After researching it, he said $70,000 was the threshold household income for people to be happy. He said “I’m a little freaked out” not knowing the consequences.
Now that it’s a few weeks later, he has good reason to freak out.
It would seem that giving yourself a 95% pay cut and redistributing those funds so every member of your staff was making the same salary is a fair and egalitarian thing to do.
Now everyone is equal. Bernie Sanders thinks so highly of this compensation strategy that he thinks every CEO in the United States should follow suit.
Or should they? Is $70K min wage truly fair?
It’s important to ask some key questions; fair to whom? Is it fair to your most experienced, motivated employees that their extraordinary contribution is not longer prized for what it is?
Is it fair that someone just out of college recently hired, making $40K last week now makes the same amount of money as someone with years of experience who earned their way with promotions and bonuses to earn that $70K per year?
Is it fair that someone who just “punches the clock” makes the same amount of money as someone who meets every deadline and goes the extra mile for customers?
The people who were making $70K per year received almost no income boost. This didn’t make the headlines.
Is $70K min wage fair to the highest performers? No, it isn’t in this case. Fairness does not mean equal pay anymore than giving an “A” to everyone of my students is fair regardless of how well they perform on exams.
While our lives may have equal value in the sight of our Creator, we are not equal contributors in a workplace. That’s observable fact, not discrimination.
Some people are more motivated than others. Some are more talented in certain ways than others. We ignore the laws of gravity at our peril.
The key to fairness is to compensate equal effort regardless of where it comes from. By paying the under performers and the newbies the same wage as the superstars and veterans, you are lying to your staff. You are telescoping to them that they all have the same worth to the business, which is not true.
The two top performers at Gravity tried to discuss this new compensation and were told, according to the New York Times, that they were “selfish.”
They were challenging management to be more honest with the high performers. When management didn’t listen, they left. They were not selfish. They were honest.
As the sun rises in the East this was predictable. When I turned around a failing $130 M business for a large global bank back in the day, there were two people on whom the business relied day to day.
Without them, we never would have had the success we did. People are not interchangeable.
Superstars are rare and need to be recognized for their contributions.
Pay scales send an important message to them and to those who aspire to be like them. If you eliminate the pay differential between high and low performers, the best talent will go to your competition. Or the worst case; the high performers give up trying because it doesn’t matter anymore.
High performers always have choices even in down markets. If you doubt me, just ask Bill Gates.
Let’s look at the newbies and lower performers. You’re lying to them as well. You’ve created a false indicator that they’re worth a lot more than they actually are.
Remember, whatever someone’s is earning, double that and you have a good approximation for the true cost of that employee to the business. The additional costs include payroll taxes, benefits, unemployment and disability insurance to name a few.
So a $70,000 per year employee actually costs the business $140,000 per year. You’ll see that on the Net Income Statement. But its “left pocket/ right pocket” you might claim. The CEO reduced his salary and spread it around.
Look more carefully on an individual basis. If sales, general and administrative expenses are roughly 20% of revenues in a healthy business, then this means every, single employee must return up to 5X each one’s fully loaded costs in order for the business to afford to keep them employed.
The numbers go like this; someone’s salary is $70,000. Their fully loaded costs to the business is $140,000. They need to deliver every year, year after year, at least $700,000 in additional revenues or reduced costs back to the business or else the business can’t afford that person.
So for the people who were making $40,000 last week who are now making (notice I didn’t say “earning”) $70,000 after the announcement, did these people become 75% more productive overnight? No.
Someone needs to have a “come to Jesus” conversation with the staff who got fat raises for doing nothing to explain this to them. Contrary to what they think, Dan Price doesn’t pay their salary, customers do.
When Gravity lost several of its largest customers a few years back, it had to lay off employees.
That experience should be fresh in Mr. Price’s memory.
So with this new compensation scheme, high performers go where they’re more appreciated and recognized, while low performers stay because they know they’d never make this money anywhere else.
This is called institutionalizing mediocre performance.
So Dan Price’s Human Resource specialist wasn’t consulted nor were his investors. Had he asked them, they would have taken him through the long term risks of doing this.
The time to freak out is not when the announcement was made but in dealing with the aftermath of it.
In addition to the loss of tremendous talent that’s extremely difficult to replace, customers have been leaving because they’ve been expecting price increases to cover this new compensation scheme.
Let’s not forget the investors who took big risks to invest in Gravity Payments and have been with the company through thick and thin. They deserve some notice when the CEO is going to upturn the company.
They are suing Dan because he has made sweeping changes affecting the ability of the company to pay its bills and to generate adequate cash to stay viable.
If the productivity isn’t there and with the loss of high performers, it’s probably gone down, that’s the risk. My guess is, Dan will have a harder time raising investor capital going forward because of this dynamic.
“But he just reduced his salary, what’s the big deal”, you say? Dan Price developed this business along with the investors, strategic partners, hiring top staff, and building and retaining his customers base. At a salary of $1 MM per year, he was probably underpaid. No that’s not a typo.
Everyone who draws a salary at Gravity has to protect the business or they won’t have to worry about their pay; they won’t have a job. I’d love to have the opportunity to teach them this. There’s a lot at stake.