What Happens When You Give Employees a $70,000 Minimum Wage

In April 2015, Gravity Payments, a credit card payment processing firm based in Seattle, did something highly unorthodox: it unliterally gave all employees, from lowly clerks to customer services representatives, a minimum annual salary of $70,000 — well above the median rate of the average American worker.

Phased in over a period of three years, the plan will effectively double the salaries of 30 workers and give raises to 40 more making less than $70,000. All minimum salaries jumped to $50,000 right away, with $10,000 for each of the next two years. Anyone already earning $50,000 to $70,000 would still enjoy a nice raise of $5,000.

Moreover, CEO and founder Dan Price would accomplish this not by laying off staff, raising prices, or cutting the pay of certain highly paid workers; rather, he would make up the difference by slashing his own $1 million salary to $70,000 and investing 75 to 80 percent of the company’s anticipated $2.2 million for the year.

While plenty of companies could well afford to pay their workers well by going this route — allocating less profit and payroll to executives and shareholders — few would ever entertain the idea, let alone go through with it. Hence all the media attention that this exceptional pay raise warranted.

Unsurprisingly, this shockingly generous move was met with a lot of skepticism, both towards the motive (was it a publicity stunt?) and the practicality (could a company survive with so much profit going to workers)? Doubters and critics seemed quickly validated once the the firm became inundated by a series of misfortunes that related to the decision. 

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.”

It speaks volumes about the cultural mindset of so many Americans that this decision would be met with consternation, envy, and contempt, rather than be welcomed as an example of how to treat your workers and still run a successful business. Even if one doubts the feasibility of such a high minimum salary, at the very least this should be treated with an open mind as an experiment worth scrutinizing and learning from, as Inc recently argued.

Price had not only struck a nerve; he had also turbocharged a debate now raging across the American landscape, from presidential forums to barrooms to fast-food restaurants. How much — indeed, how little — should workers be paid? While financiers and C-suite honchos have showered themselves in compensation, most Americans haven’t had a raise, in real dollars, since 2000. Especially in the wake of the recession, entrepreneurs and corporate bosses have tightly controlled costs, including wages. That boosts profits — and bonuses. But at what cost? In a U.S. economy that is more than two-thirds consumer spending, GDP growth is chained to income growth. Workers can’t spend what they don’t have, nor do they have the home equity to borrow and spend. Weak wage growth helps explain why this long economic expansion has been so tepid.

Until Price dropped his wage bomb, much of that debate was punditry. He gave it a name and a face: a modern Robin Hood helping the working class by stealing from himself — and perhaps from shareholders of other companies whose bosses are now also putting employees ahead of profits: #imwithdan! Was it coincidence that Walmart, that paragon of parsimony, coughed up raises for its lowest-paid workers?

Indeed, the Inc piece suggests that the experiment will still continue, with the company’s initial woes being a mere bump on an otherwise smooth road.

Six months after Price’s announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have also doubled. Gravity did lose a few customers: Some objected to what seemed like a political statement that put pressure on them to raise their own wages; others feared price hikes or service cutbacks. But media reports suggesting that panicked customers were fleeing have proved false. In fact, Gravity’s customer retention rate rose from 91 to 95 percent in the second quarter. Only two employees quit — a nonevent…

…Raising your cost of doing business is generally not considered the best way to increase profits and improve market position. Yet the finish line for Price may be when he can lift his own salary up to market rate — making it easier for the company to replace him, if necessary, and show CEOs that sacrifice by the boss is only temporary when overhauling a company’s wage structure. He’d also like to get his $3 million loan back — invested to “take us from a low to a high margin for error,” he says — but won’t sweat it if that doesn’t happen. “I started with nothing,” he says. “I can always make enough to support myself.”

Price says establishing a $70,000 minimum wage is a moral imperative, not a business strategy. And yet he must prove the business wisdom behind it, not only to keep Gravity from sinking — and going down with the ship himself–but also to achieve his long-term goal of transforming the business world. “I want the scorecard we have as business leaders to be not about money, but about purpose, impact, and service,” he says. “I want those to be the things that we judge ourselves on.”

Indeed, the U.S. could use more moral and empirical examples like this to follow. While productivity has improved 22 percent since the turn of the century, real median wages (e.g., adjusted for inflation) have grown only 1.8 percent over the last decade and a half — falling 3 percent since the 2007 recession. According to the Economic Policy Institute, CEOs have gone from making about 71 times more than the average worker in 1990, to an incredible 300 times.

While not every company can follow Gravity’s example — nor even needs to in order to offer a decent standard of living to workers — most of them could be doing a lot more to share the fruits of their workers’ hard work. There will now be a high profile case study to look to — not that there is any shortage of companies, across industries, that are successful without beggaring their employees.

What are your thoughts?

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