower insignias on their doors, and employees can come to them for clarification or to get questions answered. These leaders, who come from all areas of the corporation and volunteer or are chosen by their departments to be leaders, are trained and have continual sessions at which they're given up-to-date information. There are approximately 20 SharePower leaders at the corporate business alone, who also help design promotional events for the corporate facility.

Because PepsiCo's many businesses work independently, they're free and encouraged to do their own promotion around SharePower. Frito-Lay, for example, holds a rally every year. Others award prizes to people who have demonstrated SharePower attributes. Also, the company periodically holds Investor Days for which it brings in outside analysts, and on other occasions invites people from within the corporation to talk about their jobs and how that affects shareholder value.

Along with the formal communications, SharePower constantly is reinforced within the company by employees themselves. King relates an incident that happened shortly after the program first began that illustrates this fact perfectly. It occurred in the Frito-Lay division. A standard procedure for the business's sales people is to carry products to supermarkets in cardboard boxes, unload the products, and then bring the boxes back for reuse. The sales people would try to get six to seven uses out of the boxes before they became too dilapidated. Well, somebody at Frito-Lay, and King doesn't know who, printed "SharePower" across every box, along with a phrase something like, "If we can just get one more turn of the carton, we've saved and made ourselves more money."

"SharePower is in the lexicon of PepsiCo," Rogers explains. "When you talk to people about things they've accomplished, contributions they've made to the company, they consistently refer to how that's going to add to the value of SharePower. And People refer to ideas that they come up with as SharePower ideas."

Eva Rossman, public relations assistant, for example, consistently uses the backside of used paper for notes and internal memos, and cites SharePower whenever somebody comments. "It's little things like that we all do collectively that makes an impact," says Wright.

SharePower contributes to the ownership culture.
The impact of SharePower is derived from the ownership mindset that it has created. It's this mindset that prompts people to go that extra mile—people like Larry Apple, a driver for Pepsi Food Systems who delivers products at PepsiCo's restaurant chains. While delivering dry products at a Pizza Hut at 3:00 am, he found the cooler door open and the cooler filled with warm air. He closed the door and started to unload his products, hoping that closing the door would help the chamber cool. However, when he finished unloading and checked the refrigerator unit again, it was still warm. As most employees would do, he contacted the store manager to let him know there was a problem. But then he went one step further. He loaded all of the products from the warm cooler into his refrigerated truck, saving the entire inventory of stock.

And there are people like Mike Glassford, a Frito-Lay employee who saw a chance to introduce not only Frito's products to his community's junior league world series, but Pizza Hut and Taco Bell products as well. The enterprising man further promoted his company by dressing in the Chester Cheetah suit (Frito-Lay's mascot) and marching in the opening day parade.

"There are thousands of examples," King says. In addition, he says, SharePower has stimulated workers to better understand financials as a way to help the company's stock price grow. On a recent trip to Europe, for example, King met with some managers in the stock-option program. They were interested in knowing why the stock price wasn't moving (it has been fairly flat in the last year or so). King talked with them about it. "It means something to them," he says. "Employees now feel they have a piece of the action in PepsiCo and that they really belong here."

Comments Rosen: "A lot of companies are saying that they want to give employees a sense of ownership. But providing just a sense of ownership is like providing a sense of lunch: You can smell it, you can look at it and you can help decide what to eat but you can't eat it. At PepsiCo, the company shows a real commitment to the concept of sharing ownership broadly."

And the concept works. King says that when the company conducts culture surveys, workers tell the HR staff that they like their jobs. "When we ask them why they like their jobs, they say it's because they have responsibility and a chance to do their job on their own," he says. "That's a pretty important ingredient to success."

Indeed, Rosen confirms that there's now compelling evidence that the combination of broad ownership programs that get employees involved in sharing ideas and information has a powerful effect on performance. Certainly, the concept works for PepsiCo. The price of a stock grant when the program began in 1989 was $17.58: Today it's $30.75.

Rogers has doubts as to whether such a program would work for every company, however. "You really have to have something like Wayne's vision to put something like this in," he says. "It shouldn't be something you do just because seven other companies you survey have stock-option programs. It really is about ownership." And Robuck will tell you it's about working within a culture that allows you to act like an owner, even at the risk of being insubordinate.

Personnel Journal , June 1995, Vol. 74, No. 6, pp. 42-49.

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