Pour Your Heart Into It (19 page)

I had anticipated just that objection, and countered it by arguing that granting stock options would give the company a strong backbone that would help it achieve its objectives, in terms of both sales and profits. Investors might own a slightly smaller percentage of the company, but the value of their holdings would grow faster and more surely. If we linked everyone in Starbucks to the performance of the company as a whole, I told them, every employee would bring the same attitude to work as the CEO who is himself a shareholder. In the end, the stock plan would add value in several respects—to the performance of the business as a whole, to the bottom line, and to the morale and spirit of the workplace.

When Bean Stock came up for a vote in May, the board approved it unanimously. They were as excited about the possibilities as I was.

As far as I know, no other company has attempted a stock option plan as widespread and ambitious as Bean Stock. We granted stock options to over 700 employees when we were still private. To do so, we had to obtain a special exemption from the Securities and Exchange Commission. (The SEC considers a company public if it has more than 500 registered shareholders.) Even today, you’d be hard-pressed to find another company, especially a retailer, that gives stock options to all its employees. Software and other high-tech companies routinely offer stock options, but normally just to developers and other highly skilled technical employees. In retail, it’s unheard of.

In August 1991, we introduced the plan to the employees, and in early September, we held a big meeting to roll it out. I spoke about how this program fulfilled a long-held dream, and Orin Smith, then chief financial officer, gave a slide presentation to explain the way stock options worked—a complex matter even public company employees might have a hard time understanding. Every employee was presented a packet tied with a blue ribbon, and inside was a brochure explaining Bean Stock. We celebrated with cookies and sparkling cider and toasted to being “Partners . . . in Growth,” the line we used to describe Bean Stock.

From that day on, we stopped using the word “employee.” We now call all our people “partners,” because everyone is eligible for stock options as soon as he or she has been with Starbucks for six months. Even part-timers who work as little as twenty hours a week qualify.

The first grant was made on October 1, 1991, just after the end of the fiscal year. Each partner was awarded stock options worth 12 percent of his or her annual base pay. A partner earning $20,000, for example, would be given $2,400 worth of stock options. He or she could cash in one-fifth of the amount each year after that, simultaneously buying at the first year’s low price and selling at the current price, keeping the difference. Every October since then, good profits have allowed us to raise the grant to 14 percent of base pay. So each year the partner remains with Starbucks, he or she receives another 14 percent of his or her salary, awarded at the stock price prevailing at the start of the new fiscal year. As the stock price goes up every year, the options become more valuable.

We granted those first Bean Stock options at $6 per share. By the time they were fully vested, on September 30, 1996, our share price was $33; but since our stock had split twice, each of those original options became four shares, worth $132. To illustrate the value, an employee making $20,000 a year in 1991 would have been able to cash in his 1991 options alone for more than $50,000 five years later.

Even with no guarantee that the options would ever be worth anything, Bean Stock began to affect people’s attitudes and performance immediately. I started hearing comments like “I’m Bean-Stocking it” when someone figured out a way to save the company money—say, by traveling with a Saturday night stay-over to reduce airfare. People started coming up with innovative ideas about how to cut costs, to increase sales, to create value. They could speak to our customers from the heart, as partners in the business.

By educating our people on the importance of creating value and profits for our company, we linked them to shareholder value. Every quarter, to this day, we explain our results to them in Open Forums, allowing time for questions and answers. Sometimes they resent the fact that, as a public company, we have to focus so much on numbers. But at the end of the day, they appreciate the need to balance their individual concerns with the company’s overall performance.

How do you measure the benefits of listening to your people and sharing ownership with them? You can’t. But the benefits can run deeper than you think. One member of the “people growth” team was Martin Shaughnessy, a tall, talkative, pony-tailed man who worked in receiving, unloading heavy burlap bags of green coffee at the plant. He was amazed and thrilled to be invited to off-site meetings with office workers, asked for his input, and given the opportunity to present ideas to management. Months later he came into my office and told me we needed a professional distribution manager—in effect, asking us to hire him a boss. I asked him to write up a proposal and make a presentation to the executive board. He did, and within six months, we acted on his suggestion.

One day in early 1992, Martin came into the human resources department, bearing a letter, signed by an overwhelming majority of the warehouse and roasting plant employees, indicating they no longer wished to be represented by the union. “You included us in the running of this business,” he said. “Whenever we complained, you fixed the problem. You trusted us, and now we trust you.”

For me, working at Starbucks has provided no greater reward than the pride I feel whenever I receive a letter from a partner about Bean Stock, thanking me. I was especially moved by one from Jani Daubenspeck, who joined Starbucks in 1989 as an assistant to Dave Olsen and rose to become a production scheduler at our Seattle roasting plant. In 1994, she bought her first home, a one-story bungalow in Seattle’s Seward Park neighborhood with a “great garden.” She had been living with her sister and was finally able to afford her own place, thanks to cashing in some of her early Starbucks stock options to make the down payment of $10,000.

I get letters and messages like that all the time. Martin Shaughnessy bought a brand-new Harley-Davidson motorcycle when he sold his Bean Stock shares. Another partner purchased a vacation home. Another got an antique car. Yet another cashed in her options and took the family to visit her husband’s relatives, whom she had never met. Several have cashed in options to pay for college tuition.

Stories like this crystallize for me the true importance of the work we do and the truth that Starbucks stands for something special beyond buying and roasting coffee and satisfying customers.

If you treat your employees as interchangeable cogs in a wheel, they will view you with the same affection.

But they’re not cogs. Every one of them is an individual who needs both a sense of self-worth and the financial means to provide for personal and family needs.

I tried to make Starbucks the kind of company I wish my dad had worked for. Without even a high school diploma, he probably could never have been an executive. But if he had landed a job in one of our stores or roasting plants, he wouldn’t have quit in frustration because the company didn’t value him. He would have had good health benefits, stock options, and an atmosphere in which his suggestions or complaints would receive a prompt, respectful response.

The bigger Starbucks grows, the more chance that some employee, somewhere, isn’t getting the respect he or she deserves. If we can’t attend to that problem, we are facing a failure worse than any shortcomings Wall Street can detect.

Ultimately, Starbucks can’t flourish and win customers’ hearts without the passionate devotion of our employees. In business, that passion comes from ownership, trust, and loyalty. If you undermine any of those, employees will view their work as just another job.

Sometimes we lose sight of that at Starbucks, especially as we get larger and a distance develops between me and the newest hire in the newest store. But I know, in my heart, if we treat people as a line item under expenses, we’re not living up to our goals and our values.

Their passion and devotion is our number-one competitive advantage. Lose it, and we’ve lost the game.

CHAPTER 10
A Hundred-Story Building First Needs a Strong Foundation

The builders of visionary companies . . .
concentrate primarily on building an organization—
building a ticking clock—rather than on hitting a
market just right with a visionary product idea.

—J
AMES
C. C
OLLINS
AND
J
ERRY
I. P
ORRAS
,
B
UILT
TO
L
AST

Sometimes losing money is healthy.

Now there’s a novel thought.

Losing money is scary—that I know from experience. It’s a danger sign for most businesses, especially mature, established ones. But for a young entrepreneurial company, full of promise, losing money could be a healthy sign that it’s investing ahead of the growth curve.

If you aspire to fast growth, you need to create an infrastructure for the larger enterprise you are planning to create.

You can’t build a hundred-story skyscraper on a foundation designed for a two-story house.

T
HE
I
MPORTANCE
OF
I
NVESTORS
WITH
S
TRONG
S
TOMACHS

Starbucks was profitable until I took over. It didn’t take long for me to realize that we couldn’t both sustain that level of earnings and build the foundation we needed for fast growth. I predicted that we would lose money for three years.

In fact, that’s precisely what we did. In 1987, we lost $330,000. The next year losses more than doubled, to $764,000. The third year we lost $1.2 million. It wasn’t until 1990 that we finally turned a profit.

That was a nerve-wracking period for all of us, filled with many white-knuckle days. Although we knew we were investing in the future and had accepted the fact that we wouldn’t be profitable, I was often filled with doubts.

One night in 1988, Ron Lawrence, then Starbucks’ controller, knocked at the door of my house at 11
P.M.
Sheri and our son were already asleep upstairs, and when I led Ron into the kitchen, I saw that his face was ashen. He had just calculated our monthly numbers, and we had lost four times more than we had budgeted for. A board meeting was scheduled for the following week, and as we sat at the table with the figures spread before us, I was appalled.

“I can’t go to the board with these numbers,” I said. “This is unbelievable. How did this happen?”

Ron explained that it was an unusual circumstance, in which everything hit the P&L at once. It was unlikely to happen again. Still, I didn’t sleep well that night, trying to plan how I would explain the huge shortfall to the directors.

The board meeting was as tense as I had expected it would be. “Things aren’t working,” one of the directors said after hearing my report. “We will have to change strategy.” We had only about 20 stores at the time, and some directors thought my plans were far too ambitious. I began to imagine conversations among board members, before and after those meetings, in which directors complained:
We’ve got to get this guy out of here. Howard doesn’t know what he’s doing. How much of our money are we going to let him lose before we pull the plug?

The pressure was on, and I had to justify those losses. I had to prove that they were necessary for my investment strategy and not just money poured down the drain. Although I was quaking inside, I had to summon every ounce of my conviction to convince them.