Jack Keough: The Saga Of The $70,000 A Year Salary

Jack Keough examines what happened when a company enacted a $70,000 salary across its company, regardless of position. Is it a good way to run a business?

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This article first appeared in the November/December print issue of Industrial Distribution. To view the full digital edition, click here.

Arguably, one of the biggest business stories of this year occurred in April when the CEO of a Seattle, WA-based credit processing firm said he would pay all his employees $70,000 annually no matter what position they held in the company.

Dan Price, the CEO of Gravity Payments, said he decided to raise salaries to that number after reading a study about happiness, which concluded that income of up to a salary of $75,000 a year can make a significant difference in a person’s emotional well-being.

For many employees that meant substantial raises, since the average pay of a worker at Gravity Payments was about $48,000. Price himself took a $930,000 hit, slashing his own salary from $1 million a year to $70,000.

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About 70 of the company’s 120 workers will have their pay raised to $70,000 over the next three years. Salaries increased to $50,000 this year and will rise to $60,000 in 2016 and $70,000 in 2017. Thirty of those workers will have their pay doubled.

Shortly after all this, the story of the $70,000 salary went viral. All the major networks and cable stations made Gravity Payments their lead news story. Price was praised by many for fighting for income equality while others criticized his decision as a political statement and a step toward Socialism. Business school professors from around the country called and wanted to do a case study on Gravity.

Some companies became new customers to support Price while others, including existing clients, criticized him and wondered whether he would be forced to increase his prices to pay for the new salaries.

Now, several months later, Gravity Payments is having problems because of its decision, according to a story in the New York Times.

Here are just a few examples mentioned in the article: Two well respected employees quit because they were doing much more demanding work for the company while others with less responsibility were getting equal pay.

Price had to rent out his house and get an apartment in order to help absorb the salary increases. Only a few weeks after making the $70,000 announcement, he was hit by a lawsuit from his brother, Lucas Price, a co-founder of the company. Lucas alleged that Dan had breached his rights as a minority stockholder.

And here’s more from the Times article: A web developer who had his pay raised from $41,000 to $50,000 left because “people who were just clocking in and out were making the same as me.”

Another employee left because Price gave raises to “people with the least skills (who) are the least equipped to do the job, and the ones who were taking on the most (responsibility) didn’t get much of a bump.”

One employee who stayed wondered about getting the raise because “I didn’t earn it.”

Is this the right way to compensate employees?

In my opinion, there are many other methods to increase the pay of workers rather than establishing a set salary for everyone in the company.

Years ago, I interviewed a distributor in the Northeast who decided that he would not receive a salary more than four times his lowest paid employee. He also established a new policy in which workers would be paid a bonus if the company made a profit for that month.

“Why should they wait for the end of the year, or even a quarter, if they helped us make a profit that month?” he asked.

Of course, salaries aren’t the only reason for keeping employees. Flexible work schedules, telecommuting, tuition reimbursement, and 401k programs also play important roles.

In fact, almost every study shows that the majority of employees don’t leave a company because of salaries. Other factors include poor communication, indecisiveness by their supervisors, lack of career advancement opportunities, and a failure of management to listen to legitimate concerns of employees.

Maybe you don’t have to pay a minimum salary of $70,000, but simply recognize that creating a proper work atmosphere and listening to your employees can go a long way toward the happiness of your workforce.

Some experts in the HR field suggest that the overall lesson learned from Gravity’s experiment is that employers must recognize the specific talents that each employee has and pay them according to their skills, knowledge, and experience. And that may be the right way to improve an employee’s “emotional well-being.”

Jack Keough is contributing editor of Industrial Distribution. You can reach him at john.keough@comcast.net.

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