We've all seen the scenario before. The CEO stands up at an all-company meeting to announce changes to the compensation system. Usually, this means profit-sharing is canceled or bonuses are being cut, but when 29-year-old CEO Dan Price addressed the 120 employees of Seattle-based Gravity Payments last week, the message was very different. By the end of this year, no employee will make less than $50,000 per year, and by the end of 2017, that number will be $70,000.
You read that right. Price is setting a minimum salary for the employees at the payment processing company he started while he was still in college, and ensuring that no single employee makes less than 70 grand. (Note: This doesn't mean ALL employees will make $70k, but that no employee will make less than that amount.)
This is a big deal and, justifiably, has garnered a ton of press attention -- including predictable naysayers who say this is pure socialism and, thus, doomed to fail. I suspect, however, that this is not a decision Price made lightly (nor without input from his father, leadership and talent management consultant Ron Price). While there's no doubt that there will be unintended consequences of this bold move (which I'll leave to the economists to ponder), it's important to workers everywhere for a number of reasons. Here are just a few:
Some Gravity Payments employees are getting massive salary increases
According to the annual Buck's Compensation Planning Survey, the average pay increase for a worker in the United States has been stuck right around 3 percent for a few years now.
We don't have enough information to know the full impact of this salary increase, and since Gravity is a privately held company, we never will. However, according to the New York Times, the current average salary at Gravity Payments is $48,000. If an employee making $48,000 gets bumped up to $70,000, that's more than a 46 percent raise over three years!
The money is coming out of the CEO's pay and company profits
According to the Economic Policy Institute, the average CEO compensation (including stock options exercised in a given year) in 2013 was $15.2 million -- up 2.8 percent from the previous year and inconceivably up 21.7 percent from 2010. From 1978 to 2013, CEO compensation increased a whopping 937 percent when adjusted for inflation, while typical worker compensation saw only a 10.2 percent increase in the same period.
Even more sobering, the ratio of CEO-to-worker compensation in 2013 was an almost-impossible-to-understand 295.9-to-1. This was actually down from the insane 2000 peak of 383.4-to-1, but a completely different world from 1978, when the ratio was just 29.9-to-1.
Price is swimming bravely upstream with his Gravity Payments policy. The progressive Millennial is paying for the salary increases out of company profits and his own compensation. Price's current compensation is around $1 million, and he'll be taking a pay cut to $70,000 to help make this work.
The compensation change is explicitly intended to make employees happier
Dan Price didn't come up with this idea or the figure of $70,000 on his own. Instead, he was actually moved by scientific research. In 2010, Princeton psychology professor (and author of Thinking Fast and Slow) Daniel Kahneman co-authored a paper with economics professor Angus Deaton titled "High income improves evaluation of life but not emotional well-being." The paper detailed research by Deaton and Kahneman that examined the impact of various life circumstances on emotional well-being (the frequency and intensity of positive and negative feelings on a day-to-day basis) and life evaluation (how people think about life, in general).
Kahneman and Deaton found generally that increases in income were likely to influence how people thought about life in general (a mostly intellectual and rational assessment), but were less likely to influence feelings of happiness:
When plotted against log income, life evaluation rises steadily. Emotional well-being also rises with log income, but there is no further progress beyond an annual income of ∼$75,000. Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone. We conclude that high income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.
The fact that emotional well-being doesn't continue to rise along with income beyond $75,000 might be evidence of a phenomenon known as "hedonic adaptation," which explains how and why we quickly become accustomed to circumstantial changes and return to a baseline of happiness.
A large gap often exists between research findings and common practices in Corporate America. It can often take 10 or 20 years for a research insight to find its way into management and leadership in organizations (including academia). But Price is an exception to this. He took relatively recent research and put it into practice, with the goal of increasing employee happiness.
The decision is also growth-oriented
Dan Price might be a completely altruistic CEO, or he might be an incredibly shrewd one. A growing body of research suggests that happier employees are more productive, and it appears that Price is counting on this. He says he'll be taking his pay cut until company profits come back to where they were before making the policy change, so he's betting that Gravity Payments' growth will more than pay for the compensation boost.
The gauntlet has been thrown down
Perhaps most important of all, the decision that Dan Price has made for his own company stands as a challenge to many others. It is a criticism of exorbitant CEO compensation and the growing discrepancy between CEO and average worker compensation. It is a money-where-your-mouth-is demonstration of how valuable employees are. And it's an implicit call for other CEOs to examine how compensation works in their organizations. Time will tell how much impact a 120-employee company has on standard practices, but if Gravity Payments demonstrates that such a massive paradigmatic shift can work, it will be hard for others to ignore.
Still, compensation isn't everything
Though this is very exciting and definitely a story to keep watching, we mustn't forget that pay isn't everything. I know nothing about what it's like to work at Gravity Payments. Is the culture positive? Do leaders provide clear direction? Are managers equipped to support and develop employees? Are employees given tools and opportunities to do what they do best -- and to grow? Do employees have predictable work schedules and a healthy sense of balance between the demands at the office and other life priorities?
Far more than compensation, these are the factors that influence what it feels like to work for an organization, and that determine whether employees stay or go. While Price's move to improve employee pay is both groundbreaking and admirable, time will tell what impact it has on culture, employee engagement, and customer experience. I, for one, will be watching closely.
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