Back in April Dan Price from Gravity Payments, a retail credit card processing terminal, announced that he is raising the minimum wage at his company to $70,000 over the next three years. He immediately bumped the minimum up to $50,000 which had some employees getting literally double the pay for the same job, overnight.
The announcement was huge, it created a ton of attention for Gravity Payments, good and bad. Some looked at Dan’s decision as a socialist publicity stunt, others applauded him for taking such good care of his workers, and even still his own brother (30% partner in Gravity) is suing Dan claiming that he took a bunch of money from the company without giving Lucas (his brother) his fair share.
It certainly is a bold, loud statement – I am going to pay my employees not based on the market averages for their role, but based on an arbitrary number that should allow them to live a full happy life. Who can argue with that? Do you hate workers? You must be one of those selfish types! The decision itself is divisive, and I decided rather than hating on Inc Magazine for running eight stories on Dan a day (only a slight exaggeration) I would assemble my thoughts in no particular order:
ONE – He Will Hurt The People He Is Trying To Help
How could paying somebody extra money hurt them? Doesn’t that only help them? It’s a big picture small picture problem. The pay raises most benefited the members of his team on the bottom, the entry level or low-trained jobs that don’t require a fancy degree. These folks are now pretty much married to his company, which could be a huge blessing or become a nightmare curse.
It’s human nature to live according to our means, and if my income suddenly doubled I would maybe rethink getting a nicer car, or maybe moving out of my parents house before I’ve finished paying off student loans. Suddenly these folks feel “Hey I can afford that!” and they’re spending money based on a job that they frankly could not replace.
So Dan is not only mortgaging his two houses, selling his personal stocks and pushing all that capital into the company, but he’s also risking these low ranking members of his team by changing their pay scale in an unsustainable way.
If an employee has to move, or gets fired, or decides to leave the company for any reason, that same entry level job paying $70,000 doesn’t exist elsewhere, so if they want to keep their new lifestyle they are completely married to Gravity payments, which assumes they were the right employee to begin with.
Gravity has over one hundred employees, so there will be turnover, and he will learn that some of the people who received the raise hadn’t been with the company long enough to know if they were a good fit, so they received that unrealistic boost to their income but will soon learn that they didn’t earn it and may be in for a rude awakening if they change jobs.
I can only hope that Dan buys everyone a copy of Dave Ramsey’s “Total Money Makeover” so they know how to manage that new money wisely and they don’t wind up in debt if they suddenly lose that unicorn wage.
TWO – Dan Had To Borrow Money To Attempt His Experiment
Companies borrow money all the time, leveraging assets is a part of the world we live in, but the fiscal conservative in me cringes at the idea that Dan had to take out not one but TWO mortgages on his homes, sell off all his stocks, and invest a huge chunk of his net worth into the company to attempt his experiment.
That type of “all or nothing” leverage is dangerous.
Dan’s decisions now are based around long term profit goals, he has staked his name on this experiment and if he wants anyone to take him seriously he needs to ensure that their low profit margin (around 2-3%) is maintained to where they can bring in enough money to where he doesn’t have to keep borrowing money to keep the experiment afloat.
Debt is bad business. It can work, but the idea that he had to reduce his $1.1 Million salary to $70,000 AND borrow against two houses AND sell off his personal stocks to invest that money to cover his crazy idea? That should scare anyone with a financial stake in the company. It proves that Gravity did not have the profits to begin with to warrant giving people those raises, and his budget now operates without a CEO’s salary, which is great for liberal leaning publications to blog about, but not sustainable in the long term.
Dan is making a political statement with his wealth, distributing it to his employees, they aren’t earning it, he is simply giving it to them, it amounts to charitable bonuses coming out of Dan’s pockets, which he had to borrow to provide. Not wise, not sustainable.
THREE – Rewarding The Young At The Expense Of The Old
Did everyone get their wages doubled? No. Those making more than $50,000 saw a much smaller raise, which is kind of like a teacher grading papers on a curve – in reverse. That’s not to say that lesser experienced employees aren’t incredibly important and don’t grow up to become the veterans in any organization, but the “reward first, earn it later” mindset only really rewards the bottom.
The company, whom we’ve established cannot afford to pay it’s CEO’s salary because of this experiment, also will be unlikely to offer veteran level pay increases and bonuses because it is so deeply invested in this social experiment. The company lost two important employees after the announcement was made, both more senior level team members who did not receive a doubling of their pay. They watched overnight as new hires suddenly made as much as they did with much less time invested with the company.
Granted losing two employees out of over a hundred is a small amount, but my gut tells me some people are just sitting back with their heads down happily collecting a larger paycheck while Dan is out sending press releases and speaking about his experiment. Psychologically the increase in wages comes exclusively at the expense of those who really deserved the increase, those who were highly skilled, who had been with the company the longest, and who had already proven their loyalty to the brand.
Instead, everyone at Gravity now starts at $50,000, increasing to $70,000 by 2017. Seniority, rarity of skills, educational levels, none of that is factored in, you spent all that time in college to make the same as a recent graduate who is answering phones. If the psychological damage hasn’t resulted in internal problems for Dan, it soon will.
FOUR – Dan’s Experiment Relies On A Hatred Of U.S. Meritocracy
It’s hard not to see politics in Dan’s decision. American businesses, my own business included, run based on the merit of their employees. Our ability to improve a websites search rankings is not based on what I pay people, but on how good they are at their job. It is based on the merits of the work, that is the foundation of the American meritocracy, and that is what Dan is saying shouldn’t exist.
When one employee who might have started at $25,000 now starts at $50,000 and someone who would have made $40,000 also starts at $50,000 you’re creating an environment where all of the resume building that person has done (or hasn’t done) is thrown out the window.
Other companies have handled this very differently while also still rewarding the people who help make the company successful. Profit sharing, annual or quarterly bonuses based on growth, job performance bonuses, etc.
These are all existing tools that would allow a low paid employee the opportunity to drastically increase their income, but also requires that they earn it.
No company succeeds without hustle, and building an employee incentive program around simply showing up? That’s just bad math.
FIVE – God Gave Us Two Ears, But Only One Mouth
Don’t worry I’m not going gospel on you – but you’ve heard that quote. The ability to listen, to read a situation, is incredibly important to any leaders success. Unfortunately in Dan Price’s situation he listened to a single employee who felt he was underpaid and decided to shift the entire company on its head.
He didn’t listen to his customers. He didn’t listen to his team. He got on his soap box and he announced it to the world, and as you can imagine that was a shock to several customers, many of whom canceled their service for fear that their prices would go up.
We don’t run a lot of credit cards ourselves, as consultants we mostly deal with checks, but if I were a vendor using a credit card processor and I heard that even day one hires all start at $70,000? I’d want to know how much extra I was being charged to facilitate that amount of compensation for over one hundred employees.
Dan has lowered his salary to $70,000 a year, but for how long? No founder is going to take a pay cut like that for long, and eventually he will be taking money from the company again, to pay himself back for the $3 Million he loaned the company after mortgaging his two homes and selling all his stocks, and to deal with the lawsuit he has pending from his brother. Eventually the money being spread around the bottom will return to the top, and that means another vendor could sneak in and disrupt Gravity by offering the same product for less, not saddled by Dan’s fair tale overhead.
Had Dan spoke to his customers FIRST, had he spoke to his employees FIRST, he might have adopted a balanced roll out for this, or a more merit based opportunity for his employees, but instead this feels like a publicity stunt. It feels like Dan piggy backing on the $15 minimum wage debates throughout Seattle and nationwide.
Dan wanted to make a statement, and that statement was a nearly $34 minimum wage, before even calculating for payroll taxes. I’m not saying that companies don’t make enough money to spread it around, but weighting it so heavily at the bottom rewards the least skilled at the expense of the highly skilled, and anyone who disagreed with Dan in the company was told they were being selfish.
I Really Really Really Really Really Hope I’m Wrong
Dan is enjoying the spotlight from his decision, the company was inundated with interview requests, people want to talk to Dan’s employees, it was a huge disruption to their routine for the few months following the announcement. Dan is now speaking on tours about his decision, and in my opinion celebrating before he has proven anything.
All of this bravado, this focus on Dan for being the little guys hero, comes at the expense of his little guys. I’m scared for them, for their financial future. I’m scared because when you increase your quality of life and suddenly take a huge pay cut that can often lead to crippling debt, not to mention the depression of having your salary cut in half.
I’m afraid for the employee with a sick manager who knows how valuable their job is and holds it over them, we’ve already heard that Dan himself called a now former employee selfish for speaking to him with concerns for his plan. It’s scary enough to lose a job in this economy, imagine losing a job when you knew you couldn’t make anywhere near what you were making before?
What if the company has so many highly skilled workers applying for the entry level jobs that the lesser skilled people start to get phased out of the company? Or if a new hire who took the job because of the high pay, who had the skills, sees that his peers are less skilled than he is but are making more than he is because of Dan’s experiment?
Dan controls the message – so what we hear is about the worker who with a $5,000 annual raise was able to buy some more school supplies for his home schooled children. That’s great, and I hope that is the rule and not the exception, but when one company so dramatically breaks the rules and laughs at convention, especially when doing so required the borrowing of over three million dollars, it really scares me.
I expect Dan’s experiment to fail. I’m sorry if that makes me a pessimist, but it’s just not a realistic idea, it’s not a sustainable idea. I really hope that I’m wrong, because it’s not Dan that’ll suffer when he has to make changes, it’s the little guys who were receiving his charity who will be in for a rude awakening when reality catches up to Dan’s dreams.