Source - http://www.forbes.com/sites/davidbur...vity-payments/
Originally Posted by Forbes
Why A $70,000 Minimum Salary Isn't Enough For Gravity Payments
When Dan Price announced that he was raising the minimum salary in his company to $70,000, it made a lot of headlines. The story of the founder and CEO of the Seattle-based credit card processor Gravity Payments drastically cutting his own salary in order to raise the standard of living of even his lowest paid employees was written about just about everywhere, from liberal bloggers to conservative radio hosts.
Inside the company itself, the reaction was generally positive. “Everyone start[ed] screaming and cheering and just going crazy,” Price told Business Insider shortly after the announcement. That enthusiasm eventually settled down as Gravity Payments went about figuring out how to make the new plan work. The original plan immediately raised everyone’s minimum to $50,000 and then would increase by $10,000 until it reached $70,000 by December 2017.
But that plan might have to change.
Price and Gravity Payments have made headlines again, after a New York Times article revealed that the company is struggling to deal with the implications of Price’s plan. The media coverage started a flood of emails, phone calls and social media posts about the company, which even when positive was an unneeded distraction. In addition, some customers, who saw the move as a political statement or feared a price increase, took their business elsewhere.
But the most damaging blow to the company is internal, as some of the most valuable employees at Gravity Payments have started to leave the company. The Times reported that two employees have left directly because of the policy. One told the paper she was initially excited about the new policy, but as she thought about the details she began to get dismayed. “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 she presented the issue to Price along with an alternative way to raise salaries, but was met with an accusation of selfishness. So she decided to quit. Another employee, on the lower-end of the former pay range, also decided to quit after thinking through the policy. “Now the people who were just clocking in and out were making the same as me,” he told the Times. “It shackles high performers to less motivated team members.”
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No matter how altruistic Price’s intentions, nor how unexpected the media attention was, the departure of long-tenured and more valuable employees was actually predictable. In Price’s plan to raise salaries, lower paid employees saw their incomes almost double while higher paid employees saw just a modest bump. The higher paid employees’ frustration would have been predicted by J. Stacey Adams, the organizational psychologist who, in the 1960s, laid the foundation for the equity theory of motivation.
According to equity theory, individuals are constantly calculating a ratio of their inputs (time, effort, skills, experience, etc.) to the outputs the organization gives them (salary, benefits, recognition, security, etc.). When their ratio appears equitable to that of their coworkers, the organization runs smoothly. When the comparisons are out of whack, that’s when demotivation and strife set in. When two equally skilled employees are paid unequally, problems will ensue. This is why equity theory is also the primary reason gender and racial wage gaps are everyone’s problem, not just those affected.
But equity theory also says that when two unequally skilled employees are paid equally, there is also a problem. The ratio comparisons don’t add up, and distress ensues.
The theory and its predictions apply to pay raises just as much as pay. Giving large raises to lower paid, lower contributing employees may be well intentioned, but unless it’s paired with equitable raises for higher contributing employees, it is bound to cause dissatisfaction and turnover. Price, reflecting on the policy in his interview with the Times, even admits that some of the distress was a possibility. “There’s no perfect way to do this and no way to handle complex workplace issues that doesn’t have any downsides or trade-offs.”
While that may be true, equity theory reveals that the flaw in Price’s well-intentioned plan was who he asked to feel the downsides and make the tradeoffs with him.
Source - http://news.investors.com/blogs-capi...om-company.htm
Originally Posted by Investors
The Seattle CEO who raised the minimum pay at his company was probably motivated by good intentions. He should have instead been guided by sound economics.
As the minimum-wage debate raged around him, Dan Price, founder and CEO of the credit-card-payment processing firm Gravity Payments, raised the minimum salary at his company to $70,000 a year and cut his own salary by 90% in April. It sounded to many ears like a wonderful idea.
Naturally, the praise for Price flowed. The New York Times reported that "the overwhelming majority of the responses on social media and elsewhere were positive." Price was even called an "American hero" and "folk hero." Mother Jones, which has never seen an economic law that it doesn't think can't be overcome with just a little more socialism, hoped that it was a trend just beginning.
But four months later, what Price has done best is help illustrate why floors placed on wages don't produce the desired results.
Last week, the New York Times reported that the "hoopla" surrounding the policy was causing turmoil at Gravity.
"A few customers, dismayed by what they viewed as a political statement, withdrew their business. Others, anticipating a fee increase — despite repeated assurances to the contrary — also left."
Then there was what was a predictable internal reaction. Two of Price's "most valued employees quit." The Times says they were "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."
Maisey McMaster told the Times that she initially bought into the raise. But then she thought about it. And "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.
Grant Moran, a Web developer, became frustrated that some co-workers who "were just clocking in and out were making the same as me."
"It shackles high performers to less-motivated team members," he said.
Price also hurt himself. Thanks to his lower salary, he's had to rent out his house to "make ends meet myself," he told the Times. And he's working just as hard as he had been, but now for much less compensation.
Economics blog Zero Hedge sharply observed over the weekend that "Price's experience will serve as a cautionary tale to employers who may now think twice before embarking on one-man crusades to address the nation's social and economic maladies."
Zero Hedge further noted that if the company's very existence is threatened "by the fallout from the wage hike," Gravity Payments "employees may soon find that the new pay floor is, like everything else in the world, subject to the law of ... well, gravity."
Note to all CEOs everywhere: Don't make a move like Price's without first consulting Hayek, Von Mises or Friedman.
So, WF, what are your thoughts on this turn of events? Clearly, the CEO did not have the foresight to see where it would all go wrong. Sometimes, right intentions can go awry and have unforeseen consequences.
TL: DR -
CEO cuts his own salary by 930,000 and gives his employees a minimum $70,000 salary. A few of his loyal employees quit because they are getting paid the same as new employees or employees with different productivity levels. Customers, who view what he did as a political statement, withdraw support and the company faces trouble. The CEO is forced to rent out his house because of everything happening within the company.