Is High Executive Pay Hurting Worker Productivity?

Or put anther way, will across-the-board pay increases improve worker productivity? We may be about to find out.

Dan Price of GRAVITY Payments met with his Seattle staff April 13th. Over the next three years, he said, the firm?s minimum salary would become $70,000. He would personally take a pay cut down to $70,000.

?My jaw just dropped,? Phillip Akhavan, 29, currently paid $43,000 working on the company’s merchant relations team, said in an interview with The New York Times. ?This is going to make a difference to everyone around me.?

Is High Executive Pay Hurting Worker Productivity?
Is High Executive Pay Hurting Worker Productivity?
This astounding news was greeted with cheers and ?high fives? by the employees and the national media. On all three major network newscasts that night GRAVITY?s new pay scale was the ?kicker,? the feel-good last story. Price was hailed as an innovative and imaginative boss, a hero.

The move is consistent with the shift toward dramatic increases in the minimum wage that is playing out in various major cities around the country.

Mr. Price?s plan is in line with long-held union philosophy ? income inequality. He recently heard the direct effects on Mr. Price felt his employees might be have the same struggle showing and decided to do something to fix it. This seems to follow the ideal of modern labor organizations and those who propose to ?redistribute the wealth.?

Or was it a strategically staged event to boost political perspectives? Such things do happen i the real world.

Digging A Bit Deeper

Before going any further, let me state I made attempts to reach someone ? anyone ? at GRAVITY for answers to some questions. As of July 27, 2015, there has been no response. I don?t feel rejected; other online outlets have not received call-backs, either. The Christian Post also reached out to Price at Gravity Payments for comment Tuesday but he was unavailable.

Interestingly, an online poll being conducted by finds only 19% of its respondents saying Price is a ?cool boss? for making the change.

The network newscasts each had video of the announcement and featured ?exclusive? interviews with Mr. Price so it seems the story was ?placed? with careful precision on the media most likely to give it positive and supportive coverage July 27, 2015.

Later information revealed the raises were not universal. At the time of the announcement, the average salary at Gravity stood at $48,000; the new minimum wage is expected to fatten the paychecks of about 70 employees (or, about 58% of the work force) and ultimately double the salaries of about 30 of that group, according to company spokesman Ryan Pirkle.

To pay for the increased staff wages, Price will cut his almost $1 million annual salary to $70,000. About 77 percent of the firm?s $2.2 million expected profits this year will be added to the funding pool expected to total about $2.64 million. Doing simple math, the average raise would be around $22,000. Last year, according to the Idaho Statesman, the company projected completing $6 million in transactions and end 2014 with about $15 million in revenue.

That only some of the company profits would be plowed back into the salary pool rebuts some comments heard April 15th that the firm?s ability to expand was being gutted. If all the income were to be used to pay the staff, it was wondered where would the money come from to support R&D, advertising and promotion, and capital outlays. My own calculations show GRAVITY Payments is likely to still have about half a million to finance these activities.

Why Was Price Doing This?

Perhaps it is an attempt to convince a skeptical public that our country?s staggering economy is beginning to reverse its recent course. Mr. Price, who started his company in 2004 when he was just 19, told interviewers he got the thought after reading a study on happiness that claimed that emotional well-being rises with incomes up to an amount of $75,000 annually.

The 2010 study, ?High Income Improves Evaluation Of Life But Not Emotional Well-Being,? was a study by Daniel Kahneman and Angus Deaton of Princeton University continues, ?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.?

Or was his motivation one more aligned with long-time union philosophy ? income inequality. He recently heard the direct effects of this concern while hiking with a friend who complained that she can?t make ends meet with rising rent prices. Mr. Price felt his employees might be having the same struggle and decided to do something to fix it. This seems to follow the motto of modern labor organizations and those who propose to ?redistribute the wealth.?

An explanation from Mr. Price told the New York Times said the disparity between his market rate compensation and that of his workers is ?absurd.? The average chief executive earns nearly 300 times that of the average worker in America. And this disparity is one of the largest gaps in the world, and well higher than the 20-to-1 ratio gap recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker, according to the Times.

?The market rate for me as a CEO compared to a regular person is ridiculous.? Price, who drives a 12-year-old Audi, told the Times. He said his main extravagances are snowboarding and picking up the bar bill.

?As much as I’m a capitalist, there is nothing in the market that is making me do it,? he said, referring to paying his staff the annual $70,000 minimum wage.

The $930,000 salary cut won?t bother Price?s life style a great deal. He saved a lot of the money earned since starting Gravity in 2004. He has no plans to sell his 12-year-old Audi with an odometer reading of more than 140,000 miles. His $70,000 won?t stop him from picking up the bar tab for his friends once a month, he said. It?s not clear if those ?friends? include his employees.

He says, ?There will be sacrifices.? But this refers to the operations of the company. He?s confident productivity will remain the same, though there is the nagging concern about how will innovation and creativity by workers be rewarded in an environment where pay equality appears to be a new normal. Unanswered is the question: ?Will all future raises be universal? If not, how would the disparity be explained??

A final thought from Mr. Price on the impact of this change on his own circumstances: ?Once the profit is back to the $2.2 million level, my pay will go back. So that?s good motivation.?

Will It Work?

There seems to be some skepticism, after the first blush of excitement wears off.
Sandi Krakowski, a writer who offers marketing analysis on Facebook said on Twitter: ?His mind-set will hurt everyone in the end. He?s young. He has a good intent, but wrong method.?

An associate professor of strategic management at the School of Business and Economics at North Carolina A&T State University, Patrick R. Rogers, refutes the Kahneman and Deaton study when he wrote in an email: ??Mr. Price probably thinks happy workers are productive workers. However, there?s just no evidence that this is true. So he?ll improve happiness, only in the short term, and will not improve productivity. Which doesn?t bode well for his long-term viability as a firm.?

Perhaps the most strident was Rush Limbaugh, who said it was ?pure, unadulterated socialism, which has never worked.? That?s why I hope this company is a case study in M.B.A. programs on how socialism does not work, because it?s going to fail.?

Do you work in a situation where there is great differential between management and staff? Have you ever been in a situation where there have been ?across-the-board? pay increase? Do you think Dan Price is a genuinely ?cool boss? or is this an attempt to drive home a social agenda? Where do you think GRAVITY Payments will be in 18 months?

( Photo by Axion23 )

8 Responses to Is High Executive Pay Hurting Worker Productivity?

  1. This strikes me as a feel good PR gimmick. Especially when – as you did – dig deeper to find out how many people actually get a huge raise. It is not as if these employees were making minimum wage and now they will make $70,000. Too many people don’t understand why the CEO of a company makes a lot of money, and while it could be argued that those who make multiple millions a year could get a smaller salary and still do what they do, there is definitely a reason that those in the executive suites earn more. They are the face of the company. When something goes wrong, they are the ones interviewed by a business hating media. Their job is never 9 to 5. They often miss many family events because they are at work until 10 or 11 at night whether at the office or on the phone at home. They frequently have to travel away from home. And often times, they become CEO only after having been in the work force for 30+ years….oftentimes with the same company the whole time. So I might agree that they do not “deserve” $500 million, I would vehemently argue that they deserve more.

  2. Hi Kathy – I completely agree with you. CEOs are the people who drive the businesses and take the risks. Workers don’t have those risks or pressures, and hence they make far less. This is especially true when the CEO is also the founder of the business and has his or her own capital invested in the company.

    That said, I do think that executive salaries, at 300X the average worker salary, are out of line by historic standards. This reflects fundamental imbalances across our economy that I think will be resolved by unpleasant readjustments. I sometimes get a sense that the corporate chieftains realize that the party won’t continue too much longer, so they’re extracting all the compensation out of the company that they can, while simultaneously moving company operations overseas. But that’s just my sense of things.

    Something else was pointed out to me by someone with more knowledge on this topic. Up until 30 or so years ago, the CEOs of companies were true entrepreneurs. Sam Walton is an example. Using their own capital, they built businesses from the ground up. Today however, the CEO is more likely to be from the managerial class, not a true entrepreneur. They are recruited/appointed from other companies, and their equity in the company is not from the seed capital they provided, but from stock options they’re granted as a sign-on bonus or incentive. That has changed my view a good bit.

  3. Steve Jobs did the exact same thing back at NeXT computers back in the 1986. Those who joined before 1986 were paid $75,000 while those who joined afterwards were paid $50,000.

    $75,000 was a lot more money back 1986!

  4. Hi Johny – My memory banks don’t go back 29 years! What was the reason for grandfathering some, while leaving others to work for a lot less? In my thinking, it essentially created a two-tier employment system that seems as if it would have been counter-productive.

  5. Hi, Kevin and others,
    Thought you might be interested in this story from

    Seattle CEO who set firm’s minimum wage to $70G says he has hit hard times

    The Seattle CEO who reaped a publicity bonanza when he boosted the salaries of his employees to a minimum of $70,000 a year says he has fallen on hard times.

    Dan Price, 31, tells the New York Times that things have gotten so bad he?s been forced to rent out his house.

    ?I?m working as hard as I ever worked to make it work,? he told the Times in a video that shows him sitting on a plastic bucket in the garage of his house. ?I?m renting out my house right now to try and make ends meet myself.?

    The Times article said Price?s decision ended up costing him a few customers and two of his ?most valued? employees, who quit after newer employees ended up with bigger salary hikes than older ones.

    ?He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn?t get much of a bump,? Gravity financial manager Maisey McMaster, 26, told the paper.

    She said when she talked to Price about it, he treated her as if she was being selfish and only thinking about herself.

    ?That really hurt me,? she said. ?I was talking about not only me, but about everyone in my position.?

    Approaching burnout, she quit.

    Grant Moran, 29, also quit, saying the new pay-scale was disconcerting

    ?Now the people who were just clocking in and out were making the same as me,? he told the paper. ?It shackles high performers to less motivated team members.?

    Price said McMaster and Moran, or even critic Rush Limbaugh, the talk show host, were not wrong.

    ?There?s no perfect way to do this and no way to handle complex workplace issues that doesn?t have any downsides or trade-offs,? he said.

    The Times said customers who left were dismayed at what Price did, viewing it as a political statement. Others left fearful Gravity would soon hike fees to pay for salary increases.

    Brian Canlis, co-owner of a family restaurant, already worried about how to deal with Seattle?s new minimum wage, told Price the pay raise at Gravity ?makes it harder for the rest of us.?

    ?It pains me to hear Brian Canlis say that,? Price said. ?The last think I would ever want to do is make a client feel uncomfortable.?

    The Times said Price has dozens of new clients inspired by his move but those accounts won?t start generating profits for at least another year.

    Making matters worse for Price is a lawsuit his older brother filed two weeks after the pay hike announcement.

    Lucas Price, who owns 30 percent of the company, accuses his brother of taking millions of dollars out of the company while denying him the benefits of his minority ownership.

    The lawsuit has forced Gravity to pay mounting legal fees at a time when the new salary scale is being eaten up by profits.

    ?We don?t have a margin of error to pay those legal fees,? Dan Price said.

  6. Hi Bill – The moral of the story is that socialism doesn’t/can’t work in the workplace. The high producers will be underpaid and the slackers will be overpaid. Where’s the incentive. But that said, there is a pattern in large companies of top executives over-compensating themselves, while putting rank and file employees into a financial vice grip, where even the best job performance won’t materially raise income. Again, where’s the incentive in that? My own feeling is that executives are draining company coffers against the day when the roof caves in. And then there are golden parachute plans…

    Let’s also touch on that $70k salary thing to Mr. Price. What he’s demonstrating is that he can’t live on that much money, even though it’s about 40% higher than the median household income in the US, which is to say that most households are not as well off as he is. Poor guy, how WILL he get by???

  7. I happen to work for one of those companies that have that huge ratio of CEO pay to lower level employees. Okay I have a union paid position, which only maintains my job and pay as long as there is a contract between the company and the union. My company is going out of business after 157 years in business due to a combination of inefficiency of the corporate leaders who were only concerned with making profits but not presenting a good sales program to generate higher customer count and the union not removing the lower function employees because of seniority causing the higher productive lower paid employees to be dissatisfied. In essence a very bad environment to work in. But this environment is present in all similar companies, I would like a solution to be found where the company makes profit (it shouldn’t be based on 70% but on growth development in the industry) and the employees should get a living wage to afford daily expenses (food,rent,transportation,etc)

  8. I completely agree with you Maria, we need to come up with a compensation scheme that will reward both executives and employees with some sort of balance. I’m of the opinion that executives are bleeding companies dry, while all the while claiming to be the vanguard of corporate America. And a company that doesn’t concern itself with the well-being of it’s employees by paying them a living wage, shows disregard for it’s entire operation on a long term basis. Henry Ford once raised his employees pay levels across the board, citing that his employees were also his best customers. There was an industrialist who “got it”. That’s in short supply today.

    But on the other hand, I worked in a union environment in a previous life, and I saw them defend dead wood, and sacrifice jobs so that the old guard could protect their jobs and escalating pay levels. The unions went to far with this mindless strategy and that’s why the private sector is now practically devoid of unions.

    It seems that everything in humanity gets pushed to obscene levels, and then it blows up – and then we wonder why. Too much short-sighted thinking!

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