Oops! One Company’s Efforts to Combat “Income Inequality” Backfires

August 3, 2015

NOTE: Though I am referencing an article on a conservative website, this is NOT a political post. It’s an ECONOMICS post.

I read this article this morning. In case you’re not familiar, Dan Price, CEO of Gravity Payments announced recently that he was going to set his company’s minimum wage at $70,000 per year. A noble goal, according to some. The media went nuts. Everyone was singing this guy’s praises.

Well, it turns out it wasn’t such a great idea.

Actions meet (unintended) consequences:

What few outsiders realized, however, was how much turmoil all the hoopla was causing at the company itself. To begin with, Gravity was simply unprepared for the onslaught of emails, Facebook posts and phone calls. The attention was thrilling, but it was also exhausting and distracting. And with so many eyes focused on the firm, some hoping to witness failure, the pressure has been intense.

More troubling, 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. While dozens of new clients, inspired by Mr. Price’s announcement, were signing up, those accounts will not start paying off for at least another year. To handle the flood, he has already had to hire a dozen additional employees — now at a significantly higher cost — and is struggling to figure out whether more are needed without knowing for certain how long the bonanza will last.

Two of Mr. Price’s most valued employees quit, 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. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.

Then potentially the worst blow of all: Less than two weeks after the announcement, Mr. Price’s older brother and Gravity co-founder, Lucas Price, citing longstanding differences, filed a lawsuit that potentially threatened the company’s very existence. With legal bills quickly mounting and most of his own paycheck and last year’s $2.2 million in profits plowed into the salary increases, Dan Price said, “We don’t have a margin of error to pay those legal fees.”

The author of the article sums it up nicely:

It didn’t work for two reasons. First, a business can’t survive when employees can’t generate enough value to give you a big enough return on what you pay them. And if they can’t do that because you paid them too much, that’s not on them. It’s on you. Second, people don’t appreciate what they haven’t really earned. You think they’re going to be grateful and loyal to you because you were so good to them. It doesn’t work that way.

4 responses to Oops! One Company’s Efforts to Combat “Income Inequality” Backfires

  1. I didn’t follow the original story closely. But I thought it was just a publicity stunt to drum up more business. I guess they learned some economics and human psychology.

  2. A talk radio host has been discussing this the past two days.

    It would be nice, in a way, if the world worked that way, but…

    It reminds me of the $15/hour minimum wage effort. So many people would be unemployed, that’s just the way the real world works.

  3. The article is making it sound like this guy has already failed. As far as I know, he is still paying his employees $70k+/yr, and is gaining more clients per month than before the switch (350 new clients signed up in June).

    As for the brother that has 30% ownership and hasn’t worked there in years: if he doesn’t like how the business is run, then he should either show up and work (and change things), sell his stake, or shut up. Filing lawsuits only makes lawyers rich.

  4. Oops, forgot to mention — I’d be shocked if anyone I work with makes less than $70k/yr (a large fortune 500 company). If you pay low wages, you will get low talent. If you pay attractive wages, you will get top talent — that’s the way the world actually works.