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— by Polydamas
Over the past few months, we here at The Cassandra Times were following with interest mixed with amusement the travails of a Seattle, Washington company named Gravity Processing, which processes credit card transactions. Dan Price, the 31-year-old chief executive of the company, decided on his own accord to raise the salaries of every one of the company’s 120 employees to a minimum of $70,000 per year. Every one of Gravity’s employees, from the mailing room clerks to the receptionists to the secretaries, all received raises that brought their salaries to the same level as a middle executive in corporate America. Almost overnight, Dan Price became the darling and poster boy of liberal politicians, academicians, and activists across America.
Patricia Cohen of The New York Times initially reported, in her April 1, 2015 article titled “One Company’s New Minimum Wage: $70,000 a Year” (http://tinyurl.com/prwp9m2), that Mr. Price decided to raise the minimum salary at his company “after he read an article on happiness” which “showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.” Mr. Price “heard stories of how tough it was to make ends meet even on salaries that were still well-above the federal minimum of $7.25 an hour.” Some of his workers were having financial trouble on a salary of $40,000 per year due to “a surprise rent increase or nagging credit card debt”. He stated “I hear that every single week. That just eats at me inside.”
To fund his company-wide increase to a minimum salary of $70,000, Mr. Price lowered “his own salary from nearly $1 million to $70,000” and used “75 to 80 percent of the company’s anticipated $2.2 million in profit this year.” A quick calculation shows that Mr. Price’s decision increased Gravity’s labor costs by approximately $2,500,000. For a company of 120 employees, the average increase in salary was $21,500.
In the short run, Mr. Price’s decision received rave reviews. Patricia Cohen’s later article on July 31, 2015 in The New York Times titled “A Company Copes With Backlash Against the Raise That Roared” (http://tinyurl.com/o6shvk3) reported that “talk show hosts lined up to interview Mr. Price. Job seekers by the thousands sent in résumés. He was called a ‘thought leader.’ Harvard business professors flew out to conduct a case study. Third graders wrote him thank-you notes. Single women wanted to date him.”
Later on, however, Mr. Price’s decision resulted in consequences that were unforeseen to him. Some of the company’s customers took their business elsewhere in anticipation that the company’s substantially higher labor costs would cause it to raise its prices. Ms. Cohen’s further reported that “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.”
Worst yet, Lucas Price, Dan Price’s older brother and early investor in the company, “filed a lawsuit that potentially threatened the company’s very existence.” Having invested $2.5 million in giving raises to his employees and facing high legal bills to defend the lawsuit, Dan Price said, “We don’t have a margin of error to pay those legal fees.”
The natural consequences of Mr. Price’s decision were very easily foreseen by classic laissez faire economists who had not been seduced by the siren song of John Maynard Keynes’ macroeconomic theories. In an introductory university microeconomics class, students learn the concept of scarcity. An individual, a company or a country have limited resources and an infinite array of wants, needs, and desires placed upon them. This may be elementary and obvious, but the vast majority of working individuals cannot decide to use 100 percent of a month’s salary on luxuries. Such a decision would leave nothing left over to pay the rent or house mortgage, food bills, transportation and utility costs, credit card bills, taxes, and any other expenses. Unfortunately, all too many Americans are prone to short-sighted, emotional, impulse buying of big-ticket items and living a lifestyle beyond their means that jeopardize their long-term well-being and leave them deep in debt and on the verge of bankruptcy.
Like individuals, companies must also decide exactly how to allocate their spending priorities. Had Mr. Price decided to commit only his own $1 million salary to his altruistic idea, the company would have been no better and no worse than before. However, Mr. Price’s altruistic decision to allocate $2.5 million of Gravity’s resources to increase the salaries of its 120 employees left a corresponding gaping hole elsewhere in the company’s budget. It prevented him from buying out his older brother’s 30 percent equity in the company and resulted in a shortage of the financial resources necessary to defend the company against legal challenges. Also, the company’s over-sized investment in labor left it vulnerable and without adequate financial reserves to overcome economic downturns and unforeseen problems of its own.
Most interestingly, the latter article explains the grievances that caused two of his key employees to leave the company. One former employee explained that Mr. Price “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.” When she brought the matter to Mr. Price’s attention, she said “He treated me as if I was being selfish and only thinking about myself. That really hurt me. I was talking about not only me, but about everyone in my position.” Another key employee quit because “Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.” Even some of the employees who joined the company shortly before the raise was instituted and received substantial increases in their salaries candidly admitted that they did not earn the raise.
Despite The New York Times’ well-documented penchant for demonizing or giving short shrift to viewpoints that oppose the extremely liberal social and economic policies that this once-great newspaper advocates, Ms. Cohen, to her great credit, did not do so in her well-balanced article. She quoted Roger Reynolds’ very salient criticism of Mr. Price that “Everyone may have equal rights, but not equal talent or motivation. I think he’s trying to bring in some political and aspirational beliefs into the compensation structure of the workplace.”
Ms. Cohen also deserves kudos for identifying the deeper religious motivations behind Mr. Price’s altruistic yet ill-fated decision. She notes that Mr. Price was home-schooled and was raised to accept the Bible as the literal truth. Although Christianity and religion, in general, have been responsible for much that is good in this world, helping develop the morals of stone age people and instilling in them the virtues of compassion and charity, their unrealistic, aspirational beliefs are also responsible for much of the economic ignorance that has plagued the world. Many believing Christians and those who were raised as Christians are wracked with fear and guilt after reading such quotes as from Matthew 19:24 or Mark 10:25 or Luke 18:25 that “It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.” James 5:1 states “Go to now, ye rich men, weep and howl for your miseries that shall come upon you.” Many Christians have long taken to heart the injunction in Luke 18:22, Matthew 19:21, and Luke 12:23 to the rich young ruler to “sell all that thou hast, and distribute unto the poor, and thou shalt have treasure in heaven”. It is, thus, unsurprising that Mr. Price felt morally compelled to divest himself of his wealth, viewing his company’s workers as the poor to whom he must distribute his wealth in order to obtain his entry ticket into heaven.
Although the United States Declaration of Independence is adamant that all men are created equal, this is an aspirational article of faith and does not represent economic reality. God may love all of his children equally and every one of them has an equal chance at the afterlife, but one need only consider that people are born with a vast difference in talents, skills, and abilities. People have widely divergent intellectual, physical, emotional, athletic, leadership, business, and artistic abilities that to deny this direct evidence of the senses is to deny observable reality. Unfortunately, this iron law of reality can also be sadly observed in the handicapped whose capabilities fall so far below average human beings in one or more of the above dimensions that the earthly inequality of human beings is impossible to deny.
Intellectual inequality produced Sir Isaac Newton and Albert Einstein. They also allowed Google’s Sergey Brin and Larry Page and Facebook’s Mark Zuckerberg to become multi-billionaires. Rare athletic gifts produce prowess in sports that reward professional sports players with stupendous wealth. Unevenly distributed physical beauty and symmetry result in enormously lucrative modeling and acting careers. Artistic and musical talents confer enormous economic rewards upon their possessors. The economic laws of scarcity, supply, demand, substitutes, and complements operate regardless of aspirational ideals of equality. Although Messrs. Newton, Einstein, Brin, Page, and Zuckerberg are certainly capable of sweeping floors if need be, floor sweepers cannot perform the opposite.
Contrary to the aspirational central theme of the 1980s movie “Trading Places”, a street hustler, brilliantly played by Eddie Murphy, cannot be bathed, attired in a smartly-tailored three-piece suit, and substituted for a real world Wall Street trader any more than an average man can be plucked from the street and asked to replace Eddie Murphy as the star of the movie. The average woman who warbles in her bathtub cannot perform vocally well enough to take the place of Mariah Carey, Katy Perry or Jennifer Lopez. A street performer who plays for passerby and collects their tip money in his hat cannot compare to Lindsey Stirling’s virtuoso abilities on the violin while dancing.
A minimum wage or Dan Price’s minimum salary of $70,000 treat people as a homogeneous collection of rice or corn and do not discern the fundamental differences in skills, abilities, experience, and performance between individual people. There can be no doubt that a 23-year-old administrative assistant, with only two months on the job, like Gravity’s Stephanie Brooks, is not as competent or efficient as an administrative assistant who competently worked for the same company for five years. According to Payscale.com, the national average annual salary for an administrative assistant is $33,000. An entry-level administrative assistant can expect to be paid eight percent less, or an annual salary of $30,360 while a late-career and very experienced administrative assistant can expect to earn $37,950 per year. This means that Stephanie Brooks and other administrative assistants who work at Gravity are paid almost twice the salary of far more experienced administrative assistants. It is exceedingly unlikely that Stephanie Brooks and other administrative assistants who work at the company generate per person at least $70,000 of productivity and incoming cash flow for Gravity to pay for this extravagant salary.
In the very short term, at age 23, Stephanie Brooks may be among the highest paid administrative assistants in America, if not the world. This is a great situation for her personally, but not for the company. Gravity’s overdrawn credit card and mounting costs will soon crash against the steely reality of economics, and Gravity will be forced to rescind Mr. Price’s utopian largesse or to shed employees whose productivity does not exceed their cost by some margin. A company like Gravity cannot defy economic reality by overpaying for certain jobs, hemorrhaging money, and can only expect to hit the hard economic pavement. Far from being the new standard bearer for “socially and economically enlightened” companies, the darling of progressive socialists like President Barrack Obama, Massachusetts Senator Elizabeth Warren, and Vermont Senator Bernie Sanders, Gravity will be a case study and a cautionary tale on how not to operate a company for students in America’s graduate business schools.
Minimum wage laws and Price’s minimum salary of $70,000 are the product of economic ignorance. As pointed out by the great 19th century French economist and social commentator Frédéric Bastiat in his 1850 essay titled “What is Seen and What is Unseen”, the vast majority of people make their economic decisions based upon the benefits apparent to them while completely ignoring repercussions and hidden costs. Those who advocate doubling the minimum wage from the present $7.25 to $15.00 per hour to mistakenly assume that it will give minimum wage earners more earning power and more money left over after paying for necessities. This assumption only works if all other prices and expenses stay the same, which cannot be.
For example, let us suppose that Bill and Mary are minimum wage earners and currently earn $7.25 per hour. Let us assume that Mary works at a store and receives a raise to $15.00 per hour because she is efficient and competent. Let us assume that Bill works at a sandwich shop and he is neither efficient nor competent at his existing minimum wage of $7.25 per hour. If Mary buys a sandwich prepared by Bill that costs $5.00, she has $10.00 remaining in buying power to spend elsewhere. She is rewarded for her efficiency and competence. If the minimum wage is increased to $15.00 per hour, Bill must be paid this wage regardless of his efficiency and competence. Since Bill’s labor costs nearly doubled, the sandwich shop must now charge at least double or $10.00 for its sandwich to break even. Mary’s efficiency and competence make no difference whatsoever because she is rewarded the same $15.00 per hour as Bill is rewarded for his inefficiency and incompetence. Now, instead of Mary’s sandwich costing 1/3 of her hourly wage, the new minimum wage caused Mary’s sandwich to increase to 2/3 of her hourly wage. With every minimum wage earner now receiving $15.00 per hour, the increases in labor costs will ripple throughout the economy. A gallon of gasoline will cost more because the labor costs will increase to account for the increase in the minimum wage. Groceries will cost more because the supermarket will have to pay its own employees the same increased minimum wage. Housing costs will increase because landlords will have to pay janitors and landscapers double the money. The increase in the minimum wage will permeate throughout the economy even to occupations that are paid much more than the minimum wage. Teachers and other government employees will need to be paid more to compensate for sandwiches costing double than before and babysitters who charge $15.00 per hour and groceries that cost at least twice than before. Businesses will forgo hiring teenagers for after-school jobs. Meanwhile, the elderly, retired, and handicapped who live on fixed income will fall into deep poverty. An increase in the minimum wage is nothing more than a “feel good” measure that will end up hurting its intended beneficiaries most of all and inevitably will result in a price inflation and erosion of the currency even further. In a few short years, the same economically ignorant activists and demagogues will wail that a $15.00 minimum wage is woefully insufficient and will clamor for a $30.00 minimum wage that will start the selfsame cycle of futility all over again.
As for Dan Price’s $70,000 minimum annual salary, the employees of Gravity only prosper if they are paid far more than similarly-situated employees in Seattle, Washington, and have more left in their pocketbooks after paying for $10 lattes at Starbuck’s. Once envy sets in among other government employees and unionized labor in Washington, every teacher, bus driver, and bureaucrat will also earn a salary of $70,000 or more. Once everyone receives a minimum annual salary of $70,000, the salary received by Gravity’s employees will no longer be unique and will no longer confer upon them an advantage in buying power. If the company survives long enough, Gravity’s employees will once again complain to Dan Price about their anxiety of only earning $70,000 per year and their vulnerability to sudden rent increases and mounting credit card bills. The new mantra will be a minimum annual salary of $150,000. At some point, the unrealistically high labor costs will cause the company to totter on the edge of bankruptcy and a future socialist government will have to come in and bail out the company from the forces of economic gravity. Ah, but this has been done before in 2008, when the government bailed out General Motors caused by its ruinous labor agreements with the United Auto Workers.
We at The Cassandra Times wish to share a cautionary tale about compensation that is untethered to excellence and productivity, but, instead, is shackled to the needs of the recipients. In 1957, almost 60 years ago, long before Gravity’s Dan Price was born, Ayn Rand published her fictional masterpiece and bestselling novel “Atlas Shrugged”. The author Ayn Rand, born Alisa Rosenbaum, had experienced first-hand the Russian Revolution of 1917 and knew that philosophical ideas have real-world consequences. In one of the more prescient portions “Atlas Shrugged”, Rand described a fictional company, The 20th Century Motor Company, whose owners decided to compensate its employees, not based upon their abilities, but upon their needs, in much the same way as Gravity’s Dan Price had decided that his employees needed a salary of $70,000. Here are a few excerpts from the story told by one of the company’s former lathe operators about how the company ended up in bankruptcy and he became unemployed and homeless.
Well, there was something that happened at that plant where I worked for twenty years. It was when the old man died and his heirs took over. There were three of them, two sons and a daughter, and they brought a new plan to run the factory. They let us vote on it, too, and everybody—almost everybody—voted for it. We didn’t know. We thought it was good. No, that’s not true, either. We thought that we were supposed to think it was good. The plan was that everybody in the factory would work according to his ability, but would be paid according to his need.
Try pouring water into a tank where there’s a pipe at the bottom draining it out faster than you pour it, and each bucket you bring breaks that pipe an inch wider, and the harder you work the more is demanded of you, and you stand slinging buckets forty hours a week, then forty-eight, then fifty-six—for your neighbor’s supper—for his wife’s operation—for his child’s measles—for his mother’s wheel chair —for his uncle’s shirt—for his nephew’s schooling—for the baby next door—for the baby to be born—for anyone anywhere around you—it’s theirs to receive, from diapers to dentures—and yours to work, from sunup to sundown, month after month, year after year, with nothing to show for it but your sweat, with nothing in sight for you but their pleasure, for the whole of your life, without rest, without hope, without end. . . . From each according to his ability, to each according to his need. . . .
We’re all one big family, they told us, we’re all in this together.
But that wasn’t all. There was something else that we discovered at the same meeting. The factory’s production had fallen by forty per cent, in that first half-year, so it was decided that somebody hadn’t delivered ‘according to his ability’ Who? How would you tell it? ‘The family’ voted on that, too. They voted which men were the best, and these men were sentenced to work overtime each night for the next six months. Overtime without pay—because you weren’t paid by time and you weren’t paid by work, only by need.
Do I have to tell you what happened after that—and into what sort of creatures we all started turning, we who had once been human?
We began to hide whatever ability we had, to slow down and watch like hawks that we never worked any faster or better than the next fellow. What else could we do, when we knew that if we did our best for ‘the family,’ it’s not thanks or rewards that we’d get, but punishment? We knew that for every stinker who’d ruin a batch of motors and cost the company money—either through his sloppiness, because he didn’t have to care, or through plain incompetence—it’s we who’d have to pay with our nights and our Sundays. So we did our best to be no good.
What was it they’d always told us about the vicious competition of the profit system, where men had to compete for who’d do a better job than his fellows? Vicious, wasn’t it? Well, they should have seen what it was like when we all had to compete with one another for who’d do the worst job possible. There’s no surer way to destroy a man than to force him into a spot where he has to aim at not doing his best, where he has to struggle to do a bad job, day after day. That will finish him quicker than drink or idleness or pulling stick-ups for a living. But there was nothing else for us to do except to fake unfitness.
We knew our jobs and we were proud of it and we worked for the best factory in the country, where old man Starnes hired nothing but the pick of the country’s labor. Within one year under the new plan, there wasn’t an honest man left among us. That was the evil, the sort of hell-horror evil that preachers used to scare you with, but you never thought to see alive. Not that the plan encouraged a few bastards, but that it turned decent people into bastards, and there was nothing else that it could do—and it was called a moral ideal!
If men fall for some vicious piece of insanity, when they have no way to make it work and no possible reason to explain their choice—it’s because they have a reason that they do not wish to tell. And we weren’t so innocent either, when we voted for that plan at the first meeting. We didn’t do it just because we believed that the drippy old guff they spewed was good. We had another reason, but the guff helped us to hide it from our neighbors and from ourselves. The guff gave us a chance to pass off as virtue something that we’d be ashamed to admit otherwise. There wasn’t a man voting for it who didn’t think that under a setup of this kind he’d muscle in on the profits of the men abler than himself. There wasn’t a man rich and smart enough but that he didn’t think that somebody was richer and smarter, and this plan would give him a share of his better’s wealth and brain. But while he was thinking that he’d get unearned benefits from the men above, he forgot about the men below who’d get unearned benefits, too. He forgot about all his inferiors who’d rush to drain him just as he hoped to drain his superiors. The worker who liked the idea that his need entitled him to a limousine like his boss’s, forgot that every bum and beggar on earth would come howling that their need entitled them to an icebox like his own. That was our real motive when we voted—that was the truth of it—but we didn’t like to think it, so the less we liked it, the louder we yelled about our love for the common good.
Well, we got what we asked for. By the time we saw what it was that we’d asked for, it was too late. We were trapped, with no place to go. The best men among us left the factory in the first week of the plan. We lost our best engineers, superintendents, foremen and highest skilled workers. A man of self-respect doesn’t turn into a milch cow for anybody. Some able fellows tried to stick it out, but they couldn’t take it for long. We kept losing our men, they kept escaping from the factory like from a pesthole—till we had nothing left except the men of need, but none of the men of ability.
With his bearded hipster looks, Gravity’s Dan Price appears to be a decent human being who is the victim of bad altruistic religious programming. His behavior does, however, bear a resemblance to Eric Starnes, one of the three heirs to the 20th Century Motor Company who drove it into the ground:
Eric didn’t care for money—he wouldn’t have known what to do with it. He spent his time hanging around among us, showing how chummy he was and democratic. He wanted to be loved, it seems. The way he went about it was to keep reminding us that he had given us the factory. We couldn’t stand him.
The pay he got—well, I shouldn’t call it ‘pay,’ none of us was ‘paid’—the alms voted to him was fairly modest, about ten times what I got, but that wasn’t riches.
If Dan Price values the company he started and does not want it to swirl down the drain like the fictional 20th Century Motor Company, he must put the brakes to his quixotic ideas, set aside the accolades of the economically ignorant and the shady political operators, and apply himself in earnest to the study of classical laissez-faire Austrian school economics by Ludwig Von Mises, Henry Hazlitt, Milton Friedman, and Murray Rothbard. He would also be well served to read Ayn Rand’s superb novels “The Fountainhead” and “Atlas Shrugged”.
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A Company Copes With Backlash Against the Raise That Roared
Patricia Cohen
New York Times
July 31, 2015
There are times when Dan Price feels as if he stumbled into the middle of the street with a flag and found himself at the head of a parade.
Three months ago, Mr. Price, 31, announced he was setting a new minimum salary of $70,000 at his Seattle credit card processing firm, Gravity Payments, and slashing his own million-dollar pay package to do it. He wasn’t thinking about the current political clamor over low wages or the growing gap between rich and poor, he said. He was just thinking of the 120 people who worked for him and, let’s be honest, a bit of free publicity. The idea struck him when a friend shared her worries about paying both her rent and student loans on a $40,000 salary. He realized a lot of his own employees earned that or less.
Yet almost overnight, a decision by one small-business man in the northwestern corner of the country became a swashbuckling blow against income inequality.
The move drew attention from around the world — including from some outspoken skeptics and conservatives like Rush Limbaugh, who smelled a socialist agenda — but most were enthusiastic. Talk show hosts lined up to interview Mr. Price. Job seekers by the thousands sent in résumés. He was called a “thought leader.” Harvard business professors flew out to conduct a case study. Third graders wrote him thank-you notes. Single women wanted to date him.
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.”
As Mr. Price spoke in the Gravity conference room, he could see a handful of employees setting up beach chairs in the parking lot for an impromptu meeting. The office is in Ballard, a fast-gentrifying neighborhood of Seattle that reflects the wealth gap that Mr. Price says he wants to address. Downstairs is a yoga studio, and across the street is a coffee bar where customers can sip velvet soy lattes on Adirondack-style chairs. But around the corner, beneath the elevated roadway, a homeless woman silently appeals to drivers stopped at the red light with a cardboard sign: “Plz Help.”
In his own way, Mr. Price is trying to respond to that request.
“Income inequality has been racing in the wrong direction,” he said. “I want to fight for the idea that if someone is intelligent, hard-working and does a good job, then they are entitled to live a middle-class lifestyle.”
The reaction to his salary pledge has led him to think that if his business continues to prosper, his actions could have far-reaching consequences. “The cause has expanded,” he said. “Whether I like it or not, the stakes are higher.”
On a recent weekday evening, Mr. Price confidently threaded his way through clumps of tourists and past the rows of flowers and fruits that line Pike Place Market in downtown Seattle. About 70 percent of the businesses that occupy this nearly century-old marketplace use Gravity to process their credit card payments, Mr. Price said. He started courting customers there more than 11 years ago, while still attending Seattle Pacific University, a small Christian college. He would go from stall to stall, shaking hands, scribbling down phone numbers. Early on, he signed up Pure Food Fish. The shop was a backdrop in the film “Sleepless in Seattle,” but more important, it was run by the 86-year-old Solly Amon, who inherited the pocket store from his father and is lovingly known as the “cod father.” When other merchants heard Mr. Amon trusted Dan, they did too.
“They give us tremendous service,” Mr. Amon said. He remembered an incident years ago when Mr. Price had a new credit card machine up and running within three hours after his old one died.
In addition to providing the devices and software that merchants use when a customer whips out a credit card, Gravity makes sure the money shifts securely and quickly among buyer, bank and business. In an industry dominated by global banking giants and mammoth processors, the company last year processed $6.5 billion in sales for 12,000 clients, most of them small and medium-size businesses.
Was Mr. Amon bothered by Mr. Price’s new payroll policy? “He takes care of his business, and I’ll take care of my business,” he declared.
Brian Canlis, a co-owner of his family-named restaurant, is also a client. He said he was fond of Mr. Price, but was more discomfited by his actions. Mr. Canlis is already worried about how to deal with Seattle’s new minimum wage, which rose to $11 an hour in April and is scheduled to reach $15 an hour for small businesses within five years.
The pay raise at Gravity, Mr. Canlis told Mr. Price, “makes it harder for the rest of us.”
Mr. Price winced. “It pains me to hear Brian Canlis say that,” he said later. “The last thing I would ever want to do is make a client feel uncomfortable.”
But any plan that has the potential, as Mr. Price has put it, to “set the world on fire,” is bound to make some people squirm. Leah Brajcich, who oversees sales at Gravity, fielded complaints from several customers who accused her boss of communist or socialist sympathies that would drive up their own employees’ wages and others who felt it was a public relations stunt. A few were worried that fees would rise or service would fall off. “What’s their incentive to hustle if you pay them so much?” Ms. Brajcich said they asked. Putting in 80-hour weeks after the announcement, she called the mistrustful clients, stopping by their offices or stores, and invited them to visit Gravity to see for themselves the employees’ dedication. She said she eventually lured most back.
As for other business leaders in Mr. Price’s social circle, they were split on whether he was a brilliant strategist or simply nuts. As much as they respected him, they were also disturbed. “I worry how that’s going to impact other businesses,” said Steve Duffield, the chief executive of the DACO Corporation, who met Mr. Price through the Entrepreneurs’ Organization in Seattle. “We can’t afford to do that. For most businesses, employees are the biggest expense and they need to manage those costs in order to survive.”
Roger Reynolds, a co-owner of a wealth management company, said his discussion of the pay plan with Mr. Price got heated. “My wife and I got so frustrated with him at a cocktail party, we literally left,” said Mr. Reynolds, who complained that Mr. Price unfairly accused him of measuring his self-worth solely in terms of money and trying to hold somebody else down. Everyone may have equal rights, but not equal talent or motivation, Mr. Reynolds said. “I think he’s trying to bring in some political and aspirational beliefs into the compensation structure of the workplace.”
If there was a 19th-century thinker Mr. Price drew inspiration from, it would be not Karl Marx, but Russell Conwell, the Baptist minister and Temple University founder, whose famed “Acres of Diamonds” speech fused Christianity and capitalism. “To make money honestly is to preach the Gospel,” Mr. Conwell exhorted his listeners. To get rich “is our Christian and godly duty.”
Growing up in rural southwestern Idaho, Mr. Price frequently listened to a recording of the speech on tape.
Every day he and his four brothers and one sister rose as early as 5 a.m. to recite a proverb, a psalm, a Gospel chapter and an excerpt from the Old and New Testaments. Home-schooled until he was 12 and taught to accept the Bible as the literal truth, Mr. Price also listened to the Rush Limbaugh show for three hours a day — never imagining he would one day be the subject of a rant by the host. Then it was time to help his mother with organic gardening, composting and recycling.
Like his siblings, Dan was fiercely competitive, said his father, Ron Price, and hard on himself if he didn’t come in first at Bible memorization contests, backyard football or board games like Life and Monopoly. “Dan has always been a deal maker,” said his father, who is now a management consultant.
The isolation did not prepare Mr. Price for the complex social interactions of junior high school. He was awkward, out of place. He remembered joining in when a group of children started laughing, only to later realize that he had been the target of their ridicule.
His experiences did reinforce an independent, contrarian streak even as he made a place for himself in the teenagers’ terrain. He formed a rock band and got a girlfriend. After their first hug at 17, her conservative Christian father demanded to know his intentions. The two were engaged, and they married four years later. (They divorced amicably in 2011.)
His parents instilled a sense of purpose. “We had a family mission” to glorify God, he said. The household was run as a “family business” with jobs and responsibilities carefully set out in charts and diagrams. “All my siblings hated it, but I thought it was cool,” Mr. Price said with a laugh.
Mr. Price is no longer so religious, but the values and faith he grew up on are “in my DNA,” he said. “It’s just something that’s part of me.”
He transferred that zeal to his credit card processing business, which he started out of his dorm room in 2004 with his brother Lucas, five years his senior.
He preached Main Street capitalism that promised to deliver good value, low prices and individual service. His success won him a shelf full of local business awards and even a chance to meet President Obama during National Small Business Week when he was just 25. Though he now has the shoulder-length hair and beard of a hipster, back then he looked like a baby-faced Donny Osmond and sounded like Alex P. Keaton, the eager beaver Republican played by Michael J. Fox on the 1980s sitcom “Family Ties.” He did not actively oppose Seattle’s minimum-wage increase, but a reason he urges other business owners to follow his lead on pay is to avoid more government regulation.
Mr. Price’s drive to succeed, fierce commitment to help small businesses and exacting standards attracted other business-minded idealists. Some even took pay cuts to work at Gravity. Keeping an existing client is more important than getting a new one, he decreed. Never make a caller hear more than two rings before picking up.
Nydelis Ortiz, 25, a former Peace Corps volunteer in Peru (not to mention the 2010 Miss Vermont), said she was drawn to his passion and community volunteer projects. Emery Wager, 30, a Stanford engineering graduate and a former Marine, decided to forgo applying to Harvard Business School so he could work closely with Mr. Price. (He felt vindicated when a Harvard friend who had ridiculed his decision told him Gravity’s pay scale was discussed in class.)
Maisey McMaster was also one of the believers. Now 26, she joined the company five years ago and worked her way up to financial manager, putting in long hours that left little time for her husband and extended family. “There’s a special culture,” where people “work hard and play hard,” she said. “I love everyone there.”
She helped calculate whether the firm could afford to gradually raise everyone’s salary to $70,000 over a three-year period, and was initially swept up in the excitement. But the more she thought about it, the more the details gnawed at her.
“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,” she said. To her, a fairer proposal would have been to give smaller increases with the opportunity to earn a future raise with more experience.
A couple of days after the announcement, she decided to talk to Mr. Price.
“He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.”
Already approaching burnout from the relentless pace, she decided to quit.
The new pay scale also helped push Grant Moran, 29, Gravity’s web developer, to leave. “I had a lot of mixed emotions,” he said. His own salary was bumped up to $50,000 from $41,000 (the first stage of the raise), but the policy was nevertheless disconcerting. “Now the people who were just clocking in and out were making the same as me,” he complained. “It shackles high performers to less motivated team members.”
Mr. Moran also fretted that the extra money could over time become too enticing to give up, keeping him from his primary goal of further developing his web skills and moving to a digital company.
And the attention was vexing. “I was kind of uncomfortable and didn’t like having my wage advertised so publicly and so blatantly,” he said, echoing a sentiment of several Gravity staff members. “It changed perspectives and expectations of you, whether it’s the amount you tip on a cup of coffee that day or family and friends now calling you for a loan.”
Several employees who stayed, while exhilarated by the raises, say they now feel a lot of pressure. “Am I doing my job well enough to deserve this?” said Stephanie Brooks, 23, who joined Gravity as an administrative assistant two months before the wage increase. “I didn’t earn it.”
When Mr. Price chose $70,000 as the eventual salary floor, he was influenced by research showing that this annual income could make an enormous difference in someone’s emotional well-being by easing nagging financial stress.
He might have also considered the parable of the workers in the vineyard from the Gospel of St. Matthew, where the laborers hired at sunup were upset that their pay was the same as those who showed up right before quitting time. Early adopters and latecomers may be equally welcomed in the Kingdom of Heaven, but not necessarily in the earthly realm, where rewards are generally bestowed in paycheck form.
As for the raw feelings of friends or staff members, Mr. Price readily admits that he can be contentious, even censorious. A disagreement often comes across as a personal attack. “It’s just as painful for me as anyone else,” he said.
Mr. Price, who extolled Ms. McMaster’s talents, said he didn’t think she, Mr. Moran or even Rush Limbaugh was 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. When other entrepreneurs suggested that stock options or profit-sharing would have been a better approach, he said that’s the way capitalism works: Everyone tries to invent the best mousetrap. “I came up with the best solution I could.”
And the publicity surrounding it has generated tangible benefits. Three months before the announcement, the firm had been adding 200 clients a month. In June, 350 signed up.
That new business won’t start paying off for 12 to 18 months, however, Mr. Price said, and in the meantime, he is contending with the lawsuit brought by his brother. Lucas Price owns about 30 percent of their company, although he has not actively been involved in day-to-day operations for several years. There had been tensions between the two long before the new pay plan, and Lucas is demanding that Dan buy him out for an unspecified amount, plus damages.
Lucas, who lives in Seattle, declined to be interviewed but wrote in an email: “Dan has taken millions of dollars out of the company for himself while denying me the benefits of the ownership of my shares, and otherwise favoring his own interests as the majority shareholder over my interests.” He said his complaints predated the pay raises.
Even so, they clearly are critical to the outcome. With profits, at least in the short term, shifted to salaries, there is little left over to buy out his brother, let alone pay the legal bills or make longer-term capital improvements in the company, Dan said.
Flabbergasted when the suit arrived, Dan said he was puzzled by the accusations, saying that Lucas agreed to his $1.1 million salary and bonus package, instituted for 2012.
Family fighting over a business can be ugly and is often about more than just money. Dan conceded he may have previously given short shrift to Lucas’s contributions. “Who knows if I would have had the opportunity to build the company without him helping me out in the first couple of years?” he said.
Lucas was the best man at his wedding, and the two, close friends, often hiked, surfed and attended ballgames together. By the end, “being in business together was the worst thing for our relationship,” Dan said. After the lawsuit was filed, he said he called the rest of his family and told them to offer “unconditional love and support” to both Lucas and him. (Their younger brother Alex, 23, also works at the company.)
While it is upsetting to see two of his sons at odds, Ron Price said, “their mother and me don’t lose sleep over it. I think they’ll get it sorted out.”
Dan Price, who estimated his current net worth, including his home, at about $3 million, said he had offered to “give up everything I have personally and everything I’ll have for years to come.” A court date has been set for May.
For now, at least, Mr. Price has undoubtedly made an immediate difference in the lives of many of his employees. José Garcia, 30, who supervises an equipment team, was able to afford to move into the city and replace the worn tires on his car. Ms. Ortiz, who was briefly homeless as a child, can now visit her family in Burlington, Vt. Cody Boorman, 22, who handles operations out of his eastern Washington home, said he and his wife finally felt financially secure enough to start a family.
There have been other ripples. Mario Zahariev, who runs Pop’s Pizza & Pasta, switched to Gravity after seeing Mr. Price on the news. When he learned his monthly processing fees would drop to $900 from $1,700, Mr. Zahariev decided, “I was not going to keep the difference for myself.” He used the savings to raise the salaries of his eight employees.
Pop’s Pizza aside, Mr. Price’s plan is not easily replicated, said Nick Hanauer, a Seattle venture capitalist and an early promoter of the city’s $15 minimum wage law. Still, he noted, “These individual acts can create a new kind of perception of what’s possible and what’s righteous.” After all, he said, two years ago, no one would ever have guessed higher minimum wage laws would be catching fire in cities around the country. “Who can tell what that last thing is that catalyzes big change?”
In that sense, Mr. Price’s foray into the public debate on wages is not unlike his newfound passion of wake surfing. Cruising atop the curl of a wave created by a motorboat isn’t easy. Lean too far ahead of the swell or drift behind it and you wipe out. For the moment, he is balancing on the crest, enjoying the ride and doing his best to keep from falling off.
A version of this article appears in print on August 2, 2015, on page BU1 of the New York edition with the headline: The Raise That Roared .
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One Company’s New Minimum Wage: $70,000 a Year
PATRICIA COHEN
April 13, 2015
The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.
His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.
“Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”
If it’s a publicity stunt, it’s a costly one. Mr. Price, who started the Seattle-based credit-card payment processing firm in 2004 at the age of 19, said he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year.
The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 a year.
Mr. Price’s small, privately owned company is by no means a bellwether, but his unusual proposal does speak to an economic issue that has captured national attention: The disparity between the soaring pay of chief executives and that of their employees.
The United States has one of the world’s largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists’ estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.
“The market rate for me as a C.E.O. compared to a regular person is ridiculous, it’s absurd,” said Mr. Price, who said his main extravagances were snowboarding and picking up the bar bill. He drives a 12-year-old Audi, which he received in a barter for service from the local dealer.
“As much as I’m a capitalist, there is nothing in the market that is making me do it,” he said, referring to paying wages that make it possible for his employees to go after the American dream, buy a house and pay for their children’s education.
Under a financial overhaul passed by Congress in 2010, the Securities and Exchange Commission was supposed to require all publicly held companies to disclose the ratio of C.E.O. pay to the median pay of all other employees, but it has so far failed to put it in effect. Corporate executives have vigorously opposed the idea, complaining it would be cumbersome and costly to implement.
Mr. Price started the company, which processed $6.5 billion in transactions for more than 12,000 businesses last year, in his dorm room at Seattle Pacific University with seed money from his older brother. The idea struck him a few years earlier when he was playing in a rock band at a local coffee shop. The owner started having trouble with the company that was processing credit card payments and felt ground down by the large fees charged.
When Mr. Price looked into it for her, he realized he could do it more cheaply and efficiently with better customer service.
The entrepreneurial spirit was omnipresent where he grew up in rural southwestern Idaho, where his family lived 30 miles from the closest grocery store and he was home-schooled until the age of 12. When one of Mr. Price’s four brothers started a make-your-own baseball card business, 9-year-old Dan went on a local radio station to make a pitch: “Hi. I’m Dan Price. I’d like to tell you about my brother’s business, Personality Plus.”
His father, Ron Price, is a consultant and motivational speaker who has written his own book on business leadership.
Dan Price came close to closing up shop himself in 2008 when the recession sent two of his biggest clients into bankruptcy, eliminating 20 percent of his revenue in the space of two weeks. He said the firm managed to struggle through without layoffs or raising prices. His staff, most of them young, stuck with him.
Mr. Price said he wasn’t seeking to score political points with his plan. From his friends, he heard stories of how tough it was to make ends meet even on salaries that were still well-above the federal minimum of $7.25 an hour.
“They were walking me through the math of making 40 grand a year,” he said, then describing a surprise rent increase or nagging credit card debt.
“I hear that every single week,” he added. “That just eats at me inside.”
Mr. Price said he wanted to do something to address the issue of inequality, although his proposal “made me really nervous” because he wanted to do it without raising prices for his customers or cutting back on service.
Of all the social issues that he felt he was in a position to do something about as a business leader, “that one seemed like a more worthy issue to go after.”
He said he planned to keep his own salary low until the company earned back the profit it had before the new wage scale went into effect.
Hayley Vogt, a 24-year-old communications coordinator at Gravity who earns $45,000, said, “I’m completely blown away right now.” She said she has worried about covering rent increases and a recent emergency room bill.
“Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it,” she said.
The happiness research behind Mr. Price’s announcement on Monday came from Angus Deaton and Daniel Kahneman, a Nobel Prize-winning psychologist. They found that what they called emotional well-being — defined as “the emotional quality of an individual’s everyday experience, the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant” — rises with income, but only to a point. And that point turns out to be about $75,000 a year.
Of course, money above that level brings pleasures — there’s no denying the delights of a Caribbean cruise or a pair of diamond earrings — but no further gains on the emotional well-being scale.
As Mr. Kahneman has explained it, income above the threshold doesn’t buy happiness, but a lack of money can deprive you of it.
Phillip Akhavan, 29, earns $43,000 working on the company’s merchant relations team. “My jaw just dropped,” he said. “This is going to make a difference to everyone around me.”
At that moment, no Princeton researchers were needed to figure out he was feeling very happy.
Email: patcohen@nytimes.com; Twitter: @patcohennyt