Be good to your employees and your employees will be good to you

October, 2018

A century before Amazon used on-line sales to revolutionize how Americans bought things, becoming the new 500-pound gorilla in retail sales, Sears Roebuck used its 700-page printed catalog to do the same thing. Anyone could buy almost anything from the Sears catalog and have it delivered directly to their home – including a new, prefabricated house!

But there is a significant difference between the two companies in the way they distributed the enormous profits generated by their market-dominating positions.

As The New York Times reported on October 18, 2018:

“Half a century ago, a typical Sears salesman could walk out of the store at retirement with a nest egg worth well over a million in today’s dollars, feathered with company stock. A warehouse worker hired now at Amazon who stays until retirement would leave with a fraction of that.

“Much as Sears has declined in the intervening decades, so has the willingness of corporate America to share the rewards of success. Shareholders now come first and employees have been pushed to the back of the line.”

Sears earmarked 10% of pretax earnings for a retirement plan for full timers. After half a century, a quarter of the company was owned by employees. Amazon, on the other hand, has been curtailing its employee stock distribution program except for the top level, and as the Times reports “one man at Amazon, the founder and chief executive Jeff Bezos, owns 16 percent of the company and is ranked as the world’s richest person.”

“If Amazon’s 575,000 total employees owned the same proportion of their employer’s stock as the Sears workers did in the 1950s, they would each own shares worth $381,000.”

Amazon’s policies are far less generous than Sears, but above average for companies today (They just raised their own minimum wage to $15 an hour). This, says the Times, reflects “deep changes in how business is now conducted in America. Winner-take-some has evolved into winner-take-most or all, and in many cases publicly traded companies are concentrating wealth, not spreading it. Profit-sharing and pensions are a rarity among the rank-and-file, while top executives take home an increasing share of the spoils.”

When Pat McGovern founded what became International Data Group, the world’s leading publisher of computer periodicals (PC World, MacWorld, Computerworld) and creator of the “For Dummies” book series, in 1964, his business plan included significant profit-sharing for his employees. Early employees got shares in the company in anticipation of its going public. When Pat decided that going public would put him at a competitive disadvantage, he set up an Employee Stock Ownership Plan (ESOP).

I was a big fan of ESOP’s, but most people I worked with were skeptical. I spent many hours trying to sell people on the ESOP, and was eventually very pleased to see middle managers retire with half a million dollars or more.

In his new book about IDG, Future Forward, Glenn Rifkin recognized the importance of the ESOP and gave Pat a lot of credit for his attempts to maintain a personal connection with his employees, but I would have given the ESOP even more credit.

For one thing, the public companies with which we competed (Cahners, McGraw Hill) were forced to pay close attention to quarterly earnings, strongly limiting their ability to launch new publications, which usually took years to become profitable. So they usually grew by buying publications. In a new field like computers, not much was for sale. So they became insignificant in the market.

When competing with our privately held competitors (such as Ziff-Davis and CMP), there was always a battle for experienced people, of which there were never enough. Everyone was always pirating employees. But the ESOP was a great retention tool. When Ziff people talked to me, I cited the ESOP, in which I had a significant balance, and the Ziff executives said they were always running into that problem when they went after IDG employees. They needed to do something to match it.

The decline of real income of the middle class, and the growing concentration of wealth in the top 1-5% are destroying our economic equilibrium.

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