Proponents of income redistribution think that they can solve inequality in our nation simply by taking money from the wealthy and giving it to poor – that only works in fairy tales. Dan Price, the CEO of Gravity Payments, is learning this lesson the hard way.
The head of a Seattle payment-processing company pledged to raise the salaries of all of his employees to at least $70,000 per year. That means doubling the pay of about 30 workers and significant raises for another 40 employees. Some 50 workers already earned above $70,000 per year.
To accomplish this, he is taking a 90-percent pay cut on his nearly $1 million salary and slashing profits.
Price decided to hike his employees’ pay after reading a study about happiness that found adding additional income significantly increases a person’s emotional well-being when up to the point that they earn $75,000 per year.
Price means well with his social/economic experiment, but his plans haven’t had quite the impact he was expecting. First it’s really expensive. He’s seeing the company’s $2-million profit eaten away by higher labor costs.
Price has also lost customers who fear he will raise prices or who think this is an experiment in socialism. He has apparently attracted some new customers, but their revenue won’t start paying off for at least another year. The attention on social media, phones, and employment applications, has been overwhelming requiring Price to hire more workers – at $70,000 salary – and he’s uncertain for how long he’ll need to retain them.
Price’s brother filed a lawsuit against him citing long-standing differences and the suit has put Price in a financially pickle forcing him to dip even more into profits.
Recently, two of his most valued workers left citing concerns about the policy, including one who was in line for a raise and didn’t appreciate that getting blasted out publicly. The New York Times explains why some of the workers aren’t on board with this policy:
Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.
Maisey McMaster was also one of the believers. Now 26, she joined the company five years ago and worked her way up to financial manager, putting in long hours that left little time for her husband and extended family. “There’s a special culture,” where people “work hard and play hard,” she said. “I love everyone there.”
She helped calculate whether the firm could afford to gradually raise everyone’s salary to $70,000 over a three-year period, and was initially swept up in the excitement. But the more she thought about it, the more the details gnawed at her.
“He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump,” she said. To her, a fairer proposal would have been to give smaller increases with the opportunity to earn a future raise with more experience.
A couple of days after the announcement, she decided to talk to Mr. Price.
“He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.”
Already approaching burnout from the relentless pace, she decided to quit.
The new pay scale also helped push Grant Moran, 29, Gravity’s web developer, to leave. “I had a lot of mixed emotions,” he said. His own salary was bumped up to $50,000 from $41,000 (the first stage of the raise), but the policy was nevertheless disconcerting. “Now the people who were just clocking in and out were making the same as me,” he complained. “It shackles high performers to less motivated team members.”
Mr. Moran also fretted that the extra money could over time become too enticing to give up, keeping him from his primary goal of further developing his web skills and moving to a digital company.
These employee raise great questions about morale among those who are higher skilled and shoulder greater responsibility. The market rewards workers differently based on the value they create. Whether because they are more skilled and experienced or because they take greater risks, there’s a reason some workers earn more. What happens when you reward two people with different skills equally? The person with fewer skills is excited, but the other is devalued in the market.
Price wants to tackle income inequality. It’s his prerogative –he has good intentions. However, it’s not as easy as giving everyone more money and putting them on equal pay. As other workers identified, he has now rewarded those who clock-in-and-clock out just as much as those who have earned their pay. Productivity has been disincentivized.
Price thinks this could work for a public company, but shareholders may not be on board to plow profit back into salaries with no strategy behind it that incentives greater productivity.
This social experiment is indeed interesting and we’ll continue to watch how it unfolds.