How Jack Stack's approach to business lets him avoid the problems of the traditional manager

Here's the plot:

A middle manager at one of America's worst-run companies is sent on a mission to shut down an ailing plant in Springfield, Mo. The guy is barely 30 years old, a college dropout. When he shows up at the plant, he finds a work force so demoralized the only real question is whether the Teamsters or the United Auto Workers will win the upcoming union election. Somehow he is able to rally the workers, stave off the union, and save the plant. Four years later he buys the division with his fellow managers and builds it into the star of its industry, using an original -- some would say revolutionary -- approach to management. He becomes a celebrity. Inc. names him chief operating officer of its Dream Team.

Such is the unlikely saga of John P. Stack, a man who has fascinated us ever since we first ran into him back in 1985, less than three years after he negotiated the leveraged buyout of Springfield Remanufacturing Corp. (SRC) from International Harvester Corp. At the time he was still in the process of inventing what came to be known as the Great Game of Business, SRC's unique management system (see "The Turnaround," August 1986), but we could already see he was onto something. His way of running a company seemed so simple, so logical, so obvious that it was hard not to wonder, Why isn't every business run this way?

Stack's approach is based on the premise that business is essentially a game -- one that is no more complicated than, say, baseball or football, probably less. Yet most people don't understand it, he argues, because they've never been taught the rules. At SRC everyone learns the rules and plays the Game, from the receptionist at the front desk to the guy who cleans engine parts. They follow the action through weekly income statements and react accordingly, homing in on their annual goals. They also share in the risks and rewards: how they perform determines both the size of their quarterly bonuses and the value of their stock.

It's a system that transforms every aspect of the business, from compensation to marketing to finance. Its effectiveness is a tribute to its creator, Jack Stack. Yet as extraordinary as Stack is in one way, he is typical of a whole generation of managers in another. After all, he didn't set out to be the chief executive officer of a $50-million company with 475 employees. In the course of becoming one, he's had to deal with a range of difficult issues.

Stack talked about being the boss with Inc. executive editor Bo Burlingham.

INC.: I think most company presidents we know get a certain charge out of occupying the top slot, despite all the aggravations. Do you like being the boss?

STACK: Well, no, not really. Because a boss is forced to set examples, and I'm not a good example setter. I really don't like living in a glass house. People pay a lot of attention to the guy who's in charge. What he says is always being compared with what he does. And that's the way it should be. If I'm going to say something, I'll do it, too. But I'd rather not be under that microscope, because I know one day I'm going to slip.

INC.: Are you worried that the company will turn on you?

STACK: I hope not. I've worked pretty hard to keep that from happening.

INC.: What do you mean?

STACK: Well, you can go back to the buyout. I don't own 100% of SRC. I own 19%. The rest is owned by the employee stock ownership plan and various employees. I could have had more, but that was plenty for me. Not wanting to be accused of being greedy probably had something to do with it. But more important, I didn't want to be alone. I was going to be leading the charge up the hill. I wanted to make sure that when I got to the top of the hill and turned around, there was a bunch of people coming with me.

INC.: A lot of company founders would say you're crazy. Do you really think you're safer as a minority stockholder than as the sole owner?

STACK: I've learned that there are certain higher laws in business. One of them is "You get what you give." And here's another: "It's easy to stop one guy, but it's pretty hard to stop 100." I don't know where I got these laws. You don't learn them in college. You pick them up on the street. I probably got them from supervising 2,000 or so people at International Harvester and then here. But I know they are real laws.

INC.: It sounds as though you had already developed a lot of your ideas about business before you came to Springfield.

STACK: Absolutely. I learned a lot at Harvester.

INC.: Give us an example.

STACK: One of my first big lessons was in 1972 or '73. I remember, we had to ship out 800 tractors to the Soviet Union, and I was in charge of scheduling the parts. At the time there was a severe shortage of the parts we needed, but without those parts the tractors wouldn't go to Russia, and our department would get killed. As I recall, we had until November 1, and this was October already. On paper, it couldn't be done. So I put up a big sign, saying "OUR GOAL: 800 TRACTORS," and I explained to my guys exactly what was going on, what was at stake. That was unusual, because Harvester was a very quiet company. I'd go to meetings, and the understanding was always, OK, here's what we have to do, but don't tell anybody.

INC.: How did your people respond?

STACK: They were amazing. They went into the factory each night and crawled over those tractors and figured out what parts were needed and how many tractors were short those particular parts. Then they got the parts any way they could. On October 31, we hit 803. Boy, did we send up the balloons.

INC.: Why was that such an important lesson to you?

STACK: Because it showed me what people could do. I saw these guys get hungry. I saw them push and accomplish things they never thought were possible. I saw satisfaction on a daily basis. I mean, these guys didn't know they were working! I thought, My God, if I can get people pumped up, wanting to come to work every day, what an edge that is! That's what nobody else is doing. Suppose I could run the right numbers, so that a guy wakes up in the morning and says, "Man, I feel like shit, but I really want to go in there and see what happened." That's the whole secret to increasing productivity.

INC.: In a way, that's the definition of a good boss, isn't it? Someone who creates an atmosphere where people want to come to work in the morning.

STACK: I guess. Anyway, it absolutely convinced me that secrecy is bullshit. From then on, I was going to give my people everything I've got, and eventually that grew into the whole idea of teaching people how to make money.

INC.: Wait a minute. You're getting ahead of us here. What do you mean, "teaching people how to make money"?

STACK: Well, think about it. Most people who work in companies don't understand business. They have all kinds of misconceptions. They think profit is a dirty word. They think the owners just slip it into their bank accounts at night. They have no idea that 46% of business profits goes to taxes. They've never heard of retained earnings. And there's a good reason for all this ignorance. No one teaches them how business works. I worked at the Harvester plant in Melrose Park, Ill., for 10 years. Every Friday I went to a staff meeting where the plant manager said, "We gotta make more money, we gotta be more profitable." But he never taught me how to make more money. We got plenty of orders -- deliver a crank-case to such-and-such line, make sure that workers are safe, get so-and-so's productivity up. I never knew anything about making money, and here I'd supervised hundreds and hundreds of people. Finally, it dawned on me that there was a better way.

INC.: Which is . . .

STACK: It's the way businesses have been run for a long, long time -- with financial statements. If people know how to use them, that's really the simplest way to run a business.

INC.: Hold on. Say I'm 23 years old with a high-school education and an entry-level job at SRC. You're going to teach me to read financial statements?

STACK: That's right. When people come to work at SRC, we tell them that 70% of the job is disassembly or whatever and 30% of the job is learning. What they learn is how to make money, how to make a profit. They don't have to play the game, but they do have to learn it. We teach them about after-tax profits, retained earnings, equity, cash flow, everything. We teach them how to read an income statement and a balance sheet. We say, "You make the decision whether you want to work here, but these are the ground rules we play by."

Then every week the supervisors come back with the updated income statement, showing how we're doing in relation to our annual goals. And of course, the quarterly bonuses are tied to those goals. So the numbers are just flying around. The more people understand, the more they want to see the results. They want to know how well they are doing and if they are contributing. There's internal competition and peer pressure, and they get caught up in it. It's a game -- the Great Game of Business, as we call it. It's a mechanism for getting people to come into work every morning and enjoy it.

INC.: Did you start out with this idea of teaching people how to make money?

STACK: No, I started out with the idea that I really didn't want to be in the position of having to lay people off.

INC.: What do you mean?

STACK: I just think you take on a big obligation when you hire somebody. That person is bringing home money, putting food on the table, taking care of children. You can't take that lightly. Of course, it's a two-way street, but -- as much as possible -- you should make it their choice whether they leave or not.

INC.: OK, but what does that have to do with your Game?

STACK: That's how the Game got started. After the buyout, we had an 89-to-1 debt-to-equity ratio. As a corporate entity, we were nearly comatose. We began with $1 million in working capital, but we owed $8 million, and all the assets were pledged. So I looked at this situation, and I realized there were two things we couldn't do. Number one, we couldn't run out of cash. Number two, we couldn't destroy ourselves from within. If either one of those happened, we'd lose the company, and 165 people would lose their jobs.

INC.: How might the company have destroyed itself from within?

STACK: Bad morale. The danger was we'd get into a situation where people would turn on each other. So how do you avoid that? It became obvious to me that we had to communicate with people through the financial statements. They had to know the company's situation at every point. We had to tell them where the cash was and then make sure they were involved in deciding what to do with that cash. That's how the Game evolved.

INC.: In a sense, you're saying this system provides people with a kind of job security.

STACK: It provides them with the only kind of job security that means anything. Look at Harvester -- a company that went back 100 years, one of the 30 largest in the country, more than 100,000 employees. My dad retired from it. I worked there for 14 years altogether. I just assumed my job was secure, and I had no way of knowing it wasn't. Then Harvester went down the tubes. So that's one thing the Game does: it gives people a scorecard and a way to influence the score. It tells them how secure their jobs really are. It doesn't provide guarantees, but there aren't guarantees anymore.

INC.: At the same time, it reduces your responsibility for their job security, doesn't it?

STACK: It delegates the responsibility, yes. Just like it delegates every action in the company. It doesn't put all the emphasis on one guy.

INC.: How does it delegate every action in the company?

STACK: By identifying each person's role. Our people know exactly where they show up on the income statement and how they contribute. So responsibilities are completely delegated. The Game provides a structure whereby the individuals support the body. It teaches people the fundamentals -- what they each have to do to make the company successful. If your fundamentals get out of whack, you find out right away, and you don't move until they're back in line.

INC.: Who makes sure that you don't move?

STACK: Usually, it's your peers.

INC.: If all these responsibilities are delegated, what does that mean for you as the boss?

STACK: My role is to make sure the Game is working. For example, we have two company wide goals every year. One is profitability, and the other changes from year to year, depending on the particular weakness we see in the company. This year we've targeted liquidity, measured as current assets divided by current liabilities.

INC.: Why liquidity?

STACK: It's something we don't have under control, and it's the only thing that can really hurt us. We have to control the money, the spending. Otherwise, if we grow too quickly, we're going to run out of cash. If we run out of cash, we're not going to have a company -- or rather, the company is not going to be ours anymore. We'll have to bring in somebody to put in the cash we need to grow, and that will change the Game. OK, so we completely missed our liquidity target in the first quarter. Now it's true that you often don't hit your targets right away if you've picked a really good goal. The whole idea is to choose a weakness that affects your long-term security. If you solve the problem too easily, it may not be a real weakness. But even so, you expect some progress in the first quarter. In this case, the progress was very disappointing.

INC.: Whose fault was that?

STACK: I think it's my responsibility to make sure those goals are met. I mean, we're talking about a major problem that affects the long-term security of the employees. If the problem isn't being solved, I need to do everything I possibly can to get the organization focused on it. So we put together a high-level task force to reduce inventory -- I'm talking about really visible people in important positions around the company. We pulled them off their jobs to focus on this particular problem. At the same time, we straightened up accounting to make certain we're 100% on top of all our receivables. Of course, this sends a message. It creates an atmosphere where everybody is working toward the same goal and doing their part to get the bonus.

INC.: It's interesting that your Game relies so heavily on incentive compensation systems, and yet what really inspires you is getting people to work for rewards other than money.

STACK: I'm not foolish enough to believe that money isn't a major motivator. It just isn't necessarily the only one. I guess what I'm really obsessed with is getting rid of the living dead. I can't stand going into factories and businesses and seeing all these faceless people around. They don't look healthy, and they don't act healthy, and they're a big problem for corporate America.

INC.: Faceless people?

STACK: The people who are there because it's a job, whose attitude is "I have to be here, but I don't have to like it. I'll do it for my family, not for myself." You can't believe how I hate this. What have we done to create those kinds of environments? We should be able to tell this person, "It's your obligation to be happy. Find somewhere to be happy. Don't sit around me and be miserable." Then we wonder why we have a productivity problem. Well, you can't have high productivity with faceless people. They're not happy with themselves, they're not happy with their jobs, they bring you down. So what do we do? I mean, there are lots of jobs in this world that involve putting washers on bolts. You can't walk away from it. The work is boring, but it has to be done. I think the answer is a system where everybody can have fun, even the people who put washers on bolts. They can be playing something else at the same time. Statistics, rewards, and incentives are one way to do that -- to make people aware, to stimulate them, to give them the opportunity to use their intelligence and achieve something.

INC.: Let me play devil's advocate. We often see incentive systems that have the opposite effect, that become a mechanism of control and that make work less fun, not more.

STACK: That happens if you have shortsighted or unquantifiable goals. You need goals with a larger meaning.

INC.: In what sense?

STACK: Our goals are always based on the security of the company, so the larger meaning is to create jobs and keep people working. If we fail to reach a goal, the company is at risk. Each goal is a must, not a want. I mean, we're trying to create a company that will last 30, 40, 50 years. More important, we're creating a system that makes everybody aware of the company's strengths and weaknesses and that forces the weaknesses to be addressed.

INC.: You say the larger meaning is to create jobs. Why isn't it to create top-quality products for customers?

STACK: There's another higher law, which is "If you are going to take care of other people, you have to take care of yourself first." That applies to the company. If our people don't feel good about themselves, they aren't going to be good at remanufacturing engines. The more time they spend in training programs, education, getting involved, the better the end product is going to be. They have to be in the right frame of mind, free of mental stress; they can't be worrying about their job security. Happy people are productive people, and productive people do all the little things required to be great at remanufacturing. That's what the Game is all about.

INC.: But can't you focus too much on making people feel good about themselves? We know of companies that got so involved with corporate culture and self-improvement they forgot about their customers.

STACK: There's a big difference between what we do and what you're talking about. Those companies get caught up in a kind of emotionalism. We do the opposite. Our Game takes emotions out of the business. We go by the statistics, and the statistics don't lie. Emotions can get you all screwed up. We train our people to see that success means making sure one plus one comes out to two. It has nothing to do with standing in a circle and doing a real good job of falling into someone else's arms. We're talking about income statements and balance sheets, not about cafeterias and parking spaces.

INC.: I noticed the top managers at SRC have reserved parking spaces.

STACK: Well, partly, that's a carryover from Harvester, but it is a luxury, no question. I think there have to be certain perks that come with certain jobs, because you want people to want to get ahead. If we treated everyone equally, why would anyone want to take on additional responsibility?

INC.: But you can use that logic to justify enormous disparities of income, equity, fringe benefits, whatever.

STACK: A good manager knows what the guy on the shop floor absolutely can't stand and has disdain for. There is a definite flash point on fringe benefits. Common sense really needs to prevail. If I buy a factory one day and show up in a Lamborghini the next, can I then go and talk about the company being at risk? Would anyone believe me? The point is that you always have to maintain credibility. That requires a sixth sense, one that tells you when your credibility is in question. You know it. You can hear it out on the shop floor. You can feel it. To be a good manager, you have to have that sixth sense.


INC.: Do you ever find yourself in danger of losing your credibility?

STACK: If I see something coming, I try to get there first. I try to make sure we're the ones to get the information out on the shop floor. We confront the problem, and we communicate. Nine times out of 10, it passes without a storm.

INC.: You're saying that one of your main jobs is to anticipate credibility problems before they arise.

STACK: Absolutely, especially when you're talking about the bonuses. That's why it was so important for us to take action on the liquidity goal even before the first-quarter results were in. We knew that the first question people were going to ask the frontline supervisors was "What are we going to do to get the bonuses?" We had to prepare an answer for them, and it had to be good one. And the answer was "OK, we blew it, but we're dead serious, and we're committing top people and about $300,000 in resources toward solving the problem. This is not going to be a part-time attack. This is going to be a full-time attack for the next three quarters."

INC.: Can we go back to your point about taking emotions out of the business? A lot of people would argue that businesses thrive on emotion, that companies don't do enough to motivate employees, that we need more pom-poms and inspiration, not less.

STACK: Don't get me wrong. I'm really big on pom-poms and celebrations and inspirational messages. I just don't think they should replace solid information about the condition of the company. People should understand why those pom-poms are there. It's not fair to pat workers on the back all the time, telling them what a great job they're doing and what a great company this is, and then two years later close the door on them. They deserve more than that. They deserve to evaluate the situation for themselves. I don't want people to sit there and passively accept leadership. I want them to become active in leadership, and that means giving them a constructive path to follow. I don't think management should be some kind of glorified cheerleader.

INC.: OK, so you go by the numbers. But haven't you ever gotten into a situation where the numbers tell you to do one thing and your heart wants you to do something else?

STACK: Do I ever feel torn? Yes, of course. I felt incredibly torn after General Motors canceled those 5,000 engines in December 1986 ["Crisis Management by Committee," May 1988]. I mean, the numbers said we had to cut 100 people from the payroll or risk the company. But that kind of layoff would have been a tremendous failure of management. There was nobody else to blame. You've got to take responsibility, even if there was no way you could have seen it coming.

INC.: I guess that decision wasn't much fun.

STACK: Aw, no, it was awful. Because you're deciding whether to take somebody's job away. You could protect your own ass. But you'd sit there and stare at the ceiling and think about these people who were told they had a job. It should be their choice, not yours.

INC.: What did other people think?

STACK: There was a small group of senior employees who didn't want to take the chance. They weren't close to the new group, the ones who would be laid off. They said, "Hell, if it's between me and them, let it be them." And they had a very good point. In order to get by without a layoff, we would have to get 100 new product lines up and running in three months. Well, you just can't introduce products that fast. And if we failed, we would have had to do a much bigger layoff, get a new infusion of outside capital, and change the whole thinking of the company. It's possible there would have been a change in management as well.

INC.: So what happened?

STACK: Eventually those senior people came around. That's probably what sold me more than anything else. The hard-core guys came back and said, "Geez, we've been thinking about it, and we can weather it. We'll have to train these kids, but we'll make it. We can do it."

INC.: Was that an emotional decision?

STACK: No, I think they'd figured it out statistically. We told them we thought it was an impossible task, but they could break down the elements of the job in more detail than we could. I guess they just realized they had 33% more left.

INC.: You must feel pride in the way you dealt with that situation.

STACK: I don't know. I think the system took care of itself. If I'd heard something else from the organization, I might have had to react differently. But when those guys said, "Let's try it," that was all I needed. I really wanted to go that way. When you can see compassion in your fellow workers, that's a big reward. It motivates you even more, because you see what a good group you're working with.

INC.: What was it like to introduce all those new lines?

STACK: It was pure hell. We told people that the pressures would be overwhelming, but I don't think we had any idea how overwhelming they were really going to be. We cried in July, it was so rough. We couldn't get our quality up. We couldn't get our routines together. We had severe start-up problems. It was like recovering from a stroke -- very slow and very painful, and it hurt. It really hurt. I'm talking about long-term pain. I think we're only getting over it now.

INC.: But you made it without any layoffs.

STACK: Yeah. In fact, we added 100 people.

INC.: It's interesting that you feel so strongly about letting employees decide whether to stay or leave, about letting it be their choice. You must have a hell of a time firing people.

STACK: Well, I don't want to work around unhappy people, and if people aren't happy, I don't mind telling them that they're unhappy and they should go somewhere else. Of course, you have to understand, I really don't have to fire many people. This system does a lot of the work. The nonperformers take themselves out. Peer pressure takes them out. But, yes, anytime somebody leaves, you feel the loss.

INC.: Even the deadwood?

STACK: Deadwood is such a small percentage. It's the ones with talent who are really tough. But even losing deadwood is tough because you spend a lot of time and money training, teaching, and motivating them.

INC.: How do you deal with the talented ones?

STACK: That's probably the most stressful part of my job. I mean, when you know a guy has incredible talent but you just can't harness it, you can't focus it, you can't get it into the system -- it kills you. And then, of course, you start questioning whether the problem is him or you. You start saying to yourself, "Maybe we just have a style conflict here. Maybe I'm being too possessive. Maybe I don't want to let go." Fortunately, the system serves as a reality check.

INC.: In what way?

STACK: A style conflict won't necessarily show up in the numbers. A performance problem becomes very clear very fast, and everybody knows about it. Then the pressure gets intense. You have to do something. I can't explain to 450 people why we didn't deal with a situation -- not if it costs them their bonuses.

INC.: Is there anybody you can talk to about those kinds of issues?

STACK: I think I talk to everybody. We're all very, very close.

INC.: Are you saying that it really isn't so lonely at the top after all? I mean, what's the difference between being the number-one person and being number two, three, or four?

STACK: First, let me say there isn't always a distinct number two, three, and four. In the past decade especially, people have become very coy about designating a chain of command. It gets in the way of building a team. You can say who does what when you're gone, but you can't go much beyond that without undermining team spirit. Now in that context, the number-one person has to be prepared to work exclusively on deviations and problems. If something is going right, you have to let it go right, no matter how good you may be at that aspect of the business. Otherwise, you can't function as number one, because your role as number one is to focus on what's going wrong. When the numbers show there's a problem, you've got to go in and make sure it gets fixed, and that could be anything -- quality, volume, sales, inventories, bad debt, extension of receivables, whatever.

INC.: So you're taking care of other people's problems. Who's taking care of your problems? The board?

STACK: There are definitely situations where I rely on the board. For example, the managers may not be able to reach a consensus, and I'll have to take sides, knowing that my decision is going to be detrimental to somebody. In those instances, it's good to have a board to help you work through the problem. Having a board also helps me explain a decision to people in the company, especially with regard to wages and compensation. It's easier to say, "The board looked at the numbers and decided this wasn't a good time to give a raise." It depersonalizes some tough decisions.

INC.: Does the board set your salary?

STACK: No, not really. They review it. But I don't have to go along.

INC.: It sounds as though you disagree.

STACK: Yeah, they think it should be higher. They're afraid that, if anything happened to me, they couldn't hire a new president for what I'm making.

INC.: What do you think?

STACK: I guess I'm superstitious. I think that if I took more out of the company, something bad would happen. It's an instinct, a gut feeling, voodoo. I don't know. I'd argue that I'm making enough right now. I'm certainly not hurting. Look, we've got guys working at our automotive engine plant who make $5 an hour, which is what you pay if you're going to be competitive in that market. There's a limit to what I can justify for myself. I'm not a socialist by any means. I realize that in a competitive society we have to do certain things to compete. But my heart still goes out to that guy who's making $5 an hour and supporting two or three kids.

INC.: Do people know how much money you make?

STACK: No, it's part of an aggregate in the financial statement. I suppose someone could figure it out, plus or minus 20%. But we may take the company public someday, and then it would be printed in the prospectus.

INC.: So you think there's a limit to what people can accept.

STACK: Yes, and I admit there's a contradiction. I've been offered five times what I make to go to another company, and I do think people would feel better if I took it. But I also think they'd resent it if I stayed here and made that kind of money. Anyway, I'm not being totally altruistic. Remember, I have stock. If we sell this company or take it public, we'll get a multiple of earnings, say 15 times. In a sense, the salary I'm passing up is going into earnings. Every dollar I don't take out now could mean $15 down the line. So I'm not crazy.

INC.: Doesn't your salary put a ceiling on what you can offer other top people?

STACK: Yeah, but it hasn't hurt our ability to recruit. I mean, our compensation program is competitive, we have a good benefits package, and we offer a lot more than most companies. For one thing, there's the pot at the end of the rainbow if we take SRC public or sell it. For another, we give people a tremendous lesson in entrepreneurship. After you've spent a year or two here, you walk away with a lifetime of lessons in running a business -- your own business.

INC.: Do you actually make that pitch when you recruit people?

STACK: Pretty much, and we deliver on it, too. We just lost an executive who says he's learned more here in the last year than in his entire career up to that point. He went off to take the top spot at another company.

INC.: But let's say somebody comes in because he wants this pot at the end of the rainbow. Doesn't that put tremendous pressure on you?

STACK: Not really. That's how the whole system is set up. When the guy walks in here, he finds 500 people trying to do the exact same thing. His reaction is "Holy cow! I've never seen anything like this."

INC.: Another case of delegating responsibilities.

STACK: That's right.

INC.: I suppose, if you delegate enough responsibilities, you could make yourself obsolete.

STACK: My job is to make myself obsolete, and I'm getting there. In many ways, I'm not the boss of SRC anymore. Our system is the boss. n