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How do changes in company ownership, particularly through private equity buyouts, affect employees’ perceptions of job quality beyond salary, including factors like work-life balance, culture, and management?

Image courtesy of interviewee. November 6, 2024

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This video discusses a study focused on understanding the impact of leveraged buyouts (LBOs) on labor stakeholders, specifically examining labor satisfaction, compensation, and workforce quality. The study finds that, while private equity interventions generally lead to improved operational performance within companies, the correlation between management and employee satisfaction is complex.

Key points include:
1. The study is one of the first to comprehensively analyze employee perspectives post-LBO, revealing that labor satisfaction may initially decline following a buyout, often due to changes in workplace dynamics rather than layoffs.
2. Employees in companies undergoing LBOs experience satisfaction changes linked to financial performance and compensation structures, with performance-based pay becoming more critical.
3. A crucial finding is that while satisfaction can decline overall, it may improve significantly in high-performing deals, suggesting positive outcomes when companies thrive under private equity ownership.
4. Employees with fewer outside job options display pronounced negative responses to changes brought about by LBOs, indicating that the context and characteristics of the workforce matter significantly.
5. For private equity sponsors, understanding labor dynamics is essential for maintaining productivity and satisfaction, especially in distressed deals. Conversely, employees are encouraged to recognize that private equity ownership can lead to positive outcomes when companies succeed.
6. Policymakers might note that the market dynamics of private equity involve complex interactions between stakeholders, suggesting that extraction of value from companies isn't the sole objective of private equity sponsors.

Overall, the study indicates that labor satisfaction is nuanced, closely linked to company performance, and requires careful consideration of employee circumstances and expectations in the context of private equity involvement.

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Here are five key points from the video:

1. **Objective of the Study**: The study investigates how labor, as a major stakeholder and production factor, reacts to leveraged buyouts (LBOs), a growing trend in the economic landscape. It aims to explore both salary changes and employee satisfaction in detail, reflecting on workplace quality components such as culture and management satisfaction.

2. **Results and Expectations**: The researchers anticipated varied outcomes regarding employee satisfaction and performance related to labor conditions following LBOs. They noted a lack of comprehensive studies on this subject, making their findings unique and significant.

3. **Impact of Private Equity (PE)**: The literature suggests that private equity ownership typically leads to increased efficiency and improved company operating performance. However, the researchers caution that observed changes may not be purely causal due to preexisting conditions within companies before the buyouts.

4. **Methodology and Findings**: The study utilized a difference-in-differences approach to analyze satisfaction metrics before and after LBOs, with findings indicating the satisfaction trends of employees remained parallel to other firms in the sample. The research also highlighted that while employee pay did not decrease, satisfaction varied significantly, particularly relating to performance-based compensation.

5. **Implications for Stakeholders**: The findings suggest that private equity sponsors need to consider the broader labor force's perspective on risk and reward when executing deals. Employees may experience both positive outcomes, especially in successful deals, and negative feelings in more stressful work environments created by certain buyouts. Policymakers are advised that the market functions effectively, and the extraction of surplus by private equity depends on strategic choices rather than a predatory approach.

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Here are some key quotes and ideas extracted from the video:

1. **Motivation for Study**: "The motivation for this study was that we'd wanna know more about how labor... reacts to... leverage buyouts that have become quite a regular part of the economic landscape."

2. **Novelty of Research**: "To the best of our knowledge, no other study has looked into that as comprehensively as we could, thanks to our data."

3. **Workforce Quality Aspects**: "Not only we... able to speak about salary changes, but also satisfaction with... the workforce quality such as culture, such as satisfaction of the management."

4. **Expectations of Results**: "We expected to find results in either direction... theories would be sort of really broad in terms of what kind of outcomes we expect."

5. **Linking Performance to Satisfaction**: "We're able to link the performance that investors in those LBOs endure and satisfaction changes and pay changes for the employees."

6. **Private Equity Impact Consensus**: "The literature has shown the effects of private equity intervention on company operating performance... the consensus has been that private equity has an effect... usually aligned with efficiency."

7. **Causality Caveat**: "There is a little bit of a caveat whether these changes are causal... changes would have occurred without the private equity intervention."

8. **Employee Satisfaction Trends**: "Trends in the satisfaction metrics are very much parallel between our treated group... and the other firms."

9. **Performance-based Pay Relation to Satisfaction**: "There is a positive slope, positive relation between the performance that investors sustain and employee satisfaction changes."

10. **Resharing Mechanism**: "There's actually a resharing channel... private equity comes in and extracts all the rents altogether from everyone."

11. **Employee Impact of Successful Deals**: "For deals that perform very well... the satisfaction changes are such that overall the changes [are] positive."

12. **Takeaways for Private Equity Sponsors**: "It is important to explain whether the deal is actually very close to distress or overly risky to broader labor force in the target as opposed to just... the c-suite."

13. **Employees' Perspective on private equity**: "You don't have to be outright fearful of... private equity... oftentimes, the outcomes might be good."

14. **Takeaways for Fund Investors**: "They probably should keep track of... the track record of the manager they choose to invest with, with regards to how they sort of fare with the employees of the target firms."

These key quotes capture the essence of the study's focus on labor's reaction to leverage buyouts, the impact of private equity ownership on employee satisfaction, and suggest various takeaways for stakeholders involved.

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The motivation for this study was,

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that we'd wanna know more about,

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how labor a major stakeholder

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and the, you know, production factor, reacts to,

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such things as, a leverage buyouts that have become,

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quite, you know, regular, part

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of the economic landscape.

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Um, and, to the best of our knowledge, no other,

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study has looked into that, as comprehensively

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as we could, thanks to our data.

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'cause not only we, we able to speak about,

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salary changes, but also satisfaction with, those,

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compensation benefits as well as other aspects that,

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comprise, the workforce quality such as culture,

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such as, satisfaction

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of the management, et cetera.

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Um, and, we expected, to find results,

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in either direction, as a matter of fact.

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'cause theories would be sort of, really sort

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of broad in terms of what kind of outcomes we expect, right?

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So, and that's why we, we're really sort of excited

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to see, the results.

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And, on top of, being first to sort

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of comprehensively examine what happens to the labor force,

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and their sort of perception of the quality.

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Uh, we're also, we're able to link the, performance

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that investors in those LBOs, endure

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and, satisfaction changes

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and pay changes for the, for the employees.

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The literature shown the effects of, real effects of,

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private equity intervention on,

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company operating performance.

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Uh, and, broadly, the consensus has been that,

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private equity has an effect,

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and usually it, is aligned with,

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extracting better, sort of levels

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of efficiency from the operating assets.

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Uh, and, sometimes it works great, like, you know,

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retail, restaurants

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and, many other, sort of context that we have,

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similar literature suggesting that in fact,

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the private equity ownership, seems

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to make things better.

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Now, there is a little bit of a caveat whether, these,

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changes are causal,

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because we only observe, you know, the actual,

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the actual deal.

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And, it, could have been plausibly the,

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a result of something brewing, in the company

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and changes would have cured without,

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the p intervention.

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Anyway. Uh, now in our, settings, we, show that,

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the trends in the satisfaction metrics, are very,

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pretty much parallel, between our, treated group,

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which are the firms that were, acquired

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and, and, and the other firms, in our sample.

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Uh, and also, we, we do some additional tests

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to look at, for example, cancel deals,

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and, and we are pretty confident

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that it actually has something to do with,

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private equity ownership.

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Moreover, we, we can also link it to particular aspects

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of the deal, such as financial leverage.

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And I'll get back to that. It's actually, one

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of the channels that we think,

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what is going on. Uh, and then,

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Also what kind of outside options the employees have.

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First of our analysis is conducted using a difference in

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difference, design in which we,

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basically compare what happens afterwards,

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and, the, the basis for comparison is,

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the company scores itself, that,

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and as well as, firms that did not endure,

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such a shock, such a treatment,

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in like quarters afterwards.

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Uh, and, again, so the key, sort

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of the first thing you wanna check there is,

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parallel trend assumptions, while it holds, do,

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do you see anything that is different and we don't.

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The other interesting thing that comes up from this sort

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of event study, sort of look at the, definitive, is

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that the fact is very, kind of front loaded, really,

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what happens is that over the first couple of quarters,

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and you see that the drop in satisfaction ratings,

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moreover, it's not, driven really by, layoffs

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and always driven by, you know, certain events

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that we can, we can observe in terms of, you know, company,

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sort of, let's say layoffs.

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It's only concentrated with the preexisting employees.

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So, for example, new employees, you know, they are,

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satisfaction as sort of assessment, compared

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to the previous jobs don't, don't seem to be sort

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of lower at all, which is not too surprising, right?

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They, they match there for reason.

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Um, so this is, methods wise

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and, as far as the return,

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to employee satisfaction relation, there,

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we are very careful to not claim a CAU relation.

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Um, so there is a positive slope, positive relation

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between the performance that, investors sustain

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and, employee satisfaction changes.

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Uh, and, the channel seems

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to be the performance based compensation that,

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you know, employees receive,

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and I can give you like one number

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or to, to sort of, kinda hang, hang on.

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Uh, is, like a 1% increase in, internal rate

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of return that invest in due in,

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in the deal translates into 0.7%

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increase in performance based pay.

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Combining this with the, the result that, the deals,

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that are very levered, particularly when it comes

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to new leverage, that's where the,

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effect is concentrated.

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And, the employee base that seem to have, sort

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of inferior outside options, whether it's driven by sort

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of employee, education

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or sort of level of entrenchment,

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how much time they spent at the firm, they,

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they also seem to react more adversely.

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So overall, sort of the mechanism seems to be,

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consistent with this, with sharing idea that,

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on the one hand, we do see evidence consistent

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with the private equity owners breaching.

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So-called implicit contracts, right?

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When you come in and you can actually, you know,

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do some changes that previous management was a likely to do,

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sometimes they hire consultants to implement some

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of the changes they won't really do

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and just call it they advise.

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But, conceptually, sort of the idea is that yes,

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private equity can do that as well, with

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or without help of consultants.

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But, an important channel, which I think, is one

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of the sort of main contributions that we make, is

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that, there's actually a

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Resharing channel.

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You could have been different.

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Uh, it could have been that, for example,

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private equity comes in and extracts all the rents

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altogether from everyone, okay?

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It could be that, you know, in fact,

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by making it, a performance based pay,

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everyone gets a sort of much happier overall on average,

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but none of, of that is actually, in the data.

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Uh, so we are seeing resharing in which, you know,

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employees, even though they don't get paid less,

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the outcome, with the variation

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and the, the pay,

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increases, and they're not liking it.

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Um, so, you know, I can make analogy here, for example,

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when you are level up, your equity, your equity wants

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to make higher returns because at risky,

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and so the same analogy I, I would, I would make, for,

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for the labor, okay?

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So, basically if, if I could sort of,

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figuratively speaking, sort of collapse into one sentence,

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the labor says, well, I'm not getting,

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getting paid for that enough.

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Uh, 'cause it's like two too sort of, stressful

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and I, I need to be paid more.

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But at the same time, we see that, for deals

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that perform very well, sort of top quartile

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or so in the cohort, the satisfaction changes actually,

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are, are such that,

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overall the changes positive relative

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to the counterfactual or no intervention.

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So a successful deal actually results in happy employees.

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Moreover, that pass through of, deal performance to,

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employee satisfaction is stronger

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for private equity backed firms when compared

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to similar sort of, manufactured,

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publicly paid from returns.

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Um, and that is, another central result is

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that this path through channel information stronger than

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private equity, but on average,

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because average deal cannot perform in, in a top quarter,

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you see a decline for different, stakeholders,

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for different participants

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there takeaways might be different.

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Let's start with the private equity sponsors.

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Uh, I think, for them it is important to realize

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that labor, sort of productivity, is a function

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of labor satisfaction.

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And, it is important to, explain whether,

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the deal is actually very close to distress

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or overly risky to broader, labor force,

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in the target as opposed to just, you know, the c-suite.

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Uh, and, that's one.

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Two, they need to realize that if, they do make,

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the deal sort of, sort

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of the company risk here objectively, they don't,

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they shouldn't expect that, you know, the

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pre the existing employees, would be happy with

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that increase in the risk, okay?

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So if they want, to preserve the level of satisfaction

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for some strategic reasons, they need to, realize

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that the pay has to actually go up, frankly.

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Um, and then, the, the, the employee,

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side here is that, well, you don't have

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to be outright fearful of,

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you know, private equity, right?

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In fact, oftentimes, the outcomes might be good,

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and particularly for the management,

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and that when it comes to, sort of, again,

206
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that comparison with the public, public

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Companies, really, when the stock is doing great, right?

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When the returns are good for the investors, you get

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to keep more of that as a, as a private equity backed,

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firm backed employee.

211
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Uh, so that is, that is good news.

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Now, the bad news is that, actually,

213
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it does seem like, if for, you have two

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of a deal, like if somebody, has spent, you know,

215
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their lifetime with this company,

216
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and, yeah,

217
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they're not really looking forward to changing anything.

218
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Uh, then, in a sense, pri private equity,

219
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ownership is bad news for these people,

220
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for, for these employees.

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And, this is a fact.

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There's nothing much I can add on that.

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Um, now for policymakers, I wouldn't say there is a,

224
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that much of, actionable sort of, insight here.

225
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Um, perhaps, we can just say that there appears

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to be, you know, a market that functions,

227
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and, it is up to, sort of the choice

228
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that the PE sponsors make, how much they want to extract,

229
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you know, surplus, from a, any given deal.

230
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But what we can tell, is

231
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that it's not like they're just trying to, you know,

232
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take out everyone's else's lunch.

233
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No, that's what not happening.

234
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That's not what, what is happening.

235
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Um, not, it is not what is consistent with the data.

236
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Uh, and, yeah, again, here,

237
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perhaps, the importance of information transmission,

238
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and understanding that,

239
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there are other stakeholders that may be heard by,

240
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deal distress is, the sort of the most top level,

241
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implication for, for the policy makers.

242
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Finally, for the, fund private equity fund investors,

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what they probably should keep track of is,

244
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what is the, sort of track record

245
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of the manager they, choose to invest with, with regards

246
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to, how they sort of fair with the, employee,

247
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employees of the target firms.

248
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Uh, course, not only it can, have certain,

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implications for their, investors' own, ESG profile,

250
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but also, speak to the ability

251
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to generate value, through,

252
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making companies more valuable as how

253
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to make a company more valuable, with some exceptions.

254
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But in general, in most industries, it's how

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to make the company, more valuable without, by,

256
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making the employees really unhappy.

257
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So this is gonna be something that will prevent the,

258
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the exit to be better than would have been.

259
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And I think in my view, this is one of the mechanisms,

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like why we see the risk sharing,

261
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why we see the upside sharing, this is,

262
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to entice effort, but also, to, actually have a,

263
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an exit, venue, where you don't have

264
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to hide, you know, your, targets employees from,

265
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from somebody, right?

266
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You don't wanna kinda, them appear as if they're,

267
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exploited or something.

268
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So that is kind of like, actually somewhat paradoxically,

269
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but, the fact that, private equity owners,

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they don't own it forever, right?

271
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Uh, they, they, they seek to, to sell, to sell it

272
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to somebody is actually what, is,

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an additional incentive to, to actually play it nice

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to labor as.

Understanding Labor's Response to Leverage Buyouts

00:00:00 - The motivation for this study was, that we'd wanna know more about, how labor a major stakeholder and the, you know, production factor, reacts to, such things as, a leverage buyouts that have become, quite, you know, regular, part of the economic landscape. and, to the best of our knowledge, no other, study has looked into that, as comprehensively as we could, thanks to our data. 'cause not only we, we able to speak about, salary changes, but also satisfaction with, those,

00:00:35 - comprise, the workforce quality such as culture, such as, satisfaction of the management, et cetera. and, we expected, to find results, in either direction, as a matter of fact. 'cause theories would be sort of, really sort of broad in terms of what kind of outcomes we expect, right? So, and that's why we, we're really sort of excited to see, the results. And, on top of, being first to sort

00:01:06 - and their sort of perception of the quality. we're also, we're able to link the, performance that investors in those LBOs, endure and, satisfaction changes and pay changes for the, for the employees. The literature shown the effects of, real effects of, private equity intervention on, company operating performance. and, broadly, the consensus has been that, private equity has an effect, and usually it, is aligned with,

Examining Private Equity Effects on Employee Satisfaction

00:01:37 - of efficiency from the operating assets. and, sometimes it works great, like, you know, retail, restaurants and, many other, sort of context that we have, similar literature suggesting that in fact, the private equity ownership, seems to make things better. Now, there is a little bit of a caveat whether, these, changes are causal, because we only observe, you know, the actual, the actual deal.

00:02:11 - a result of something brewing, in the company and changes would have cured without, the p intervention. Anyway. now in our, settings, we, show that, the trends in the satisfaction metrics, are very, pretty much parallel, between our, treated group, which are the firms that were, acquired and, and, and the other firms, in our sample. and also, we, we do some additional tests

00:02:42 - and, and we are pretty confident that it actually has something to do with, private equity ownership. Moreover, we, we can also link it to particular aspects of the deal, such as financial leverage. And I'll get back to that. It's actually, one of the channels that we think, what is going on. and then, Also what kind of outside options the employees have. First of our analysis is conducted using a difference in difference, design in which we, basically compare what happens afterwards,

Examining Employee Satisfaction Trends Post-Acquisition

00:03:13 - the company scores itself, that, and as well as, firms that did not endure, such a shock, such a treatment, in like quarters afterwards. and, again, so the key, sort of the first thing you wanna check there is, parallel trend assumptions, while it holds, do, do you see anything that is different and we don't. The other interesting thing that comes up from this sort of event study, sort of look at the, definitive, is that the fact is very, kind of front loaded, really,

00:03:45 - and you see that the drop in satisfaction ratings, moreover, it's not, driven really by, layoffs and always driven by, you know, certain events that we can, we can observe in terms of, you know, company, sort of, let's say layoffs. It's only concentrated with the preexisting employees. So, for example, new employees, you know, they are, satisfaction as sort of assessment, compared to the previous jobs don't, don't seem to be sort

00:04:14 - They, they match there for reason. so this is, methods wise and, as far as the return, to employee satisfaction relation, there, we are very careful to not claim a CAU relation. so there is a positive slope, positive relation between the performance that, investors sustain and, employee satisfaction changes. and, the channel seems to be the performance based compensation that, you know, employees receive, and I can give you like one number or to, to sort of, kinda hang, hang on.

Impact of Leveraged Deals on Employee Compensation

00:04:47 - of return that invest in due in, in the deal translates into 0.7% increase in performance based pay. Combining this with the, the result that, the deals, that are very levered, particularly when it comes to new leverage, that's where the, effect is concentrated. And, the employee base that seem to have, sort of inferior outside options, whether it's driven by sort of employee, education or sort of level of entrenchment, how much time they spent at the firm, they,

00:05:17 - So overall, sort of the mechanism seems to be, consistent with this, with sharing idea that, on the one hand, we do see evidence consistent with the private equity owners breaching. So-called implicit contracts, right? When you come in and you can actually, you know, do some changes that previous management was a likely to do, sometimes they hire consultants to implement some of the changes they won't really do and just call it they advise. But, conceptually, sort of the idea is that yes,

00:05:48 - or without help of consultants. But, an important channel, which I think, is one of the sort of main contributions that we make, is that, there's actually a Resharing channel. You could have been different. it could have been that, for example, private equity comes in and extracts all the rents altogether from everyone, okay? It could be that, you know, in fact, by making it, a performance based pay, everyone gets a sort of much happier overall on average, but none of, of that is actually, in the data.

Employee Satisfaction vs. Pay Dynamics in Private Equity

00:06:21 - employees, even though they don't get paid less, the outcome, with the variation and the, the pay, increases, and they're not liking it. so, you know, I can make analogy here, for example, when you are level up, your equity, your equity wants to make higher returns because at risky, and so the same analogy I, I would, I would make, for, for the labor, okay? So, basically if, if I could sort of, figuratively speaking, sort of collapse into one sentence,

00:06:50 - getting paid for that enough. 'cause it's like two too sort of, stressful and I, I need to be paid more. But at the same time, we see that, for deals that perform very well, sort of top quartile or so in the cohort, the satisfaction changes actually, are, are such that, overall the changes positive relative to the counterfactual or no intervention. So a successful deal actually results in happy employees. Moreover, that pass through of, deal performance to,

00:07:21 - for private equity backed firms when compared to similar sort of, manufactured, publicly paid from returns. and that is, another central result is that this path through channel information stronger than private equity, but on average, because average deal cannot perform in, in a top quarter, you see a decline for different, stakeholders, for different participants there takeaways might be different. Let's start with the private equity sponsors. I think, for them it is important to realize that labor, sort of productivity, is a function

Assessing Employee Perspectives in Private Equity Deals

00:07:53 - And, it is important to, explain whether, the deal is actually very close to distress or overly risky to broader, labor force, in the target as opposed to just, you know, the c-suite. and, that's one. Two, they need to realize that if, they do make, the deal sort of, sort of the company risk here objectively, they don't, they shouldn't expect that, you know, the pre the existing employees, would be happy with that increase in the risk, okay?

00:08:27 - for some strategic reasons, they need to, realize that the pay has to actually go up, frankly. and then, the, the, the employee, side here is that, well, you don't have to be outright fearful of, you know, private equity, right? In fact, oftentimes, the outcomes might be good, and particularly for the management, and that when it comes to, sort of, again, that comparison with the public, public

00:08:56 - When the returns are good for the investors, you get to keep more of that as a, as a private equity backed, firm backed employee. so that is, that is good news. Now, the bad news is that, actually, it does seem like, if for, you have two of a deal, like if somebody, has spent, you know, their lifetime with this company, and, yeah, they're not really looking forward to changing anything. then, in a sense, pri private equity,

Insights for Policymakers and Private Equity Investors

00:09:26 - for, for these employees. And, this is a fact. There's nothing much I can add on that. now for policymakers, I wouldn't say there is a, that much of, actionable sort of, insight here. perhaps, we can just say that there appears to be, you know, a market that functions, and, it is up to, sort of the choice that the PE sponsors make, how much they want to extract, you know, surplus, from a, any given deal.

00:09:59 - that it's not like they're just trying to, you know, take out everyone's else's lunch. No, that's what not happening. That's not what, what is happening. not, it is not what is consistent with the data. and, yeah, again, here, perhaps, the importance of information transmission, and understanding that, there are other stakeholders that may be heard by, deal distress is, the sort of the most top level,

00:10:31 - Finally, for the, fund private equity fund investors, what they probably should keep track of is, what is the, sort of track record of the manager they, choose to invest with, with regards to, how they sort of fair with the, employee, employees of the target firms. course, not only it can, have certain, implications for their, investors' own, ESG profile, but also, speak to the ability

Balancing Company Value and Employee Satisfaction in Private Equity

00:11:02 - making companies more valuable as how to make a company more valuable, with some exceptions. But in general, in most industries, it's how to make the company, more valuable without, by, making the employees really unhappy. So this is gonna be something that will prevent the, the exit to be better than would have been. And I think in my view, this is one of the mechanisms, like why we see the risk sharing, why we see the upside sharing, this is, to entice effort, but also, to, actually have a,

00:12:00 - to hide, you know, your, targets employees from, from somebody, right? You don't wanna kinda, them appear as if they're, exploited or something. So that is kind of like, actually somewhat paradoxically, but, the fact that, private equity owners, they don't own it forever, right? they, they, they seek to, to sell, to sell it to somebody is actually what, is, an additional incentive to, to actually play it nice to labor as.

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