Paul Saginaw sets the record straight on employee ownership and participation within an evolving Zingerman’s, contemplates the future without him

    As I suspect most of you know, a few days ago the Business Insider posted an article stating that, in the near future, Zingerman’s would be transitioning to a “worker-owned cooperative”. As you may not know, however, the folks at Zingerman’s quickly came out to say this wasn’t the case. While they were indeed planning to increase the voice of their employees in corporate decision making, and intended to put a system in place to increase employee ownership, Zingerman’s would not, according to the company’s release, become an employee-owned cooperative. Not satisfied to leave it at that, I reached out to Zingerman’s co-founder Paul Saginaw this weekend to ask why they wouldn’t be pursuing a cooperative model, and what, specifically, they intend to do instead. Following, with his permission, is our conversation, which gets into quite a bit of detail not only about these current initiatives, but also the long range plans concerning the future of the Zingerman’s Community of Businesses once he and co-founder Ari Weinzweig have passed on. It’s fascinating stuff.

    saginawpodium2

    MARK: A few days ago, the Business Insider posted a story about Zingerman’s transitioning to “worker-owned cooperative.” Given what I’ve heard from you since, that’s not quite the case, though…

    PAUL: Here’s the thing… Michigan makes no provision for a worker-owned cooperative. You can set that corporate structure up in other states. But, for some reason, in Michigan you can’t have that business structure. So that’s not a way we can go. The other thing is, we have a unique case in that all the businesses are separate legal entities. And we don’t want to roll them up into one business entity. We feel that who we are is informed quite a bit by the fact that they’re separate, and that there’s a commitment to behave as one, although there’s nothing legally binding. And so we don’t want to screw around with that. So doing an ESOP (Employee Stock Ownership Plan), for example, wouldn’t be possible, because, in order to do that, we’d have to roll everything up into one company. So what we’re trying to do is just add one more piece to the puzzle. It’s just the next step in this evolutionary journey that we’ve been on.

    We already have a high level of engagement. We already have a high level of participation when it comes to employees contributing toward the running of the businesses. As for the financial side of things, everybody has a salary, and then there can be a bonus structure on top of that, and then there’s gainsharing. What we’re talking about now is community-wide gainsharing, across all of the Zingerman’s businesses collectively… Currently the businesses aren’t financially connected.

    MARK: Just so I’m clear, right now there’s gainsharing within each of the individual companies in the Zingerman’s Community of Businesses, but not across all of the businesses collectively, and what you’re proposing now is another level of gainsharing that would accomplish that…

    PAUL: Yeah, each company has gainsharing. So every company has an annual plan, and we have agreed upon numbers that we have to hit. And, then, if we go over those numbers, the gain, or what we make over the plan, is shared among the staff of that individual business. And it’s different for each business. And they all have their own individual gainsharing plan. But there’s nothing currently that connects all of the businesses together. So we’ve been working on a way to financially connect everything, so that if the whole Community of Businesses performed well collectively, we could share that with everybody. It’s just another additional piece.

    MARK: So it doesn’t take away the individual company gainsharing that someone at, say, the Zingerman’s Creamery, may already have? It’s just another level above that…

    PAUL: Correct. It’s a layer above that… So, we have these nine separate businesses, and we have a shared service group that supports them. And Ari and I have a company called Dancing Sandwich Enterprises, Inc. And that’s a C-corp. And that holds all of our interests, Ari’s and mine, in all the various businesses. And that ownership can be anywhere from 20% to 82%, depending on the business. Dancing Sandwich also owns the intellectual property – the Zingerman’s brand. We license that to the individual businesses. That’s how Ari and I get paid… We don’t take a salary from any of the businesses… So, we’re going to set up a new LLC, and we’re going to contribute the intellectual property, along with its licensing revenue stream, to this new company. It’ll be called ZCOB, LLC. And that’s what everybody in the company will be able to buy a share in.

    MARK: What can you tell us about these shares?

    PAUL: Well, the value of the shares won’t necessarily go up and down. Whatever you buy in at, is what you’ll get back when you leave your employment. Let’s say you buy your share in ZCOB for $1,000, which is what we think it’s going to be. Having that share will allow you to participate in the distribution that will take place annually when the Zingerman’s Community of Business as a whole performs well. So a percentage of profits, or a percentage of sales, whichever is greater, is what each business will contribute each year, and that’s what will be distributed to Zingerman’s employee shareholders evenly.

    MARK: Just to those Zingerman’s employees who have chosen to invest, right? Not all employees?

    PAUL: Right… We’re thinking that, to buy in, you have to have worked for the company for at least a year. And you have to buy in for $1,000… But the company, as we’re envisioning it, will finance that for you. Your distributions will just go toward paying off the purchase price until it’s all paid down.

    MARK: OK, so you don’t have to put down the $1,000 yourself, so there’s really no reason that a Zingerman’s employee would opt out…

    PAUL: Correct.

    MARK: And would someone have to be a full-time employee to participate?

    PAUL: No, you can be part-time. It’s just that you have to be an employee in good standing for one year in order to participate.

    MARK: And I imagine you’re limited to one share?

    PAUL: Yeah, everybody will get one share…. And then there’s a separate class of shares that would be like $1 each, and those you’d have to buy at a minimum of 5,000 or 10,0000. They wouldn’t have anything to do with the distributions we’ve been discussing. They’ll be more for longer term investing. The value of those shares would go up and down with the valuation of the company as a whole.

    MARK: Like a stock exchange…

    PAUL: Yeah.

    MARK: And I imagine that you’d also have to relinquish those upon termination of employment as well….

    PAUL: We haven’t come to any conclusion on that. That’s still a work in progress…

    MARK: And, at the same time that you’re increasing equity, as I understand it, you’re also looking to increase the participation of those employees who aren’t already partners within the current Zingerman’s structure.

    PAUL: Yeah, that’s the big piece of this. The partners group, which collectively makes all of the decisions on how we operate as a community of businesses, will now have three or four non-partner members. And those people will come from the general staff. And they will be part of the decision-making body. And they will be elected by their peers, in a process that’s being developed now. So not only will they have more ownership, but they’ll also have more control. They’re going to have a voice within this decision-making group at the highest level. They’ll be there to bring the perspective of the front-line staff.

    Just like the partners aren’t there to represent the interests of their individual businesses… When they come to these meetings, they’re there to make decisions based on what’s best for the whole organization… And so these employee members won’t be there representing the interests of the staff. They’ll be there representing the perspective of the staff. Because, by definition, it’s impossible for one of the managing partners to have that perspective.

    MARK: It’ll be difficult, I would imagine, to elect a diverse group of employees, as some of the companies under the Zingerman’s umbrella are relatively small, while some, like the Roadhouse and the Deli, are quite large. How will you ensure that these employee members will be representative of the entire company, and not just those entities with the largest number of voting employees?

    PAUL: Right. We’re going to make sure there’s diversity. And we’re working on ways to ensure that… And, because we don’t vote on anything, the voices of those employees will be equal to that of the owner of the Roadhouse, or the owner of the Deli. They have to follow all of the protocol, but they can’t be outvoted, because there is no voting.

    MARK: There is no voting?

    PAUL: No, we don’t vote. We don’t vote on anything. We come to a consensus. We’ve never voted on anything. We’ve always been able to work around things to come to a consensus… Consensus is defined like this: You are 80% fine with the proposal as it’s written, and you can support it 100%. And, if you can’t, you have to come back to the group with a counter-proposal, and get people to come to a consensus on it.

    MARK: So, was all of this coming out in the press a good thing or a bad thing for you? Do you wish you’d had more time to work out the details before word got out, or are you kind of happy that it came out, as it’s forcing you to move more quickly down this path?

    PAUL: You know, we work on our own timeline. I think it’s fine. It’s just that whoever wrote that first story got it completely wrong. We’re not going to be a worker-owned cooperative. We can’t. We’re in Michigan.

    MARK: Well, I imagine that you also can’t be a worker-owned cooperative because each of these businesses already has managing partners, and you need to honor the agreements that are already in place with them. So you can’t just take their equity and say, “We’re now a corker-owned cooperative.”

    PAUL: Right. But the individual businesses could, in addition to everything we’ve been talking about, go in that direction, if there was a provision for it in Michigan. Some have expressed an interest already.

    MARK: So some of the nine Zingerman’s businesses have indicated that they would transition to worker-owned if it were possible to do so under Michigan law?

    PAUL: Yes… Individual businesses might do ESOPs… The general feeling is that we’re going to move closer and closer to having ownership distributed as widely as we possibly can… But understand that the bigger, more radical change that you’re going to have is that there will be non-partner members of the partners group included in decision making at the highest level. That’s really the big thing.

    MARK: In terms of the equity piece, as I understand it, nothing will really change relative to your managing partners. You’re not, in other words, asking them to give anything up. It’s just that you and Ari are giving up your slice, right?

    PAUL: Correct… And then, at the same time, we’re also allowing all of the partners to buy up to 90% of their individual businesses. And we’ll retain that 10% in the center. And, then, as far as succession, we don’t know what will happen with that when both of us die… You know, what remains in the center, what holds everything together, when the two founding partners pass away? That’s another thing that we’re dealing with. We know how we’re going to deal with the positions. We know that there will still be two co-CEOs. And we know how they’ll get elected to those positions. But we don’t know what happens to the stock that’s retained by Dancing Sandwich Enterprises? We haven’t worked that out yet.

    MARK: So, at the same time all of this is happening with the employees, you’re also giving your managing partners the opportunity to buy more of their individual companies, thinking about succession, etc.

    PAUL: Correct.

    MARK: And I guess you guys have been thinking about this for a long time.

    PAUL: In January, it’ll be three years that our Governance Committee has been working on this… There aren’t really models for us to follow. Nothing quite fits. The ESOP doesn’t fit. The member cooperative doesn’t fit. The worker cooperative doesn’t fit…. I had hoped that the new crowdfunding legislation that passed would help us, but the SEC (Securities and Exchange Commission) has begun to put so many restrictions on it that it doesn’t help much either… Yeah, there’s not a great roadmap for us. There are several businesses of our generation that are struggling with this issue, and there are people writing about it. There’s a former BALLE (Business Alliance for Living Local Economices) staff member writing a white paper about it. Her name is Alissa Barron-Menza. And we’ve got this idea for a symposium on this, inviting a lot of the businesses working on this to come together and share what they’re thinking and doing in this evolution toward worker-owned.

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      25 Comments

      1. murph
        Posted June 24, 2014 at 6:25 pm | Permalink

        Sorry if I missed this, but what is Michigan law lacking that would be the keystone in a worker coop? A legal label of “worker coop”? It sounds like all of the tools exist for a group that wanted to establish such a firm, just perhaps nit neatly bundled under that name?

        It also sounds like there are other issues, like the existing partner contracts and succession concerns, that are more immediate reasons for a more hybridized ownership abd management structure, but the legal obstacle is mentioned enough times to make it seem significant.

      2. Packer
        Posted June 24, 2014 at 7:25 pm | Permalink

        Yeah, this is far from being a coop. Better to call it something like a guilty millionaire’s creative publicity concept.

      3. Grumpy
        Posted June 24, 2014 at 7:27 pm | Permalink

        (f) “Worker cooperative” or “industrial cooperative” means an establishment in which the owners or members all work in the establishment and are the only persons who work in the establishment. In a worker cooperative or industrial cooperative the workers hold the basic ownership or membership rights of the establishment which consist of the voting rights to elect the board of directors, which in turn appoints the management or staff, and the rights to the profits or net income of the establishment. Each worker has an equal vote in accordance with the democratic principle of 1-person, 1-vote. The net income, which may be positive or negative, is shared among the workers pursuant to an agreed upon formula.

        http://legislature.mi.gov/doc.aspx?mcl-Act-152-of-1985

      4. Posted June 24, 2014 at 8:46 pm | Permalink

        I’ve said it in the past, but I respect the hell out of Paul and Ari for trying. It would be a million times easier to just sell the company outright and retire. The brand is worth a fortune, and some large conglomerate, if given the opportunity, would snatch it up in a minute and open a string of Delis and Roadhouses across the country. Instead they’re selling their equity off to their partners, and ensuring that their staff has more of a say in governance, as well as an increased financial stake in the company as a whole. I think that’s a great step in the right direction. And it sounds like the owners of the individual businesses may even push further. I get the vitriol. It’s fun to take shots at people who are successful. I do it myself. (Tom Monaghan is a son of a bitch.) But I’d encourage you to focus your anger at other business owners who aren’t at all inclined to push boundaries and talk about these issues publicly. It takes a lot of guts to open yourself up to this kind of criticism, and I’m glad that we’ve got people in our community like Paul and Ari who are willing to do it. But, yeah, if they wanted, they could probably forcibly roll up all of the companies under the Zingerman’s umbrella, pissing off all of their partners, change the culture of the business that they’ve created, and impose something more closely resembling a worker-owned cooperative. You’re right. Does that make them hypocrites, or does is just make them bright people who are trying to successfully navigate though uncharted waters while remaining profitable and maintaining consensus? I think it’s the latter? And, yes, they’ll likely make enough from this company of theirs to retire comfortably. Good for them. They deserve it.

      5. Grumpy
        Posted June 24, 2014 at 9:57 pm | Permalink

        That wasn’t my point at all Mark. I think that the link I posted to the law of the land was an example of a legal provision in response to this part of the interview:

        “PAUL: Here’s the thing… Michigan makes no provision for a worker-owned cooperative. You can set that corporate structure up in other states. But, for some reason, in Michigan you can’t have that business structure.”

        There are plenty of good things about Zingerman’s for the media to overexagerate and heap praise upon them. They deserve a lot of it, but living wages and worker democracy are not historically among their strengths. I’m also glad that they are taken steps toward paying a living wage in the future and increasing worker democracy in the future, but it’s somewhat alarming when the message comes out as only Zingerman’s-priced businesses can afford to pay $10/hr min wages (which Zing doesn’t in the present) and that it is impossible to form a worker cooperative in MI but Zingerman’s is the closest thing (also very far from the truth).

      6. Posted June 25, 2014 at 1:48 am | Permalink

        Interesting.

      7. Michael Tobler
        Posted June 25, 2014 at 6:29 am | Permalink

        When Ben and Jerry’s sold out, how did they do it? Does anyone know how that deal was structured, and how employees made out?

      8. Michael Tobler
        Posted June 25, 2014 at 6:34 am | Permalink

        From Wikipdeia:

        “In April 2000, Ben & Jerry’s sold the company to Anglo-Dutch multinational food giant Unilever.” (No mention of increased employee ownership.)

        “Ben & Jerry’s used to have a policy that no employee’s rate of pay shall exceed five times that of entry-level employees. In 1995, entry-level employees were paid $8 hourly, and the highest paid employee was President and Chief Operating Officer Chuck Lacy, who earned $150,000 annually. When Ben Cohen resigned as Chief Executive Officer and Ben & Jerry’s announced the search for a new CEO in 1995, the company ended the five-to-one-ratio policy.”

      9. Posted June 25, 2014 at 6:47 am | Permalink

        Mark, your comment hits the nail on the head (sorry, I have a cold and can’t think of any cute Zingermans analogy like hits the cheese ball on the cheese head or something). It IS fun to rip on the rich/successful, because they are so often total dicks who are beyond selfish and greedy and just want more, more, more. Here are two guys who seem to be saying “enough” and not going for the billion dollar buy out. Yes, I’m sure they are going to make money off of this but at least they aren’t selling out their employees (and town) in the process.

        I live fairly close to the deli/next door and I’m always oddly touched when people from out of town stop and ask me where Zingermans is. They are really a great thing! (And I’d highly recommend their “Dancing Lunches” at the Next Door…$10 for sandwich, side, pudding and I think a drink might come with it)

      10. MargaretS
        Posted June 25, 2014 at 7:35 am | Permalink

        Thanks for doing this Mark. I was totally confused about what was going on. It still makes my head hurt trying to sort it out, but I think I’ve got it now.

        I do admire Paul’s motivations – he is the real deal. I think what starts to grate for many of us who live here, is how over the top, self-aggrandizing their brand is. Everything is framed as if they know “the way.” Things like the notes on the bread bags that say in effect ” this bread isn’t stale, it is the best bread you will ever have the privilege of tasting – you just need to be educated to treat it properly by placing in an oven” The moonie style customer service (and staff culture) is also a bit too much for me personally.

        Hater types aside, I think those who criticize ZCOB are just tired of all the glowing attention with no balance in the reporting. Thank you for giving us a real story.

      11. Mr. X
        Posted June 25, 2014 at 7:43 am | Permalink

        I love the idea of a local conference on this subject, bringing in people from around the country like Bob from Bob’s Red Mill, who recently retired, turning his company over to his employees. It’s awesome that some succseeful business owners are thinking about these issues and I hope it’s contagious. As for these recent developments at Zingerman’s, I think that their rejecting the “worker owned cooperative” model

      12. Mr. X
        Posted June 25, 2014 at 7:46 am | Permalink

        probably had more to do with the owners of the individual businesses than it did with Michigan law, but I don’t think that diminishes the significance of the announcement. Furthermore, I’m encouraged to learn that some of the individual companies may pursue ESOP on their own.

      13. Posted June 25, 2014 at 7:56 am | Permalink

        So please don’t take my comment as critical of Paul / Zingerman’s! I think they’re doing a lot of good stuff here.

        I’m more curious about how much of a blueprint their expereince in navigating this offers for other businesses, and, if there are missing pieces, what they are, specificlly.

      14. Meta
        Posted June 25, 2014 at 11:41 am | Permalink

        It doesn’t really add that much, but the Ann Arbor News posted a similar story.

        http://www.mlive.com/business/ann-arbor/index.ssf/2014/06/zingermans_owner_says_new_mode.html

      15. Elf
        Posted June 25, 2014 at 3:42 pm | Permalink

        Find me another local food service job where people are getting cut in on the company’s profits or shut the fuck up.

      16. Elf
        Posted June 25, 2014 at 3:43 pm | Permalink

        That wasn’t directed at any of you. I’d just read the A2 News comments.

      17. karen
        Posted June 25, 2014 at 5:22 pm | Permalink

        you should have asked them if they are really going open a place in despot town or if that was just bullshit.

      18. Grumpy
        Posted June 25, 2014 at 8:44 pm | Permalink

        C’mon Karen, can’t you come up with a harder hitting question than whether the non-binding letter of interest in the potential future version of that historic wall was bullshit? That one was pretty transparent.

      19. Jean Henry
        Posted June 26, 2014 at 8:01 am | Permalink

        I work at Zingerman’s and can respond to Karen’s depot town question. There is currently no plan to open a business in Depot Town. We are very interested in doing so, but developing a business at Zingerman’s is a very long process. Prospective managing Partners must complete a “Path to Partnership” in which they work with us (often for years), develop their business plan and product, etc, etc. The very last step is looking for a location. We have one new business in the pipeline and on the verge of looking for a space. San Street has been running as a food cart and pop-up shops for three years now. I doubt the Depot Town building will be ready in time for Ji Hye Kim (the prospective managing partner and a long time Zing employee) to use that space. When it is ready, maybe one of our developing businesses will be the right fit for that space. Maybe not. If there was a Zing business, to move there it would be it’s own unique entity– not like any of the others in concept. Zingerman’s loves Ypsi and would lbe thrilled to site a business there someday. It is always on the radar in the relatively rare conversations about leasing spaces. (Maybe some Ypsi resident reading this has a Zing-aligned business they’d like to develop with us? Let us know.) The press likes to run with all things Zingerman’s. Just because what Zingerman’s is actually planning doesn’t always align with their version does not make it BS. At least not ours. Any interested reader can attend one of our Partner’s Group meetings to see all the numbers and decision making at work. They are open meetings. I’d be happy to meet you there. Even Grumpy;-)

      20. Grumpy
        Posted June 26, 2014 at 8:14 am | Permalink

        Jean, can you respond to the misinformation being spread about the alleged impossibility of forming a worker-owned co-operative in the state of Michigan?

      21. anonymous
        Posted June 26, 2014 at 8:22 am | Permalink

        “Maybe some Ypsi resident reading this has a Zing-aligned business they’d like to develop with us? Let us know.”

        How about a business called Enlightenment Gatherers, in which a small group of committed individuals form a kind of Ideas Co-op, and use the knowledge they acquire to re-educate the rest of the Zing Community about how the Cult of Profitability is at the root of much of what is destructive in our society?

      22. Elf
        Posted June 26, 2014 at 8:26 am | Permalink

        How much vitriol is being focused at the owners of Main Street Ventures? They employ hundreds across their portfolio of distinctive, successful Ann Arbor-base food businesses, and, as far as I know, they have no plans to share profits with their employees.

      23. Grumpy
        Posted June 26, 2014 at 8:26 am | Permalink

        Elf, the Bartertown Diner in Grand Rapids is a worker-owned coop vegan restaurant. I wasn’t able to find any specifics about their legal business structure, but my guess is that it is an LLC owned by the worker collective. It is an IWW shop with equal pay, equal say across the board.
        After turning over the business to the employees the founder has started a pizza restaurant with the intention of developing a similar worker-owned business.
        http://www.mlive.com/business/west-michigan/index.ssf/2013/04/cult_pizza.html

        There is also an effort in Grand Rapids to start a brewing co-operative. They seem to be about halfway through the process of starting up. This would be a not-for-profit (but not tax-exempt) consumer co-op, somewhat akin to the mug club at the brewery formerly known as Corner, but with ownership stake and voting rights as part of membership. They have their documents in progress posted on their website, which makes for an interesting resource for potential grassroots efforts to launch co-operative businesses.
        http://www.beer.coop/documents/

      24. Grumpy
        Posted June 26, 2014 at 11:11 am | Permalink

        Elf, Main Street Ventures is not routinely depicted as the most wonderful place in the world that pays all its employees at least $20/hr and is transitioning to a worker-owned co-op. I don’t think it’s unfair to hold Zingerman’s to a higher standard than any shit restaurant business given the extremes of their marketing rhetoric.

      25. Posted July 5, 2014 at 9:40 pm | Permalink

        Zingerman’s is featured in today’s New York Times.

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