CEO raises minimum company wages to $70k/year. Could you do this if you were the CEO?

PO3 Steven Sherrill — Wed, 15 Apr 2015 10:20:37 -0400

From NYT:

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.

His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.

“Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”

The average salary at Gravity Payments had been $48,000 year.
The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 year.

Mr. Price’s small, privately owned company is by no means a bellwether, but his unusual proposal does speak to an economic issue that has captured national attention: The disparity between the soaring pay of chief executives and that of their employees.

The United States has one of the world’s largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists’ estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.

“The market rate for me as a C.E.O. compared to a regular person is ridiculous, it’s absurd,” said Mr. Price, who said his main extravagances were snowboarding and picking up the bar bill. He drives a 12-year-old Audi, which he received in a barter for service from the local dealer.

“As much as I’m a capitalist, there is nothing in the market that is making me do it,” he said, referring to paying wages that make it possible for his employees to go after the American dream, buy a house and pay for their children’s education.

Under a financial overhaul passed by Congress in 2010, the Securities and Exchange Commission was supposed to require all publicly held companies to disclose the ratio of C.E.O. pay to the median pay of all other employees, but it has so far failed to put it in effect. Corporate executives have vigorously opposed the idea, complaining it would be cumbersome and costly to implement.

Mr. Price started the company, which processed $6.5 billion in transactions for more than 12,000 businesses last year, in his dorm room at Seattle Pacific University with seed money from his older brother. The idea struck him a few years earlier when he was playing in a rock band at a local coffee shop. The owner started having trouble with the company that was processing credit card payments and felt ground down by the large fees charged.

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When Mr. Price looked into it for her, he realized he could do it more cheaply and efficiently with better customer service.

The entrepreneurial spirit was omnipresent where he grew up in rural southwestern Idaho, where his family lived 30 miles from the closest grocery store and he was home-schooled until the age of 12. When one of Mr. Price’s four brothers started a make-your-own baseball card business, 9-year-old Dan went on a local radio station to make a pitch: “Hi. I’m Dan Price. I’d like to tell you about my brother’s business, Personality Plus.”

His father, Ron Price, is a consultant and motivational speaker who has written his own book on business leadership.

Dan Price came close to closing up shop himself in 2008 when the recession sent two of his biggest clients into bankruptcy, eliminating 20 percent of his revenue in the space of two weeks. He said the firm managed to struggle through without layoffs or raising prices. His staff, most of them young, stuck with him.

Aryn Higgins at work at Gravity Payments in Seattle. She and her co-workers are going to receive significant pay raises. Credit Matthew Ryan Williams for The New York Times
Mr. Price said he wasn’t seeking to score political points with his plan. From his friends, he heard stories of how tough it was to make ends meet even on salaries that were still well-above the federal minimum of $7.25 an hour.

“They were walking me through the math of making 40 grand a year,” he said, then describing a surprise rent increase or nagging credit card debt.

“I hear that every single week,” he added. “That just eats at me inside.”

Mr. Price said he wanted to do something to address the issue of inequality, although his proposal “made me really nervous” because he wanted to do it without raising prices for his customers or cutting back on service.

Of all the social issues that he felt he was in a position to do something about as a business leader, “that one seemed like a more worthy issue to go after.”

He said he planned to keep his own salary low until the company earned back the profit it had before the new wage scale went into effect.

Hayley Vogt, a 24-year-old communications coordinator at Gravity who earns $45,000, said, “I’m completely blown away right now.” She said she has worried about covering rent increases and a recent emergency room bill.

“Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it,” she said.

The happiness research behind Mr. Price’s announcement on Monday came from Angus Deaton and Daniel Kahneman, a Nobel Prize-winning psychologist. They found that what they called emotional well-being — defined as “the emotional quality of an individual’s everyday experience, the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant” — rises with income, but only to a point. And that point turns out to be about $75,000 a year.

Of course, money above that level brings pleasures — there’s no denying the delights of a Caribbean cruise or a pair of diamond earrings — but no further gains on the emotional well-being scale.

As Mr. Kahneman has explained it, income above the threshold doesn’t buy happiness, but a lack of money can deprive you of it.

Phillip Akhavan, 29, earns $43,000 working on the company’s merchant relations team. “My jaw just dropped,” he said. “This is going to make a difference to everyone around me.”

At that moment, no Princeton researchers were needed to figure out he was feeling very happy.

http://www.nytimes.com/2015/04/14/business/owner-of-gravity-payments-a-credit-card-processor-is-setting-a-new-minimum-wage-70000-a-year.html?_r=0

http://www.youngcons.com/seattle-employer-plans-on-paying-all-employees-70k-yearly/

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Response by Capt Richard I P. made Apr 15 at 2015 10:57 AM

Capt Richard I P. — Wed, 15 Apr 2015 10:57:16 -0400

His company, his choice. He's made the call to inspire his workers. To show himself to be their peer in wages and hopefully in suffering. We all know the dividends this will pay in loyalty and effort, his workers will absolutely put out harder for him than they would have before. I do NOT support this being imposed on business but I DO applaud his boldness and I hope it pays off in a big way.

Response by Maj Chris Nelson made Apr 15 at 2015 11:03 AM

Maj Chris Nelson — Wed, 15 Apr 2015 11:03:13 -0400

I really like the idea...especially in the face of the mulit-million dollar deals for CEOs of other companies... I think there needs to be a word of caution tho.... what he did, he did because he feels his company is strong enough to support it. If the company is too large (large employment numbers), it may not have been feasible...There HAS to be a balance point to make it work. It may not work the same way for all companies, but it certainly calls out other companies!! It will undoubtedly cause some interesting dynamics in the employees (low turn over, moral, etc). It will be interesting to see how this marches forward.

Response by Sgt Aaron Kennedy, MS made Apr 15 at 2015 11:35 AM

Sgt Aaron Kennedy, MS — Wed, 15 Apr 2015 11:35:15 -0400

The ratio of CEO pay to base employee pay is a horrible metric, especially in a profit oriented business.

The reward mechanisms are just not the same between the two, therefore they cannot be compared directly.

A CEO is rewarded based on the profitability of the company. A regular employee is rewarded based on their time invested (40/hr a week).

Does his concept of increasing pay, to reduce cost of turnover make sense? Sure. Reduced cost equals increased profits on a 1:1 basis "to a point." But I don't know if it will go all the way to $70k a year.

I don't have enough data to make an in-depth analysis past that.

Response by PO1 Glenn Boucher made Apr 15 at 2015 1:58 PM

PO1 Glenn Boucher — Wed, 15 Apr 2015 13:58:14 -0400

It is commendable for a CEO to raise the salary of their employees and lower his salary.
Is it a good move or a bad move? Only time will tell because there are employees who will be more productive as a result of the pay increase because now they feel more valued. And then there are those employees who will not change their work habits and just enjoy the benefits of the bigger paycheck.
It is not cheap to train an employee, even if they are only flipping burgers, they still have to be trained and trained properly to perform well.
I guess we will have to see the outcome in a few years to see the full effect of this move.

Response by PO1 John Miller made Apr 15 at 2015 2:52 PM

PO1 John Miller — Wed, 15 Apr 2015 14:52:45 -0400

Something in between. While I recognize the valuable contribution made by employees (they are after all the backbone of any successful business) at the same time it's my company that I built from the ground up and I would pay myself a good salary, in addition to any non-tangible benefits (stock options, etc.)

Response by SSgt Robert Clark made Apr 15 at 2015 3:10 PM

SSgt Robert Clark — Wed, 15 Apr 2015 15:10:02 -0400

This is a tough topic. On one hand I am all for and fully support a free market economy. I feel that one should get paid based on training, experience, position and a host of qualifications. I feel the higher up the food chain one climbs, the higher the income should be.
That being said, I also think it is sickening that some CEO's already have a base income in the millions and then get SEVERAL million dollar bonuses. While at the same time laying the people who are in the 30K-60K income bracket off because the company didn't meet financials.
The pay disparity between top level and mid/low level is depressing, at best.
If a company didn't meet their financial goals/targets and lay offs are necessary, then fine that's business. But when CEO's make in excess of 150 million as they lay people off then that is unacceptable.
Also, I am by no means a financial expert and don't claim to be. I'm simply someone trying to exist in an ever widening gap between haves and have nots.

Response by SSG Donald Mceuen made Apr 16 at 2015 1:16 AM

SSG Donald Mceuen — Thu, 16 Apr 2015 01:16:06 -0400

Well if this one company can do it then whats the problem out there.
Oh yeah they report to stockholders that expect there investments to increase's .
And i truly hope this company can make this happen.
Sounds like he has a good crew working for him.

Response by MSG Private RallyPoint Member made Apr 16 at 2015 2:25 AM

MSG Private RallyPoint Member — Thu, 16 Apr 2015 02:25:58 -0400

1. I think this CEO is a great example of someone who puts their money where their mouth is, and for this I applaud.

2. I think this is a misguided, if well intentioned, effort at improving employee satisfaction. Equality of wages is admirable, but being paid what one is worth is more admirable. Meritocracies that reward performance, foster performance and growth. being promoted into increased scopes of influence, risk, and responsibility aught be met with increased compensations.

Final answer: No, If I were a CEO, I would not pay every one the same amount. I would pay based on performance and scope of influence/risk/responsibility. Further, I would not accept employment at such a company, knowing that my income potential was fixed.

Response by MAJ Bryan Zeski made Apr 16 at 2015 3:51 AM

MAJ Bryan Zeski — Thu, 16 Apr 2015 03:51:58 -0400

If he can afford to forgo more luxury at the expense of taking care of employees, that's his choice. More power to him and if I needed the services of his business, I can bet that I would receive the best in customer service - even from the "lowest" of his employees.

Response by SGT Bryon Sergent made Apr 16 at 2015 9:27 AM

SGT Bryon Sergent — Thu, 16 Apr 2015 09:27:19 -0400

About time, Been getting F&*ked by the CEO's for years! They think because that they have college, or because there daddy got them the job or that there family owns the business that they are ENTITLED. I struggle with two jobs and still might loose the house while these assholes run around in the corporate jet to ball games and buying lake house and high 6 figures a year off the work that we do! they for get that yes they run the company but we Are the company!

Response by MAJ Ken Landgren made Apr 16 at 2015 5:18 PM

MAJ Ken Landgren — Thu, 16 Apr 2015 17:18:58 -0400

The company sounds like it has a healthy profit and cash flow. What he did was beyond generous and stories like this give back the humanity we seem to lose from time to time.

This reminds me of a story of a textile factory in the NE that burnt down in the early 1900s. All 500 workers dreaded the worse, but the owner paid their salaries for a whole year it took to resurrect a new factory. I have a strong assumption that they respected and loved him.

Response by PO3 Rick Kundiger made Jun 1 at 2016 8:21 PM

PO3 Rick Kundiger — Wed, 01 Jun 2016 20:21:08 -0400

I'm in the middle. It is a good goal, if done for the right reasons and with the revenue to support it.

It looks even better because it is $70k and not $40k.

However, everything isn't always what it seems. According to some newer articles (the ones cited above are dated) Mr. Price has taken quite a bit of money out of the company ($2.4M 2012, 1.1M 2013, 1.1M 2014, ~$460k through 2015Q3). He is now being sued by his brother/co-founder for excessive compensation.

http://money.cnn.com/2015/10/27/news/companies/pay-raise-ceo/index.html

He /may/ have had to sell assets and mortgage property to keep the company going, as stated in the OP article: http://www.geekwire.com/2016/court-filing-reveals-gravity-payments-ceos-pay-and-companys-financials/

The articles conflict however, and the court filings in the more recent article informs that his statements about taking out mortgages and selling assets may not be entirely true.

Either way, I do applaud the general goal. It isn't new though. Netflix was, I believe, the first to turn pay-scales on its head. They have a simple policy. They pay everyone at the top of the pay bracket for the position they are in. They don't negotiate in an attempt to get a lower salary. They simply pay the top. They also offer unlimited vacation, I believe they recently added unlimited medical maternity leave, and a number of other perks.

Nothing is "free" though. Netflix has as part of this policy an expectation that everyone will do outstanding work. In a presentation of theirs they stated that those who do good work will get a good severance package. They pay the best and therefore expect the best. Everyone thought they were crazy, until they continued to grow and destroyed video rental companies, are now in the process of destroying cable television, and have begun their effort to destroy major movie studios.

http://www.slideshare.net/reed2001/culture-1798664

The difference is, in my opinion, that Netflix stated they will pay top dollar for top talent/effort. Gravity Payments appears to have been a bit more arbitrary and simply said they will pay everyone at no less than a certain amount, regardless of talent/effort. Based on the articles regarding Gravity Payments, and the one regarding Netflix, I think Netflix did better math and strategic planning. Gravity Payments' CEO even admitted in one article that part of his reason for the pay hike was to gain favorable press coverage. That would not be the right reason to do such a thing. It doesn't send the right message or develop the right company culture.

Awnix, my company, has chosen to try to go down the Netflix path--paying top dollar for top talent. It may be possible to hire more employees at lower salaries, but we'd rather have fewer employees--ones who are happy and doing outstanding work--than twice as many doing so-so work. It's working well so far and we plan to continue down this path.

CEO who pays all staff $70,000 mortgages house, sells assets

Dan Price has mortgaged his house and sold his investments to come up with $3 million he says his company needs to weather the storm the raises stirred up.

Response by COL Private RallyPoint Member made Mar 26 at 2018 8:10 PM

COL Private RallyPoint Member — Mon, 26 Mar 2018 20:10:03 -0400

That’s what? About $33/$34 an hour? That’s a lot of pay for a clerk.