Gravity Payments
In April 2015, Dan Price, the 30-year-old chief executiveofficer (CEO), and founder of Gravity Payments, announced anincrease in every employee’s wage to US$70,000. Every employee,including the lowest-paid clerk and newly hired staff, wouldreceive a minimum annual salary of $70,000 over the next threeyears. The announcement stunned the employees and triggered a waveof high-fiving and clapping. With this decision, one youngentrepreneur in Seattle, Washington, became an instant hero when heissued a direct and adventurous challenge to the long-standingproblem of U.S. income inequality. However, at the same time, hewas experiencing unexpected challenges from different people only afew months after his bold move.
Income inequality has been racing inthe wrong direction. I want to fight for the idea that if someoneis intelligent, hard-working and does a good job, then they areentitled to live a middle-class lifestyle.
COMPANY OVERVIEW
Gravity Payments was a private credit card processing andfinancial services company. It was founded in February 2004 bybrothers, Dan and Lucas Price.
Gravity Payments provided a variety of processing and financialservices, including credit card processing, POS (point of Sales)systems, mobile payments, working capital financing, and gift andloyalty cards. The company’s customers were mostly small andmedium-sized businesses. By 2009, the company became the largestcredit card processor in the state of Washington, serving more than15 percent of small businesses in the Seattle area. The company’ssuccess was mainly due to its low-cost strategy and word of mouthpublicity. The company charged less than half of theindustry-average processing rate.
Gravity Payments had had a philanthropic mandate since itsbeginning, and launched the “Gravity Gives” program in March, 2008.Through this program, 2 percent of the company’s revenue had beendonated to charities, including World Vision, the Fred HutchinsonCancer Research Center and Northwest Harvest. Price believedstrongly in fighting poverty on both a global and locale scale.
THE DECISION
It was the right thing to do. I wanteverybody that I’m partnered with at Gravity to really live thefullest, best life they can… I think that’s the [income level]where you can start to check off those life’s goal boxes – savingfor college, buying a home, some of the basics, starting a family.I want everyone to have those basic opportunities.
Announcement of the $70,000 Minimum Salary
In April 2015, Price set a new minimum salary of $70,000 for allof his 120 employees at Gravity Payments. The idea struck him whenone of his friends shared her worries about trying to pay her billsand student loans on an annual income of $40,000. Some of Price’sown employees earned that amount or less.
Price decided upon the amount of $70,000 based upon a 2010 studyconducted at Princeton University by economist, Angus Deaton andpsychologist, Daniel Kahneman, a Nobel Laureate. According to thestudy, those who made less that $75,000 were likely to experienceemotional pain and job dissatisfaction. However, even if peoplemade more than $75,000, they did not feel any greater level ofhappiness. Simply put, the study suggested that emotionalwell-being increased with economic compensation, but only up to theamount of about $75,000. The study concluded that “low incomeexacerbates the emotional pain associated with such misfortunes asdivorce, ill health, and being alone. We conclude that high incomebuys life satisfaction but not happiness, and that low income isassociated with both with low life evaluation and low emotionalwell-being.”
Before Price initiated the salary increase, the average salaryat Gravity Payments was about $48,000, with the lowest salary ataround $34,000. Due to Price’s decision, about 30 employees hadtheir paycheques nearly double overnight, and others also receivedraises to reach the $70,000 level. Ryan Pirkle, the spokesman forGravity Payments, mentioned that this new minimum wage policy wouldincrease the salary of about 70 employees. The ground-breaking movewas met with applause and shouts of joy by many employees. Kevin, acustomer operations associate, said in an interview with the media,“I was there at the meeting… honestly, I could not believe what Iheard, and I think that’s what a lot of people felt. I kind of feltthat we needed to get that repeated.” Phillip Akhavan, a staffmember in the merchant relations team, who earned an annual salaryof $43,000, also said, “My jaw just dropped… This is going to makea difference to everyone around me.” Jaime June, in the markingdepartment, said, “Dan is just an incredible man in general. He hasa really amazing moral compass.”
The new salary would change employees’ lives. Maria Harley,vice-president of operations said, “I’ve heard things from, ‘I canfinally afford to move out of my parent’s home,’ [to] ‘I canfinally afford to have a baby,’ we have some people that areparents and really want a good education for their children andfeel like they can finally afford that.”
Huge publicity from all major national media had generated clearpublic-relations benefits for the company. After Gravity Paymentsbecame a front-page media story, it received more than 5,000resumes in just one day. Before the announcement, Gravity Paymentsadded 200 clients per month on average. In June 2015, the numbergrew to 350.
The Downside of the $70,000 Minimum SalaryPlan
There’s no perfect way to do this andno way to handle complex workplace issues that doesn’t have anydownsides or trade-offs. I came up with the best solution I could…I know the decision to pay everyone a living wage iscontroversial.
The implementation of this wage increase was not easy. In orderto pay for the increases in employees’ salaries, Price cut his ownremuneration from $1 million to $70,000. Also, about 75 to 80percent of the company’s $2.2 million profits had to be uses.
Many questions were raised. Was this a social experiment? Was ita public relations stunt? Or was Price just a nice guy? Inaddition, not everyone was pleased with his move. Other localbusiness owners and some entrepreneurial CEOs in the same,close-knit, entrepreneurial network complained that his decisionmade them look stingy. Steve Duffield, CEO of DACO Corp., who hadmet Price through the Entrepreneurs’ Organization in the Seattlearea, said, “I worry how that’s going to impact other businesses.We can’t afford to do that. For most businesses, employees are thebiggest expense and they need to manage those costs in order tosurvive.”
Some customers were against the “socialist” gesture and stoppedtheir business with Gravity Payments. Others customers withdrewtheir business due to an anticipation of a fee increase, in spiteof the repeated assurances from the company that this would nothappen.
Complaints even came from Price’s own employees. While 30 or soemployees would see their pay nearly double overnight, and about 70employees also go raises, the remaining 50 were already paid morethan $70,000. In fact, according to the New York Times, thecompany’s two best employees left the company because of Price’sdecision. For example, Maisey McMaster, who joined Gravity Paymentsfive years earlier and had worked long hours that left little timefor her family, was one of them. She said, “He gave raises topeople who have the least skills and are the least equipped to dothe job, and the ones who were taking on the most didn’t get muchof a bump.” McMaster talked to Price after contemplating a fairerproposal. From her view, a fairer proposal was offering smallraises with the opportunity to gain a future increase with moreexperience. “He treated me as if I was being selfish and onlythinking about myself,” she said. “That really hurt me. I wastalking about not only me, but about everyone in my position.”
Grant Moral, a web developer whose salary increased from $41,000to $50,000 (due to the first stage of pay increase), also expressedconcerns, even though he would receive a substantial pay increasefrom this plan. He opted to leave the company. “I had a lot ofmixed emotions. Now the people who were just clocking in and outwere making the same as me. It shackles high performers to lessmotivated team members.” He added, “I was kind of uncomfortable anddidn’t like having my wage advertised so publicly and so blatantly.It changed perspectives and expectations of you, whether it’s theamount you tip on a cup of coffee that day or family and friendsnow calling you for a loan.” From McMaster and Moran’s points ofview, it was not fair to double the paycheque of someone with thelowest skills, while the longest-serving and highest-skilledemployees received a small or no salary increase.
Furthermore, even employees who were exhilarated by the raiseshad new concerns and indicated they were facing a lot of pressure.“Am I doing my job well enough to deserve this? I didn’t earn it,”said Stephanie Brooks, 23, who joined the company as anadministrative assistant two months before the decision.
Question:
- What are the potential problems of a minimum salary as acompensation plan for the organization? How can you minimize theseproblems and motivate employees?
