Six months ago, Dan Price, founder of Gravity Payments in Seattle, WA, announced that he was going to raise the wage of every single person working in his company — even the newest Customer Service Representative on the sales floor — to $70,000 annually (just over $33/hour, assuming 52 weeks of 40 hours/week) over the next three years. The media scrutiny that his move triggered was enormous, and there was some serious fallout.
- A few midlevel employees quit because they couldn’t stomach the idea that the ‘bottom rung’ employees’ salaries were more than doubled, but they were only getting a modest raise.
- Price’s brother, a minority shareholder in the company, sued Dan, claiming that he paid himself too much as CEO (immediately after Dan announced that he was also reducing his own salary to $70,000.)
- And of course, the conservative blogosphere, talk radio, and other (Fox) news channels skewered the move, calling Price a socialist and proclaiming the complete and utter demise of Gravity Payments.
Over the next six months, story after conservative-funded story would come out shouting about how a mostly-level salary field “breeds resentment and virtually eliminates the merits of meritocracy.” Or other similar sentiments that, directly or indirectly, imply that people in the regular work world are paid what they’re worth (they’re not), and that defying that ‘natural law’ would somehow destroy Gravity Payments.
But Dan Price is playing hardball. He’s sold all of his stocks, mortgaged his home, emptied his retirement accounts, and funneled 100% of that money into Gravity Payments.
“[H]ow come I need 10 years of living expenses set aside and you don’t? That doesn’t make any sense. Having to depend on modest pay is not a bad thing. It will help me stay focused,” says Price.
A Long Experiment
What many news outlets miss about this story is the long lead-in to the $70,000 announcement. Back in 2011, Price was confronted by an employee who had learned that Price was taking $1 million annually as a salary when the company’s profit was only $2.2 million, and all of the employees were getting paid below industry standards. The employee called Price greedy, and accused him of ripping everyone at his company off.
Rather than firing the outspoken employee, Price responded by giving everyone in his company a 20% raise in 2012. He expected to have to take a hit in profits, but completely unanticipated by anyone, he made even more that year than he had previously — because while his profits took a hit due to the raises, Gravity Payments’ productivity rose more than 30%.
Bewildered but inspired, Price announced he was going to do the same thing again in 2013. This time, he was certain he was going to feel the pain — but to his shock, productivity went up again, by a similar amount, and his profit increased with it.
Now intrigued, Price sought out the why behind this phenomenon, eventually stumbling upon a Princeton study from 2010 that indicated that a wage of over $75,000 didn’t improve a person’s happiness by a notable amount, but wages below that amount definitely decreased happiness.
Moreover, Gravity Payments had marketed itself as a provider of top-tier customer service, and Price no longer believed that his employees could provide top-tier customer service when they moved through live continually worried about rent increases, car repairs, and other day-to-day expenses. (A significant number of studies have in fact shown that having money reduces stress and improves health, strongly supporting Price’s concern.)
Today at Gravity Payments
Thus, Price decided to shoot for very nearly that number, announcing the $70,000 minimum wage for his company earlier this year. The salary floor shot up to $50,000 immediately, to go up by $10,000 each year over the next two years. The gamble is significant — it’s a $1.8 million increase in costs, and his voluntary pay cut as CEO covers less than half of it. The rest will have to be made up by increased revenue, and if Gravity Payments doesn’t grow (and grow strongly), it may collapse, as the conservative pundits predict it must.
As it turns out, the publicity Gravity Payments received from the huge pay raise has paid for itself. Gravity began to be sought out by customers. Their revenue has doubled over the past six months. Customer retention — already at an industry high of 91% — has risen to 95%. (In fact, the only outstanding threat to Gravity Payments is the aforementioned lawsuit that Price’s brother filed days after the wage hike was announced.)
“We all say that people are our most important asset, yet as soon as somebody actually takes action … everybody seems to think it’s weird,” Price said. “Companies that are purpose-oriented, and have something in their minds and hearts other than making money, actually make more money over the long term than companies that are more financially driven.”
Given the success of Gravity Payments, as well as other prominent companies that voluntarily pay their workers well above the industry standard such as Costco and Trader Joe’s — and the success WalMart saw after its voluntary wage raise — it’s becoming safe to say that the modern corporate notion that labor expenses should be minimized may be incorrect.
Featured Image courtesy of John Pearson via Flickr, available via a Creative Commons license.
