EMPLOYEE OWNERSHIP:
ONE ROAD TO PRODUCTIVITY
IMPROVEMENT
Samuel J. Davy
Many American companies in mature industries have become uncompetitive because
restrictive work practices and labor costs have outstripped productivity. One answer to
the dilemma may lie in employee ownership of the business.
America's decline in productivity in mature in-
dustries is a matter of widespread concern. In many
instances, these industries are characterized by en-
trenched unionized labor which has successfully bar-
gained for restrictive work practices and wage in-
creases not compensated for by productivity gains.
Both factors increase unit cost.
When unions are uncooperative or unrealistic, it can
be difficult for management to deal constructively with
labor costs that are no longer competitive. The union
distrusts management's motivations and is usually un-
willing to give up gains won earlier in bargaining. Of-
ten plants must be closed after labor unions decline to
accept reduced wages or simplified work practices.
Ford management faced just such a problem in
Sheffield, Alabama. In the fall of 1981, the company
advised workers in its Sheffield foundry that the cost
of castings produced there was too high and must be
reduced significantly if operations were to continue.
When asked to accept a large wage reduction along
with work rules concessions, the local union refused.
Shortly afterward, Ford announced plans for closing its
plant in phases over an eighteen-month period. The
local union president expressed doubt that such a pro-
Samuel J. Davy is a Senior Consultant in the Management Coun-
seling Section of Arthur D. Little, Inc., who directed the Hyatt Clark
feasibility study.
12
gram would ever be fully implemented. Moreover, he
noted that supplemental unemployment benefits (SUB)
offer the membership protection if layoffs do materi-
alize. This position left workers vulnerable to eventual
unemployment if Ford acted to carry out its plan as it is
now doing.
General Motors earlier had been confronted with a
similar problem with its Hyatt bearing plant in Clark,
New Jersey in 1980. In that case, a constructive solu-
tion evolved (with union cooperation) which permitted
the plant to achieve competitive productivity and con-
tinue operations. Ingredients of the solution were wage
concessions, work rules concessions, an incentive bo-
nus plan, and 100 percent employee ownership. In a
larger context, this resolution contributed to the will-
ingness later on the part of the United Automobile
Workers to renegotiate its national contract with GM in
1982, ameliorating what had become an untenable cost
position the company had reached.
The experience leading up to and arising from the
formation of Hyatt Clark Industries, successor to the
Hyatt bearing plant of General Motors, identifies spe-
cific conditions under which it is possible to develop a
constructive solution involving changes in wages and
labor practices.
These conditions are:
• The business crisis and its effect on jobs must be
serious and credible.
 EMPLOYEE OWNERSHIP
• A sound prospect must exist for substantial produc-
tivity improvement, in this case the elimination of
inefficient labor practices.
• Leadership that labor respects must convince labor
that the plan is preferable to other alternatives.
For every Hyatt success story, there are several cases
where such results cannot be achieved. Workable solu-
tions are not easy to conceive and negotiate success-
fully. Yet for many mature, unionized industries, it is
urgent to identify workable solutions wherever condi-
tions permit. The problems that led to the organization
of Hyatt Clark are not unusual among major unionized
industries. Management attitudes and practices are as
fundamental to the problems as are those of labor. La-
bor's distrust of management and its aggressive de-
mands are often abetted by management's short-
sighted willingness to yield to labor's demands (in
order to maintain uninterrupted production). While the
solutions that are working for Hyatt Clark do not apply
universally, understanding the causes and solutions can
be instructive to management in related industries.
How It All Began
The Hyatt Roller Bearing Company was acquired by
General Motors in 1918 in a backward integration
move. (Alfred P. Sloan had been general manager of
Hyatt and later became president of General Motors.)
Together with New Departure, a maker of ball bear-
ings, the two divisions provided most of the bearings
required for GM cars and trucks. Long independent,
administration of the two divisions was combined in
recent years to form the New Departure-Hyatt Divi-
sion headquartered in Sandusky, Ohio. Labor relations
were governed by a companywide contract with the
United Automobile Workers, modified by a local
agreement. The Hyatt local in Clark, New Jersey, had
a reputation over the years as being militant.
Supplemental benefits protect union
members if layoffs materialize but
leave them vulnerable to eventual
unemployment if the company closes.
Nearly all Hyatt products are tapered roller bearings
for automobiles and light trucks. They are used prin-
cipally as wheel bearings and in automatic and manual
transmissions. For years, Hyatt has supplied about 80
percent of GM's requirements for "tapers." Transfer
prices are those set by Timken (the market leader).
Some Timken plants have a United Steel Workers
union; others, including those competing directly with
13
Hyatt, are not unionized. In recent years, Hyatt oper-
ations have been unprofitable. In poor automotive
years, Hyatt recorded heavy losses; in good years,
losses were small to moderate.
For General Motors' down-sized line of front-wheel-
drive cars, the company designed the new cars to use
more ball bearings and fewer tapers. Consequently, as
GM production shifts to front-wheel-drive models, the
demand for tapered roller bearings in GM cars will
shrink dramatically. This transition began in 1981 and
should mature by the middle of the decade. Appraising
the effect of this on future Hyatt operations, General
Motors decided that Hyatt could not achieve com-
petitive costs at lower volumes; it put the plant up for
sale in May 1980. Finding no takers, the auto manu-
facturer announced to its Hyatt employees in August
1980 that if an appropriate sale could not be arranged
soon, the plant would be closed.
The business crisis and its effect on
jobs must be serious and credible.
Under terms of the contract with the United Auto-
mobile Workers, laid-off workers are given preference
for hiring in other GM plants in the same labor mar-
ket—where openings exist and the worker is qualified.
The only large GM plant within the Clark labor market
is the automobile assembly plant in Linden, New Jer-
sey. That plant contained few openings for which the
Hyatt work force was qualified. Opportunities were
further limited by the low production level in a poor
automobile year. It became clear to Hyatt workers and
their local union leadership that those not eligible for
early retirement would soon have to find new employ-
ment or become unemployed after SUB entitlements
expired.
When the local union sought approval for an assess-
ment to finance a feasibility study for an employee
stock ownership plan in December 1980, it was nar-
rowly defeated 794 to 778. The defeat was attributed to
the large number of older, disinterested employees.
(The average age of the Hyatt work force was forty-
seven years. Thirty-two percent of skilled tradesmen
and 25 percent of all -employees were over fifty-five;
most of these were eligible to take early retirement
and, as such, were immune to the effect of the im-
pending closing. The burden fell largely on younger
employees.)
In January 1981, a group of supervisors joined with
the union leadership in asking all employees to express
their interest in establishing an employee stock own-
ership plan (ESOP). With joint labor-management
participation, more than 1,200 employees agreed to
14 THE JOURNAL OF BUSINESS STRATEGY
contribute $100 each on a weekly checkoff basis. The
Hyatt Clark Job Preservation Committee was orga-
nized to hire a consultant who would study the feasi-
bility of running Hyatt as a free-standing, employee-
owned enterprise and a lawyer to arrange financing and
organize the company if the consultant's finding was
positive. Three of the committee's eight members were
leaders of the local union; five were supervisors. The
committee selected as counsel a prominent New Jer-
sey attorney who earlier had successfully guided the
conversion of another large New Jersey company—
Okonite—to employee ownership. Arthur D. Little,
Inc., was selected in March 1981 to conduct the fea-
sibility study.
What the Critical Issues Were
For a positive feasibility finding, it was necessary (but
not sufficient) that Hyatt meet two primary conditions:
• A competitive operating economy in terms of Tim-
ken prices; and
• Assurance of at least sufficient volume to achieve the
target operating economy.
The second condition was the least problematic:
General Motors expressed willingness from the outset
to support Hyatt as an employee-owned enterprise. The
auto manufacturer was prepared to negotiate a multi-
year contract for a continuing supply of bearings in the
historically established proportion (about 80 percent of
total requirements).1 This commitment, combined with
a general awareness of GM plans, made it possible to
establish probable and worst case volume forecasts.
(More optimistic possibilities, including sales to other
automobile and truck assemblers, were considered
later.)
The first condition, a competitive operating cost,
was another matter altogether. Local union leadership
on the committee had already recognized that com-
petitive costs probably would not be achieved in the
Clark plant without wage concessions. At the outset,
local union leaders, contrary to the wishes of the UAW
International, were optimistic that they could convince
the membership to accept reduced wages, if they could
at the same time offer a means of augmenting wages
through profit-sharing and employee stock ownership.
1
GM's motivations were colored by the state of its corporate relations
with the UAW and by a pragmatic desire for positive public relations. The
company was hurting economically on many fronts, not the least of which
was the cost of labor. GM had been unable to induce the UAW to consider
contract adjustments for limiting GM costs. GM management was pre-
pared to support Hyatt as a demonstration of what union employees could
do for themselves to save jobs and become competitive. In addition, GM
was aware of the effect that the closing of the Ford assembly plant in
Mahwah had had on Northern New Jersey unemployment in 1980. If it
could, the company wished to avoid an outright closing and layoff of
1,800 employees in Clark, with the attendant negative publicity.
Investigators pursuing this issue posed the following
question: "If contractual work rules were voided, mak-
ing work assignments flexible as deemed necessary by
supervision, how many fewer employees would be re-
quired to produce the same output?" This question was
first put before a group of the committee, including the
union's local leaders. They found that if used efficient-
ly, only 68 percent of the nonsupervisory work force
would be required. Later, the same question was asked
of a panel of supervisors who, over the years, had
learned to live with contractual constraints. Most of
them were not members of the Job Preservation Com-
mittee. Their finding was slightly more conservative
but supported the same conclusion: Only 70 percent of
the work force was required to achieve current output
if flexible work assignments were permitted.
This conclusion was critical to the ultimate finding
of feasibility. When both controllable and uncontrol-
lable nonlabor costs were minimized, the remaining
funds available for labor, with profitable operations,
were approximately 65 percent of the amount paid to
the existing work force. Thus, at expected productivity
under nonconstraining work rules, surviving workers
employed at Hyatt could expect to earn slightly over 90
percent of current wages (70 percent of the workers
would share 65 percent of the funds).
Incentive Bonus Plans
To make the business plan credible to lenders as well
as to express employees' confidence in their ability to
achieve the targeted productivity, wages—exclusive of
fringes and bonuses—were proposed at approximately
$9 per hour, or about 80 percent of the overall budget
for wages. The balance of 20 percent would be paid
through two incentive bonus plans. One bonus was to
be based on operating productivity, calculated in terms
of sales per hourly labor dollar (direct labor and in-
direct labor lumped together), and paid monthly. The
second bonus was to be based on overall profitability
and paid semiannually. No ceiling was put on poten-
tial bonus earnings, but all bonuses were to be paid
company wide. (This would assure that social pressure
throughout the company would come to bear on under-
performing departments.)
These, then, were the fundamental elements of a
viable plan: a multiyear GM supply agreement (con-
tingent on satisfactory quality and competitive prices),
a labor arrangement offering sharply better productiv-
ity and a lower base wage in exchange for continued
employment (for some), and an incentive plan. With
these elements in place, other problems could be ad-
dressed.
 EMPLOYEE OWNERSHIP
Functional Management Skills
The Hyatt plant at Clark had not been a free-standing
division since its administration was merged with New
Departure and located in Sandusky. The organization
at Clark was solely devoted to production; there were
no sales, engineering, or accounting personnel on its
payroll. The new company's primary problems, in the
short run, would be to attain productivity goals under
the new work rules. At the same time, the company
would have to engineer and sell its products over the
longer term to new customers as well as to General
Motors.
To provide for interim general management during
preorganization and start-up, one of the Arthur D. Lit-
tle consultants was invited to serve as president. The
consultant had extensive experience in the automobile
industry. Once established, the new company would be
better able to choose and hire a long-term chief exec-
utive, which it did in April 1982, five months after
commencing operations.
The plant's former manager assumed responsibility
for sales, engineering, and quality control. Within six
months, he recruited the sales and professional en-
gineering staff the new company needed for business
development and improved quality control. During the
same period a qualified chief financial officer was re-
cruited, permitting the release of accountants borrowed
from General Motors. No new staff was immediately
required for the leadership of manufacturing operations
or personnel.
Union-Management Relationships
In a classic adversarial environment, the union's role
is clear: to fight for its fair share of the factors of pro-
duction, and to protect its gain against a predatory,
exploitative management. In an environment where all
of the employees are stockholders and, in effect, co-
owners, the question arises, "What is the proper re-
lationship between union and supervision here?" If all
workers have an owner's interest in product quality,
housekeeping, and productivity, doesn't the super-
visor's role reduce to work planning and training? Be-
fore the new company started operating, this line of
reasoning led union leadership to question the mag-
nitude of the supervisor's wage differential. Although
it did not become a sticking point, this was a divisive
issue for several weeks.
The management group knew that a considerable
indoctrination period would be required before a work
force accustomed to restrictive labor practices and a
"them-and-us" adversarial relationship could become
comfortable and efficient under the new work rules in
an ESOP environment. Management deemed the role
of supervisors central to effecting this indoctrination
15
and stood fast on its evaluation of an appropriate labor-
supervisory wage differential.
The union and its leadership have continued to raise
other issues. Some have dealt with the effectiveness of
specific supervisors. In general, they have involved
potentially useful suggestions for improving oper-
ations, or philosophical/procedural issues concerning
labor's more active participation in management. Hy-
att's first president devoted major effort to formulating
practical means of utilizing these union interests con-
structively and feels positive results were developing.
Even though the employees are technically owners,
and will in fact become owners of a tangible company
in a few years with any moderate degree of success, it
was difficult at first for them to make the psycholog-
ical transition from worker to partner. Other employee-
owned companies have encountered the same prob-
lem.2
In a classic adversarial environment, the
union's role is clear: to fight for its fair
share and protect its gains against a
predatory, exploitative management.
From the outset, Hyatt management made a con-
scious effort to communicate frequently with its em-
ployees about business developments and to train them
intensively to work for higher quality and productivity.
Quality circles and quality training have been used.
Positive results in terms of sharply higher productiv-
ity and fewer grievances were evident after only six
months (see page 19). Both the initial and current pres-
idents have met frequently at lunch with groups of
workers to improve rapport and to learn about prob-
lems firsthand. Some managers believe the company
newsletters may at times be too informative, but others
believe it is impossible to furnish too much information
in a company trying to teach its employees to think like
employee-owners.
The Role of Union Leadership
While during the formative period in the spring and
summer of 1981 local union leaders were convinced—
2
When Vermont Asbestos Group bought the asbestos mine in Eden
Mills, Vermont, from GAF in 1975, the quality-control supervisor, who
had led the employee group in the buyout negotiation (with the guidance
of the Vermont Industrial Development Agency), became president. The
employees, even though all were substantially equal partners, insisted on
retaining and relying on their local union. The employee union bargained
annually for wage and fringe increases even though dividends were large.
Management never sufficiently gained the respect and confidence of the
employees for them to abandon their union. The "them-and-us" syndrome
persisted. When business turned downward, they accepted a buyout offer
in 1978 from a local businessman and reverted to a closely held company
managed by its owner.
16 THE JOURNAL OF BUSINESS STRATEGY

EXHIBIT 1
List of Job Classifications in Effect as of September 1979
at Hyatt Plant of New Departure Hyatt Division of General Motors

Automatic Assembly Machine
Assembler General
Assembler
Assembler Test Journal Box
Bar Turning
Barrell Tumbler Automatic
Cold Form Press Operator
Chip Handler
Chip Operator Allcase
Checker Receiving, Shipping, and
Processing
Checker Inspector
Maintenance Clerk P.L.
Crane Hooker
Coating Machine
Cold Header Leader
Crane Operator
Cutter Grinder C
R.R. Double Roll-Race Grind
Driver Tardster—Steel Yard
Furnace Operator
General Service Man
Heat Treater Auto Quench
Heat Treater Race
Heat Treat Utility Man
Inspector Routine—Leader
Inspector Auto Gauge
Inspector Routine Heavy
Inspector Routine
Janitress
Laborer
Line Attendant
Lathe Production Railroad
Lubrication Controller
Miscellaneous Machine
Milling Machine J.B.
Mechanical Packager Operator
Metal Lab Assistant
Metal Lab Inspector
Packer
P.L. Race End Grind and
P.L. Other
Prutton Line Operator
Packing Machine Operator
Packaging Machine Operator
Roller Grinding P.L. Changeover
Process Inspector—Heavy
Process Inspector
Primary Machining
External Grinder Races
Repairman Rollers
Race Grinder P.L.
Race Grinder P.L.R.R.
Roller Honing P.L. Operator
Roller Grinder P.L. Operator
Repairman Races
External Grinder Rollers
Repairman Races P.L.
Repairman Race Assembly
Repairman Race Machining
Repairman Machining RR
Roller Raw Materials Inspector
Repairman Rollers P.L.
Repairman Welding R.R.
Set Up A Package Bearing H.T.
Shipping Clerk
Slitter
Scrubmobile
Auto Forge Operator
Product Specialist
Screw Machine Operator
Special Inspector
Set Up Man AA
Set Up Man A
Storeroom Attendant
Sump Truck Driver Operator
Set Up Man Races
Set Up Man A
Set Up Man B
Tool Crib Attend
Timekeeper
Tool Crib Attendant
Truck Operator Outside
Truck Driver Inside
Tool Steel Service Man
Tractor Trailer Driver
Utility Inspector
Wire Drawer
Welder Journal Box
Wrapper Packer
Line Grind Spindle
Set Up Line Grind Spindle
Set Up and Operate End and
Service
Tool and Die Chaser
Total: Ninety-one unskilled job
classifications
Skilled Trades
Chief Eng. Power House
Tool Cutter Grinder
Electrician
Inspector Standard Tools
Hardener
Inspector Tool Die & Fix Leader
Machine Repair Machinist
Mason
Machine Builder Roller Seg.
Millwright Leader
Millwright
Pipefitter
Painter Glazier
Shift Engineer Power House
Tinsmith &/or Sheet Metal Work Lr.
Tinsmith &/or sheet metal worker
Tool & Die Maker
Truck repairman Gas & Elec.
Tool Room Machine Operator
Welder
Welder Tool & Die
Inspector Tool Die & Fix
Total: Twenty-two skilled trade
classifications

and a majority of union members ultimately agreed
with them—that Hyatt as an employee-owned enter-
prise was a more attractive alternative for most em-
ployees, there was a substantial body of dissidents.
This group doubted the reality of GM's threat to close
the plant and was unwilling to make concessions in
wages, fringes, and work practices.
General Motors helped by reconfirming its commit-
ment to close the plant. It announced in April 1981 that
if a purchase and sale transaction were not consum-
mated during that summer, the plant would close at the
end of the year. All during that spring, GM had built up
inventories of Hyatt parts to cover the transition to a
new supplier—a fact that did not escape the attention of
 EMPLOYEE OWNERSHIP
employees. In May 1981, the pro-employee ownership
faction won a contested election for union leadership.
Dissidents continued to be active, however, and when
ownership became a reality at the end of October 1981,
became destructive by vandalizing a major machine
tool. These same dissidents, although few in number
and no longer employed by Hyatt Clark Industries,
continue to voice bitterness with the local community.
What the Labor Negotiations Brought
When bargaining, labor has a tendency to propose a
greater number of job classifications. This leads to a
compartmentalizing of work and prohibits assigning
workers to tasks outside their specific classification.
Ultimately, this fragmentation requires management to
employ more workers. At Hyatt Clark (the GM plant),
there were ninety-one separate hourly unskilled job
classifications and twenty-two skilled trades classifica-
tions. (See Exhibit 1.) This proliferation had demoral-
ized supervision, which felt powerless to lower labor
costs by attempting to simplify work assignments.
As a result, management's cost reduction activity
under GM had been primarily limited to installing more
efficient machinery and controlling expenses. Even
though management was making progress in contain-
ing costs unrelated to work rules, labor costs amounted
to about half the total cost of production in a recent
good year. Labor was a dominant component of total
cost. These costs, by contract, increased annually. (By
1981, the average cost of an hour of labor at Hyatt was
over $18. All of General Motors was in the same posi-
tion, as was most of the U.S. automobile industry.)
In the spring of 1981, following a determination by
the consultants and the Job Preservation Committee
that flexible work assignments would be essential to
viability, the union agreed to reduce the number of un-
skilled job classifications from ninety-one to seventy-
eight, and the number of skilled trade classifications
from twenty-two to six. (See Exhibit 2 on page 18.)
The reductions were effected by combining similar
fragmented jobs into one single job (for instance, three
jobs, tool crib attendant, checker, and checker in-
spector, became one job, material control clerk). This
opened the way for supervision to improve labor
efficiency substantially. A smaller number of employ-
ees accepting flexible assignments could do the work of
a larger group.
The magnitude of this improvement is impressive.
In evaluating the benefit of fewer job classifications
and an absence of restraint against the flexible use of
manpower, a group of the committee identified twenty-
one job classifications comprising 66 percent of the
hourly work force in which significantly fewer workers
would be required. In ten of these jobs (38 percent of
the work force), only 44 percent of the current number
of employees would be required. (See Exhibit 3 on
17
page 19.) In the other eleven jobs (28 percent of the
work force), in average of 26 percent fewer workers
would be required. Overall, 44 percent fewer workers
would be needed in these twenty-one classifications to
produce the same mix of products. Even if there were
no reduction in requirements among the remaining
ninety-two job classifications, the work force would
have become about 30 percent smaller.
What the Results Were
Productivity Gains Realized
The above analysis was conducted with the commit-
tee to evaluate feasibility. It assumed, for simplicity, a
stable level of business. Soon after the new company
was organized, on October 30, 1981, the slumping
automobile market declined still further. Within one
month, General Motors reduced its projected purchases
from Hyatt from $98 million to $76 million for the first
year.
After adjusting to this lower demand, Hyatt Clark
proceeded to organize and train its work force in the
new operating environment. A crude measure of the
actual improvement in productivity is beginning to
emerge in the data on sales per employee of the new
company as compared with Hyatt when it was part of
a GM division. Part of the way through the model
year,3 Hyatt Clark Industries was recording shipments
at an annual rate of about $73,000 per employee as
compared to $55,000 in 1981 and $50,000 in 1980.
Allowing for inflation, the real output per employee in
1982 was 25 percent greater than in 1981 and 1980.
(See Exhibit 4 on page 19.) Further, Hyatt Clark man-
agement believes further improvement in productivity
will be achieved as the work force becomes better
trained and favorably acclimated to efficiency and the
financial benefits of working together to earn group
bonuses and build equity in the company. Current
operations are substantially as productive as those of
the major industry leader, Timken, whereas compara-
ble earlier Hyatt operations were much less productive.
(See Exhibit 5 on page 19.)
The importance of the ESOP as a motivating factor
in achieving this productivity improvement must be
appreciated. Management's use of quality circles to
raise the consciousness of employees to quality and
productivity issues, together with the positive desire of
union leadership to participate constructively in policy
and direction, has given the ESOP credibility and com-
menced to develop an ownership attitude among the
workers. Evidence of this is the six-month-grievance
record as compared with the same period a year earlier.
The Hyatt Clark work force of about 800 filed only
twenty-five grievances and was awarded back-pay
3
Data as of April 1982.
18 THE JOURNAL OF BUSINESS STRATEGY

EXHIBIT 2
List of Job Classifications in Effect at Hyatt Clark Industries as of November 1981

Unskilled Trades
Batch Group Setup/Operator Gauge Attendant
Line Grind Setup/Operator Line Inspector
Line Grind Barrell Tumbler P.L.V.
Packaging Machine Setup/Operator Clearing Groups
Automatic Assembly Machine Operator Carton Audit
Packaging Machine Operator Inspection Equipment Specialist
Assembler Process Audit
Gauge Attendant Clearing House
Line Inspector Utility Man, Heat Treat
Clearing Group Allcase Setup/Operator
Acme Chucker Setup Pack Bearings HT Setup/Operator
Cold Form Setup/Operator Auto Fixture Setup/Operator
Hot Form Setup/Operator Rotary Controller
New Britain Operator Material Reliability Auditor
Acme Operator Furnace Operator
Anneal/W/B/, Coater Tool Sharpener
Sort Inspector Chip Puller
Chip Puller Clearing Group
Inside Forklift Press Setup/Operator
Clearing Group Outside Truck Driver
Cold Header Setup Material Control Clerk
Roller Line Setup/Operator Tool Material Cutter
Roller Hone Setup/Operator Forklift Driver
Cage Press Setup/Operator Oiler
Pruitton Line Setup/Operator Crusher Operator
Cold Header Chip Puller
Slitter Clearing Group
Wire Drawer Cutter Grinder C
Gauge Attendant Tractor Trailer Driver
Line Inspector Machine Packaging Setup/Operator
Barrell Tumbler P.L.III Tool Sharpener
Clearing Group Outside Truck Driver
Bar Machine Setup Machine Pack Setup/Operator
Tractor Motor Setup
Total: 80 unskilled trades classifications
Double Row Setup/Operator
Journal Box Setup/Operator
Bar Machine Operator
Lathe Operator
Rail Road Grinder Skilled Trades
Production Welder Tool and Die Tradesmen
Heavy Mechanical Processor Machine Repair Tradesmen
Railroad Assembler Pipefitters Tradesmen
Gauge Attendant Electrical Tradesmen
Line Inspector General Maintenance Tradesmen
Forklift Driver Power House Tradesmen
Automatic Assembly Machine Operator
Assembler Total: 6 skilled trades classifications
 EMPLOYEE OWNERSHIP 19

EXHIBIT 3 EXHIBIT 4
Work Force Reduction Expected From
Sales Per Employee, Hyatt Plant
Simplified Job Classifications and Flexible
Assignments
Unadjusted for Inflation
Reduction Sales Per
Current Required Sales Employees Employee
%
1. Job classifications Model Year (Index) (Index) $
requiring half or fewer 1980 103 113 $50,500
of current employees: 750 330 56
1981 100 100 55,400
• Cold Former 1982 73 54.9 73,800
• Laborer
• Line Attendant
• Millwright
• Primary Machining Real Change, Adjusted for Inflation
• Process Inspector Sales Per
• Race End Grind Sales Employees Employee
• Roller Grinder Model Year (Index) (Index) $
• Setup Man A
• Setup Man Races
1980 112 113 $45,500
1981 100 100 45,800
2. Job classifications 1982 68.6 54.9 57,200
requiring more than
half of current Real sales per employee in 1982 are 25% greater than 1981.
employees! 539 398 26 Note: 1982 data drawn from first half data.
• Checker Inspector
• Cold Header
• Furnace Operator
• Heat Treat Utility
• Inspector Auto Gauge
• Inspector Routine EXHIBIT 5
• Machine Repair Machinist Comparative Sales Per Employee
• Miscellaneous Machinist
• Packaging Machine Operator
• Race Grinder Hyatt Timken
• Truck Driver Inside Sales/ Sales/
Total for 21 job classifications 1,289 728 44 Model Year Employee Calendar Year Employee
1980 $50,500 1980 $58,200
1981 55,400 1981 66,100
1982 73,800 1982 (est.) 73,000
settlements of $500 in its first six months. By con-
trast, in the year earlier period, the work force of about Timken data drawn from annual reports and Arthur D. Little, Inc.,
1,800 in the Hyatt plant of GM filed 750 grievances projection for 1982. About two-thirds of Timken volume is de-
rived from fabricated products (a full line of tapered roller
resulting in back-pay settlements of $70,000. By any bearings and rock drill bits), and one-third from the outside sale
standard, the improvement of labor attitudes and la- of specialty steel.
bor-management cooperation was dramatic in the em-
ployee-owned company.
agement expects UDAG and EDA commitments will
be available within the first year of operation, lowering
Financing and Company Control the company's cost of capital.
Hyatt Clark Industries began to solicit financial back- To induce lenders to extend credit to Hyatt Clark
ing in the summer of 1981. Principal elements of the Industries, the company was required to furnish as-
$53 million package would be: (1) long-term, low- surance that a professional, competent management
interest loans from the federal and state governments, would have time to get the company soundly estab-
in effect to provide an equity base supplemented by lished, without interference from a potentially volatile
similar financing from General Motors; (2) a mortgage group of employee-stockholders. This was also re-
loan secured by the physical property; and (3) a work- quired by customers and suppliers, due to their need to
ing capital loan secured by current assets. make commitments and be assured of performance
The company was unable promptly to obtain the long in advance. This problem is shared by most new
government-backed loans and proceeded with the aid employee-owned companies. It is usually resolved by
of a bridge loan at commercial rates. Hyatt Clark man- arranging for the stock to be held in trust by outside
20 THE JOURNAL OF BUSINESS STRATEGY
directors for a period of years. At Hyatt, a plan was
devised to have a board of directors of thirteen mem-
bers—three representing the union, three represent-
ing management, and seven consisting of prominent,
successful New Jersey business executives motivated
to save jobs and to assure that employee ownership
would be successful. For the first ten years, there
would be no pass-through voting for directors.
The significance of the balanced board of directors is
important to the organizational concept Hyatt Clark is
using. Labor has recourse to the board and contributes
to decisionmaking at that level. (So, too, does manage-
ment in equal amounts.) But control remains in experi-
enced outside hands (seven out of thirteen). This tends
to assure that participatory management has a chance to
work and that the desires of labor and management are
tempered before being acted upon. Hyatt Clark be-
lieves no other ESOP has made effective use of such a
plan.
Conclusions and Observations
The Hyatt Clark experience confirms that there are cir-
cumstances in which unionized labor will cooperate
with retrenchment moves to save jobs. (Indeed, six
months afterward, the UAW international union re-
versed its intractable position with GM and agreed to
reopen its contract, albeit on very limited terms.) In the
Hyatt Clark case:
• A majority of employees believed that GM was seri-
ous about its plans to close the plant, and they
viewed their opportunities for alternative employ-
ment as unattractive.
• The opportunity for improving the productivity of
labor was substantial.
• Leadership the union membership respected—its
own elected officials and legal counsel—were con-
vinced that employee ownership was right for them
and sold the union members on the concessions nec-
essary to make the idea feasible, for the quid pro quo
of incentive bonuses and equity participation.
Frequently, these conditions cannot be satisfied
when a business in a mature industry finds one or more
of its plants is no longer competitive. As noted earlier,
the UAW local leadership of the Ford parts foundry in
Sheffield, Alabama, rejected Ford's request for wage
and work rules concessions to permit the plant to con-
tinue operating. Also late in 1981, A&P decided to
close an Ann Page canning plant in Horseheads, New
York. Although the work force was unionized, most
workers were earning near minimum wage. Efficient
work practices were not restricted by job classification
or other contract provisions. Lacking a means of sig-
nificantly improving productivity, a citizens' group
abandoned its efforts to find a way to operate the plant
as an independent company. These are two of many
examples of situations where one or more of the criteria
cannot be satisfied, and no attractive, constructive res-
olution results.
Who Is Responsible for Inefficiency?
The former work practices at the Hyatt plant of GM
were consistent with the national contract between GM
and the UAW, which became effective in September
1979. While there are local differences from plant to
plant due to variations in the local relationship between
management and union leadership, Hyatt conditions
seem typical of situations where the local union is con-
sidered "militant." Automobile companies are not the
only industries whose union contracts constrain work
practices and mandate inefficiency. Inefficiencies com-
parable to Hyatt's probably exist at many unionized
plants in mature industries.
It is popular to place the blame for mandated in-
efficiency on "greedy" unions. While they may indeed
be greedy (as are investors and stockholders), the pri-
mary fault must lie with management and the short-
sighted orientation of many large corporations. Where
a market lacks sharp price competition, it is easier for
management to yield to a union's contractual demands
that produce inefficiencies and increase labor cost per
unit than to resist and endure a costly strike. Unless the
specter of efficient competitors can be foreseen and
bargaining conducted with an eye toward defending
against such potential competitors, companies will
continue to concede cost increases to unions in good
times. Such concessions are virtually irreversible in
hard times.
Management Alternatives
What can management and directors do better to cope
with such a dilemma? There are no constructive (job-
preserving) short-term solutions when labor distrusts
management and treats uncompetitive wages and prac-
tices won in bargaining as nonnegotiable. In such a
case, the Hyatt solution only becomes possible when
the economic issues are both extreme and incontro-
vertible, the core business is viable and the distrusted
management steps down.
A management that has time to do so can take pos-
itive steps to improve its options for retaining a poten-
tially productive business. These include:
• Work hard and sincerely to improve credibility. This
takes time, especially if there are scars from past
incredulity, but it can be done. If union leadership
can be convinced, the task becomes easier. If man-
agement is unsuccessful in this, the possibility of an
 EMPLOYEE OWNERSHIP
early constructive solution becomes very low. Di-
rectors may find a new management is warranted,
with a fresh start on which to develop credibility.
• Seek out and document success models elsewhere.
As evidence mounts of how constructive solutions
are designed and implemented by other companies
and unions, the argument for positive action at home
becomes less pioneering and easier to accept.
• Think constructively of wage/practice formulas that
labor can reasonably accept. The incentive bonus
system in place at Hyatt is one example. The sys-
tem's two bonuses are designed to share with labor
the fruits of the business to which labor is fairly
entitled, while protecting the company against un-
competitive locked-in costs when business is down.
In this way, labor shares some of the business risk
while also sharing in its fortune.
• Educate labor and supervision about the effect of
market forces on them and the company. Unen-
lightened companies and unions in mature industries
tend to be arrogant, expecting that the market owes
them prosperity indefinitely. On the other hand, en-
lightened workers and firms are more respectful of
their market, recognizing that prosperity and longev-
21
ity usually must be earned. It is much easier to deal
with an enlightened work force.
Could GM have handled the Hyatt matter differ-
ently? Some participants believe the company posture
was sufficiently credible in the winter of 1980-1981
that the same wage/practice package might have been
negotiated without introducing the ESOP factor. This
is doubtful, however, because labor's distrust of GM
management was ingrained, the product of a long his-
tory. Further, since the international union opposed
any contract change, the local union would have had to
oppose the international within the framework of the
existing contract.
The ESOP mechanism permitted the parties to void
the old contract and write a new one. On balance, it
would have been difficult for GM to have turned
around and retained Hyatt.
If managements of mature industries adopt policies
such as the four suggested above, constructive solu-
tions will develop over time where there is a basis for
them. Meanwhile, a prudent management will avoid
creating future uncompetitive situations by keeping
future viability in mind while conducting current labor
negotiations.