CHAPTER 9
People Are Not a Line Item

Wealth is the means and people are the
ends. All our material riches will avail us
little if we do not use them to expand
the opportunities of our people.

—JOHN F. KENNEDY, STATE OF THE UNION ,

JANUARY 1962

A LESSON OF LOSS

Throughout 1987 my father’s lung cancer grew worse. I kept in frequent touch by phone and flew back to New York whenever I could. My mother was by now spending every day with him in the hospital, having given up her job as a receptionist, and relied on the support of my brother, sister, and me.

Then one day, in early January 1988, I received an urgent call from my mother. I had been expecting it for five years, but you can never be prepared for the tenseness of heart that clamps you at a moment like that. I took the first plane to New York and, fortunately, arrived in time to see my dad the day before he died. I sat next to his hospital bed, my hand on his, and tried to think of the way we were twenty years earlier, when he taught me to hit a baseball or throw a football.

So many emotions were battling in my head at that time that I couldn’t think straight. The regrets I had always had about my dad’s life struggles were now mixed with grief and loss; the fantasies I’d had of how he might have lived his life clashed with the dreams of my own that were coming true; the anguished look in his eyes helped me comprehend the significance of all the years he had worked for us and all the lives that now depended on me. On that last day, nothing in my life mattered in comparison to the pain he was suffering.

One of the terrible tragedies, for me, was the fact that my father passed away before he could witness what I achieved. On his last visit to Seattle, I had taken him to the first Il Giornale store, when it was still under construction. But now I could never show him the growing, thriving enterprise that was Starbucks. If he could have watched the company grow, he wouldn’t have believed it.

Soon after his death, I spent some time with a good friend who has known me since childhood. He was then working in Germany, where I had gone for a trade show. We talked for hours one night over beers, and I discussed my confused feelings about my father.

“If your dad had been successful,” he said, “maybe you wouldn’t have had as much drive as you have.”

My friend was probably right. Part of what has always driven me is fear of failure, for I know too well the face of self-defeat.

I finally came to terms with my bitterness and learned to respect the memory of what my dad was, instead of regretting what he was not. He did the best he could. He passed away before I was able to tell him I understood that. That’s one of the great losses of my life. It was wrong of me to blame him for failing to overcome circumstances beyond his control. But it was also wrong that in America, land of dreams, a hard-working man like him couldn’t find a niche where he would be treated with dignity.

It was a strange but fitting coincidence that during my dad’s final months, my major preoccupation at work was building trust with the employees of Starbucks. I saw on some of their faces the same doubts about the intentions of management that my father had expressed so often to me. People felt undervalued and uncertain about their future, and at times they directed their anger at me, as he had.

But I was no longer a helpless kid. I was in a position to do something about the insecurity and lack of respect that seemed to be becoming far too commonplace in much of American business.

Within a year, I did.

THE PAYOFF OF A COSTLY HEALTH PLAN

It’s an ironic fact that, while retail and restaurant businesses live or die on customer service, their employees have among the lowest pay and worst benefits of any industry. These people are not only the heart and soul but also the public face of the company. Every dollar earned passes through their hands.

In a store or restaurant, the customer’s experience is vital: One bad encounter, and you’ve lost a customer for life. If the fate of your business is in the hands of a twenty-year-old part-time worker who goes to college or pursues acting on the side, can you afford to treat him or her as expendable?

From the beginning of my management of Starbucks, I wanted it to be the employer of choice, the company everybody wanted to work for. By paying more than the going wage in restaurants and retail stores, and by offering benefits that weren’t available elsewhere, I hoped that Starbucks would attract people who were well-educated and eager to communicate our passion for coffee. To my thinking, a generous benefits package was a key competitive advantage. So many service-oriented companies have the opposite view, regarding benefits for entry-level people as a cost to be minimized, not an opportunity to attract and reward good people.

I wanted to win the race. But I also wanted to make sure that when we got to the finish line, no one was left behind. If a small group of white-collar managers and shareholders won at the expense of employees, that wouldn’t be a victory at all. We had to be in a position where we all reached the tape together.

After my dad died, I wanted to make a gesture to Starbucks’ employees that would cement the trust we were building. Ideally, I would have liked to be able to make them all owners of the company, but I knew that, in the short term, we would be losing money while we invested in the future. For a few years, at least, there would be no profits to share.

So I needed to come up with another way to reward them. One of the requests employees had made to the original owners had been health benefits for part-time workers. They were turned down. The symbolism wasn’t lost on me.

I decided to recommend to the board of directors that we expand our health-care coverage to include part-timers who worked as little as twenty hours a week.

In the late 1980s, employer generosity was hopelessly out of fashion. Corporate raiders and soaring health-care costs had forced many American executives to reduce benefits. Under the prevailing mantra of “maximizing shareholder value,” CEOs were applauded by Wall Street if they cut costs and laid off thousands. Companies that did value their employees above shareholders were mocked as paternalistic and uncompetitive. They were encouraged to become more hard-nosed, to cut bloated payrolls, and to become lean and mean. White-collar workers, too, were learning the hard way that loyalty didn’t pay.

At the same time, health-care bills were soaring to unmanageable heights. The cost of medical care rose far faster than the consumer price index, especially during the late 1980s. Few companies covered part-time workers at all, and those who did restricted benefits to those working at least thirty hours a week. Most executives were actively looking for ways to contain their medical insurance expenses.

Starbucks went the other direction: Instead of cutting health-care benefits, we found a way to increase ours.

I saw my plan not as a generous optional benefit but as a core strategy: Treat people like family, and they will be loyal and give their all. Stand by people, and they will stand by you. It’s the oldest formula in business, one that is second nature to many family-run firms. Yet by the late 1980s, it seemed to be forgotten.

When I first presented this plan, Starbucks’ directors were skeptical. I was proposing to raise expenses at a time when Starbucks was struggling to stay afloat. How could we afford to expand health-care coverage when we couldn’t even make a profit?

At that time, our board members were all big individual investors, or their representatives, and few of them had experience managing and motivating large numbers of people. “How can you be so extravagant toward employees—with our money?” they asked. “How can you possibly justify the cost?”

But I argued passionately that it was the right thing to do. On the surface, I acknowledged, it will seem more expensive. But if it reduces turnover, I pointed out, it will cut our costs of recruiting and training. Starbucks provides at least twenty-four hours of training for every retail employee, so each person we hire represents a significant investment. At that time, it cost $1,500 a year to provide an employee with full benefits, compared with $3,000 to train a new hire. Many retailers encourage turnover, either consciously or unconsciously, in the belief that it keeps down wages and benefits. But high turnover also affects customer loyalty. Some of our customers are such regulars that the minute they walk into the store, a barista recalls their favorite drink. If that barista leaves, that strong connection is broken.

Part-timers, I argued, are vital to Starbucks. In fact, they represented two-thirds of our workforce. Our stores have to open early—sometimes at 5:30 or 6 A.M.—and often don’t close until 9

P.M. or later. We depend on people willing to work short shifts on a steady basis. In many cases, part-timers are students or individuals who are juggling other obligations. They want health-care benefits as much as the full-time employee does, and I argued strongly that we should honor and value their contribution to the company.

The board approved, and we began offering full health benefits to all part-timers in late 1988. To my knowledge, we became the only private company—and later the only public company—to do so.

It turned out to be one of the best decisions we have ever made. It’s true, our health insurance program is costly. Over the years, we’ve added coverage far more generous than most companies our size, with coverage for preventative care, crisis counseling, mental health, chemical dependency, vision, and dental. Starbucks subsidizes 75 percent of coverage; each employee pays only 25 percent. We also offer coverage for unmarried partners in a committed relationship. Since our employees tend to be young and healthy, our rates stay within reason, allowing us to afford broader coverage while keeping monthly payments relatively low.

But Starbucks gets back plenty for its investment. The most obvious effect is lower attrition. Nationwide, most retailers and fast-food chains have a turnover rate ranging from 150 percent to as high as 400 percent a year. At Starbucks, turnover at the barista level averages 60 percent to 65 percent. For store managers, our turnover is only about 25 percent, while at other retailers, it’s about 50 percent. Better benefits attract good people and keep them longer.

More significantly, I found that the health plan made a huge difference in the attitudes of our people. When a company shows generosity toward them, employees show a more positive outlook in everything they do.

The true value of our health-care program struck me most deeply in 1991, when we lost one of our earliest and most devoted partners, Jim Kerrigan, to AIDS. Jim started as a barista behind the counter of our second Il Giornale store, in 1986, and he quickly rose to the position of store manager. Jim was a fantastic advocate of Il Giornale and later of Starbucks. He loved it.

Then one day, Jim came into my office and told me he had AIDS. It took incredible courage. I had known he was gay but had no idea he was sick. His disease had entered a new phase, he explained, and he wouldn’t be able to work any longer. We sat together and cried, for I could not find meaningful words to console him. I couldn’t compose myself. I hugged him.

At that point, Starbucks had no provision for employees with AIDS. We had to make a policy decision. Because of Jim, we decided to offer health-care coverage to all employees who have terminal illnesses, paying medical costs in full from the time they are not able to work until they are covered by government programs, usually twenty-nine months.

After his visit to me, I spoke with Jim often and visited him at the hospice. Within a year, he was gone. I received a letter from his family afterward, telling me how much they appreciated our benefit plan. Without it, Jim wouldn’t have had money to take care of himself, and he was grateful for that one less worry during his last few months.

Even today, there are scarcely any companies of our size that offer full health-care benefits to all employees, including part-timers. That fact was brought home to me memorably in April 1994, when President Clinton invited me to Washington, D.C., for a one-on-one meeting in the Oval Office, to tell him about Starbucks’ health-care program.

Others have been to the White House many times, but to me, born in the Projects of Brooklyn and working in Seattle, the thought of a chat in the Oval Office was overwhelming.

When I arrived at 1600 Pennsylvania that day, I tried to act nonchalant, but I could feel my heart thumping in my chest. Someone met me at the back door and took me in through a basement corridor, past pictures of great presidents, Washington, Jefferson, Wilson. These are the same halls, I thought, where Lincoln walked, and Roosevelt, and Kennedy. And what got me here was not some extraordinary feat, not walking on the moon or finding the cure for cancer. All I had done was provide health care to the people of my company, all of them, something any employer could do.

I was taken upstairs and shown to a chair outside the Oval Office.

“The president will be with you in three minutes,” a woman said. I straightened my tie and took in every detail around me. Phones were ringing, thick documents were stacked on the desk, and somber faces from history looked down from portraits on the walls.

“The president will be with you in one minute,” the woman said. I tugged on my cuffs and straightened my tie again. I watched the second hand go around the clock, and the door didn’t open. I fidgeted in my chair. Finally, the door burst open, and the president’s hand was in my face. He ushered me in. I had seen the Oval Office so many times in movies that now it seemed surreal. On his desk, I noticed immediately, was a green-and-white Starbucks cup, filled with hot coffee.

I don’t know why I said it, but the first words out of my mouth were: “Don’t you ever get intimidated, walking around here?”

He laughed and said “All the time.” He put me at ease and we talked for about fifteen minutes.

When the meeting was over, he led me across the hall to the Roosevelt Room for a small press conference. After speaking to the reporters, we attended a private luncheon with other CEOs. It was a heady experience.

At one point, with a few minutes between events, I asked to use a phone. How many guys like me do this kind of thing? I called my mother in Brooklyn, saying, “Mom, I just want you to know, I’m callin’ you from the White House.”

“Howard,” she said, “it doesn’t get any better than this!”

I wish my dad could have been there. In a sense, he was.

MEANINGFUL MISSION

STATEMENTS HAVE TEETH

From the beginning, I wanted employees to identify with the mission of the company and to have the sense of accomplishment that goes with being part of a successful team. That meant defining a strong sense of purpose and listening to input from people at all levels of the enterprise.

Early in 1990, we as a senior executive team carefully examined our values and beliefs and then drafted a Mission Statement at an off-site retreat. Our aim was to articulate a powerful message of purpose and translate that into a set of guidelines to help us gauge the appropriateness of each decision we make, at all levels of the company. We submitted a draft to everyone else at Starbucks for review and made changes based on these comments. The Mission Statement that emerged from that process puts people first and profits last. It’s not a trophy to decorate our office walls, but an organic body of beliefs, not a list of aspirations but a foundation of guiding principles we hold in common. (For Mission Statement.)

Drafting the Mission Statement was just the first step in a strategic planning process that lasted three months and involved more than fifty employees. We wanted to make sure we in management were hearing the views of our co-workers—and to ensure we had a long-term plan that our people had helped shape. At the urging of the board of directors, we invited in a Portland consulting firm called the Mt. Hood Group and assembled several teams, each composed of nonexecutive members from the stores, offices, and plant They met frequently that summer of 1990, away from the workplace, to discuss problems and make suggestions to management about decision-making, market expansion, and “people growth.” We implemented almost all their recommendations.

The “people growth” team had some of the most far-reaching ideas. They recommended that Starbucks implement a long-term stock option plan, a dream I had harbored almost since the beginning. And they insisted that writing and posting a Mission Statement wasn’t enough. Starbucks needed a way to make sure we were living up to it. So they suggested a “Mission Review” team. Every employee in each store and other location would be given a postcard-sized comment card and encouraged to report to the Mission Review team if they saw a decision that did not support our Mission Statement.

Most executives would feel threatened by such a setup. I sure did. The day of their presentation to management in September 1990, the “people growth” team members were tense. They had practiced several times, and they wondered if it might be confrontational. As I listened, I thought: Do I want a team of employees monitoring management like this, holding us to our own high standards? If I turned it down, what would that say about the sincerity of management toward the Mission Statement? We listened respectfully and asked a few questions. After a few days of consideration, we approved the idea.

Within a few months, the Mission Review system was set up. It’s still in place today. Any employee, anywhere, can make a suggestion or report an action that seems contradictory to our purpose, and we promise that a relevant manager will respond within two weeks, either by phone or by letter. Printed comment cards are given to each new employee upon hire and are also kept in common areas along with other company forms. Hundreds are submitted each year. People also have the option of not including their name. They don’t get a response, but their comment appears with others in a report I review carefully every month.

As the company has grown, Mission Review has become a vital link to the concerns of our large and scattered workforce. Every quarter, a team of people from different parts of the company meets to go over top employee concerns, seek solutions, and provide a report at our quarterly Open Forums. Not only does this process help keep the Mission Statement alive, it provides an important avenue for open communications with our people. Many great suggestions have been implemented.

WHY HAVE EMPLOYEES IF

EVERYONE CAN BE A PARTNER?

By October 1990, I could report to the board that we had achieved our first profitable year. Comfortably in the black, I could now undertake a venture that had a profound, long-term effect on the success of Starbucks.

If I hang my hat on one thing that makes Starbucks stand out above other companies it would be the introduction of Bean Stock. That’s the name we gave to our stock option plan. With its introduction, we turned every employee of Starbucks into a partner.

I wanted to find a way to share both the ownership of the company and the rewards of financial success with the people of Starbucks. But I wasn’t sure how best to do that. In January of 1991, a woman in our human resources department, Bradley Honeycutt, researched various alternatives for introducing such a plan. In conversations with consultants and surveys of other companies, she found a lot of different models but none that did what we wanted to do. Most plans were available only for public companies, such as outright stock grants and stock purchase programs, or for top executives, such as stock options. Privately held companies, like ours, didn’t grant stock or options because there was no market for them; their only alternative was to set up an Employee Stock Ownership Plan (ESOP). But that plan was mainly a way of raising capital.

We had a different aim. My goal was to link shareholder value with long-term rewards for our employees. I wanted them to have a chance to share in the benefits of growth, and to make clear the connection between their contributions and the growing value of the company.

Finally, we decided to do something novel. Even though we were a private company, we would grant stock options to every employee, company-wide, from the top managers to the baristas, in proportion to the level of base pay. If they, through their efforts, could help make Starbucks more successful every year, and if Starbucks someday went public, their options could eventually be worth a good sum of money. We had, in effect, given them a chance to create their own value.

Several of us had been tossing around names for the plan, trying to be creative. Bradley came up with the name Bean Stock one Sunday, when she was out jogging with her husband. It’s not only a playful reference to the coffee beans we sell, but it also evokes Jack’s beanstalk, which grew to the sky. So, eventually, did ours.

In May 1991, we formally presented the idea to the board of directors. All spring, I had been busy crusading with board members, in groups and one-on-one, explaining why I was convinced this proposal would work. Their main worry was that it would dilute the shareholdings of investors who had taken a risk with hard cash.

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.