Starbucks Needs to Reward Its Workers More

(Bloomberg Opinion) -- Howard Schultz's coffee has already gone cold with investors. Just three weeks ago, Starbucks Corp said that the architect of its transformation from boutique coffee house to global juggernaut would return as chief executive officer, sending shares up 5%. On Monday they fell by almost as much, after Schultz said he would immediately suspend the group's share buybacks in order to invest more in staff and stores.

Investors should look past the share-price slump. This is the right strategy for Starbucks.

Many consumer companies are now grappling with a shortage of labor. Starbucks, alongside Amazon.com Inc., also faces growing unionization among staff.

Last October, the company said it would spend $20 billion on dividends and buybacks over three years. It has now partly revoked that decision. It isn't providing details on how much of the money it will invest in staff, although they will be the primary focus. Nor has it disclosed how exactly it plans to redirect the spending. But this is an opportunity to redress the balance between investors and executives on the one hand and Starbucks employees on the other.

The simplest route would be to use the money that would have been spent on buybacks to raise the wages of the more than 400,000 people employed in Starbucks restaurants.

The company might follow the example of the the John Lewis Partnership in the U.K., which is owned by its 80,000 employees. They receive annual bonuses based on the profits of the business, paid as a percentage of salary. Starbucks wouldn't be able to replicate this model exactly, as it is a publicly listed company, not a mutual like the John Lewis Partnership.

But Starbucks could award its staff in a similar manner to give them a greater stake in the company's performance. And if these payments were deferred — for example, half paid immediately and half delayed for two years — this would also help with employee retention.

Starbucks already has a share-option program, known as “Bean Stock,” for employees in the restaurants that the company directly owns, as opposed to the franchised stores or those operated under license. But this could be augmented, for example, with an extra allocation of shares based on the performance of the company over three years.

Another British company, sportswear retailer Frasers Group Plc, has used just such a plan over the past decade to pay out substantial amounts to shop-floor staff. In 2013, it awarded 135 million pounds worth of shares to thousands of workers. At that time, a store employee earning 20,000 pounds a year would have received about 70,000 pounds in total, a transformational sum.

Neither of these models is perfect. The John Lewis Partnership's employee ownership did not protect it from the ravages of the pandemic. It closed stores and cut jobs. It paid out no bonus last year, but reinstated one last month. At Frasers, not all employees have been eligible for the share plans. While the group rewarded some staff handsomely, it came under fire for its treatment of others, such as warehouse personnel and people employed on contracts under which the company was not obliged to provide regular work.

But they are both useful starting points in a search for more effective ways to reward and retain staff. The ideal strategy will be good for Starbucks employees and will benefit shareholders, too.  

In a 2012 study, finance professor Alex Edmans found that companies on Fortune's list of “100 Best Companies to Work for in America” outperformed peers by 2.3-3.8% per year from 1984 through 2011. A rough exercise based on Edmans's study suggests that the same relationship still holds. Only 10 companies that made the list a decade ago remain on it today, but their stocks have returned 484% in the period, on average, significantly more than the 389% total return for the S&P 500 Index.

It's easy to be skeptical of Schultz's return to Starbucks. That he has unveiled such a bold plan on his first day back in the job reinforces the impression that he continues to dominate the company, and this could make it hard to recruit the next CEO.

But if Schultz's third stint leading the group helps bring about a more equitable distribution of rewards to its armies of lower-paid workers, that would be a good thing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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