Backlash against pay increases

Not Asian-related, but this story has got to be one of the more interesting business stories that I’ve seen: A Company Copes With Backlash Against the Raise That Roared. Dan Price is a young 31-year-old millionaire in Seattle who is the CEO of a payment processing company called Gravity. A few months ago, he made the decision that the lowest paid worker at his company would make a whopping $70,000 as a bare minimum. He came up with this number based on reports that happiness tended to rise until one made $75,000. He decided that he’d do his part to ensure his workers were happy. With the new system, even the lowest-paid clerk would make at least $70,000.

As it turns out, the new pricing structure backfired. Some of his top employees, angered at seeing new workers having their salaries double while more valuable employees got little to nothing, quit. Some employees didn’t like the fact that their salaries were public. Some employees resented the fact that hard workers got paid the exact same as those who simply worked to punch the clock. Some customers were angry and pulled their accounts.

I think there would be little to no issue if he set the floor at a lower number, say, $30,000. $30k is a good number for someone getting out of college, and it’s a really good number for someone without a college education. At $30k, a single young person can live quite comfortably, even in a place like Seattle. At $30k, a person can be happy with a good, solid entry-level salary and the hopes of eventually making more. This would be a good starting point towards improving one’s skill set and value to the company.

$70k kinda removes the incentive right away. If you make $70k with no college degree, $70k regardless of your contribution to the company, regardless of the effort you put into your work, there is little incentive to do better, nor is there reason to go out of your way to impress the bosses or coworkers. $70k more or less says that you’ve already made it. If you’re 22 years old, and you make $70k as a mail-room envelope-stuffer, while a human resources manager makes only slightly more, there’s little incentive to improve your skill set. If you’re the human resources manager, it’s even worse.

People like meritocracy, and most people like some inequality. If there were a chess championship and all players were declared the champion, top players wouldn’t play. Why excel in a sport where the rewards are the same regardless of your results? Such a system benefits those who perform poorly in competition, but it hurts those who have the talent and work ethic to become leaders. Similarly, if the least valuable contributors to a company makes $70k a year to start while top players make only slightly more, fewer top people will want to play.

I have nothing but kind thoughts about Mr. Price for his stand on income inequality. It takes a brave man to do what he did. To try something like this at 31 takes balls. But I can understand why his employees are angry.

8 thoughts on “Backlash against pay increases

  1. Weird. I can honestly say that I really only care about how much I make, and have never thought much about what my colleagues are making. Yet some people seem obsessed with it.

    I agree that he over-reached by putting everyone up to 70k straight away. A much better way to do it would be to start at a more reasonable level (30-40k, let’s say) and have a clear structure in which the opportunity to make 70k is realistically attainable for all his employees within a reasonable number of years, assuming consistent performances and so forth. A lot of people labour away in shitty jobs on low wages with the promise of one day making a good salary, but quit in frustration when this fails to pan out.

  2. This dude is a socialist ! It’s his money though. He could have created a real charity to help people everywhere in the world not to starve, and bring basic healthcare to them. There are millions of unfortunate people in the world who really really need help.
    People here in America can live comfortable making $20k a year, they just have to forfeit all the luxuries such as eating out at Red Lobster, taking a nice vacation, having the newest coolest gadgets, fastest connections, etc that they think they’re entitled to. They still can afford plenty of food, Obamacare, a car, a place to live, etc.
    Over entitlement is the biggest threat to America. It’s time to abolish minimum wages and disband teachers unions

  3. Paying ALL of his employees 70K minimum is fine, so long as he compensates those who put in more effort or who bring more experience to the table even more. The idea of compensation is to “compensate” workers for the value they bring to the job. As an employer you may set the bar as to what your zero point is. It might be at $8.75 an hour, it might be $30K, or it might be $70K but whatever you are paying people to “just show up,” others are likely to expect FURTHER compensation, if they do MORE than just show up.

    Now, personally, I am more like Eurasian. In fact, I have often told people at work that I don’t want to know how much anyone else makes. I just want to make what the industry will support for my level of experience and my job performance. If a secretary or janitor is making more than I am, for whatever reason, I really don’t care. That has nothing to do with me.

    However, for most people it doesn’t work that way. They expect compensation for their own work, as compared to the zero point you set for the newby’s and under-qualified. If you have more money to spend on salaries yo better be spending on the people who are doing you the most good or else!

  4. Eurasian and King,

    Those are good points. I think it depends a lot on what field you’re in. In government jobs (in the U.S. anyway), people know exactly what you make because it’s published. We know how much the President makes, how much Senators make, how much judges make, how much DMV people make, how much military people make, how much teachers make, etc. It’s all tiered and set. You make more money based on your rank, which is publicized. Money is perhaps less of an issue since everyone gets paid according to an amount that is already known. Some parts of American government, such as politics and military, have mostly hard workers since the price of failure is very high. In most other parts of American government, people don’t work as hard because there isn’t much incentive. You’ll have some phenomenal workers who put everything into their jobs, but you’ll also have lots of people who just milk the system. Most government workers are relatively well paid whether they’re good at what they do or not, so many will just cruise. They’ll show up for the minimum number of required work days, and they’ll put minimal effort into their work. Any American who has kids in the public school system knows what I mean.

    In the private sector, people are more likely to work harder since they can be fired or receive promotions more quickly. There’s more of a competitive atmosphere. There’s also the question of whether pay affects viability–“Can you afford to pay them this much without raising your prices or going out of business?”–which is why some of Price’s customers left.

    I’m probably similar to you both, but I think the question of “what others make” becomes a bigger deal when there’s a chain of command. So for example, let’s say you’re an orthopedic surgeon who just finished residency. You want to enter private practice. You find another established surgeon who is willing to hire you, and you find out that the starting pay is $250,000. You also find out that all the assistants and nurses also make $250,000 at this clinic. You take the job.

    In most surgeries, the orthopedic surgeon is the 900 lb. gorilla. He barks, “Get me the scalpel!” and the assistant gives it to him without question. There are often nurses around whose main function is to monitor, lift, or inject based on the ortho’s command. Sometimes there are other doctors working under him, such as the anaesthesiologist. Even this is competitive–sometimes ortho’s will insist on using the services of one anaesthesiologist while not hiring others. The ortho’s word is the word of God–when he speaks, people obey. And they have to obey right away since time is of the essence in a field like surgery.

    Now if everyone there–all of whom got to where they are through the competitive world of medicine–gets paid exactly the same amount, there could be a problem. If the nurse who completed a 12-month nursing program makes the exact same amount as the orthopedic surgeon who graduated from Harvard Med and who went through four years undergrad, four years med school, four years of residency, and another two years of specialized training, who now has the upper hand in the transaction? If their salaries are equal, the nurse is actually making much more since she doesn’t have his med school bills.

    Certainly at $200k a year, there’s an argument to be made that it shouldn’t matter since everyone is making so much money. But I think salaries are similar to prizes in sports competition–people measure themselves by what they make relative to others.

  5. Good comment WOWO. I think what it comes down to is that no matter how much people are making, they feel that if you have even more money available for salaries that you need to withhold paying more to people who bring less to the table and give more to those who bring more.

    But going back to the original study that Dan Price was basing his decision on, most people are quite happy when they pass the 70K barrier (provided they don’t live in New York, LA, San Francisco, or the Silicon Valley.) They have a nice place to live, and good car and enough disposable income to live a pretty good life. Of course, in LA, I’d say you kind of need to make $100K if you’re single to reach the same comfort plateau.

  6. OK, I listened to the video. I’m not sure that it explains what the details are. Are the people in the company being paid the same as the market or above? If so, why would they care if the janitor makes the same as them? Would they quit their job and go work at a different company just to make the same?

    Honestly, that’s just illogical to me. As long as I’m being paid competitively, why the f&^% would I care what someone else is making.

  7. Yes, I think the idea of compensation, in the eyes of most people, is that people get paid what they contribute to the company. If the janitor gets paid the same amount as the Head of Neurosurgery, that surgeon may in fact leave because of the mismatched pay bothers him. People might leave to make the exact same salary elsewhere if they feel like they’re being screwed or treated unfairly–or if they feel like management isn’t being prudent with how its spends money.

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