$70K minimum salary pays off
Well-treated employees offered to take pay cuts to help firm,
Gravity Payments, a medium-size credit card processing company from Seattle, was hit hard by the pandemic.
In a short time, Gravity lost about half of its revenue, which mainly comes from small businesses, hit hardest by the crisis.
In early April, Dan Price, one of the company founders and its CEO, convened the 200 employees for an urgent Zoom call, sharing with them the fact that the company was burning $1.5 million a month in cash. If it continued like this and no action was taken, Price warned, the company would run out of cash in just four months.
Gravity Payments’ competitors took extreme measures. Employees were fired and commissions were raised for customers.
Price declared that he has no intention to fire any employee, but he had to come up with a solution, and fast.
After several options such as waiting for government assistance, cutting wages across the board, and raising customer fees were reviewed, an employee raised his hand and made an original proposal. Each employee will anonymously write down the percentage pay cut he was willing to absorb for the coming months.
Price first thought the proposal had no chance, that it was a waste of time, and that each employee would expect the others to agree to a larger reduction, but he decided to give it a chance. When he got the numbers, he was amazed at what he saw.
“Ninety-eight per cent of the employees agreed to cut their wages,” he tells me in a Zoom interview from Seattle. “Ten wrote that they were willing to work for free, and several dozen offered a 50 per cent reduction in their wages.
“When I saw it, I was so moved, that tears flowed from my eyes.”
Gravity adopted the solution proposed by the workers, with slight modifications. No employee’s salary was reduced by more than half, and for those who earned less than $100,000, the maximum reduction was 30 per cent. The company was saved. To understand the corporate culture that enabled a solution like this to emerge naturally, one has to go back five-and-a-half years.
Back in 2015, Price was a successful CEO who earned a seven-figure sum. One day, when he went for a hike with a
good friend, who earned less than $50,000 working at a different company, his anger flared up.
“She was smart, very talented, and worked more than 50 hours a week,” Price said, “but when she learnt that her rent was about to go up by $200 a month, she couldn’t figure out how she was going to pay it. I was so upset. Here I am, earning an income of over a million dollars a year, realizing that, at Gravity, I work with people who I really value as partners, and they were making less than her.”
Price recalled a study conducted by Angus Deaton and Daniel Kahneman in 2010. The study found that people do not feel happier as their wages rise above $75,000 a year. However, they are significantly more miserable when they earn less than that amount. At Gravity, new employees earned $35,000 a year. In a defining moment, Price decided that he will find a way to pay all his employees a minimum salary of $70,000 a year.
This took two years to implement. Once it was completed, the salaries of 30 workers doubled, and those of an additional 40 were increased significantly. No employee was fired, and no manager’s wage (except that of Price) was reduced. More than half of the funding of the new wage program came from the reduction in Price’s own wage,
from $1.1 million to $70,000, and the rest came from the company’s profits.
While most employees were naturally thrilled, the move also drew quite a bit of criticism, both from inside and outside the company. A few workers, who earned a handsome wage before the change, accused Price of injustice, claiming that he was giving free gifts to new and junior workers, and that the work ethic would be harmed. Fox News pilloried him and conservative journalist Rush Limbaugh said, “I hope this company is a case study in MBA programs on how socialism does not work, because it’s gonna’ fail.”
“The naysayers were wrong,” he tells me now, five-and-a-half years after the eannouncement, which made national news. “I could not have imagined such a great success. The number of employees at Gravity increased by 70 per cent. The company’s customer base doubled, and the cash turnover cleared almost tripled. The employees are more committed and prouder to belong to the company.”
Price is even more proud of other measures of success. “Before the change, we had between zero and two babies a year. Since the announcement, more than 50 babies have been born to company employees. Our employees have lost 50 pounds, defeated cancer, did significant things for themselves. More than 70 per
cent have been able to pay debts, and 10 per cent bought homes in one of the most expensive cities in the U.S., Seattle. And all of this while the company continues to grow.”
Price placed a cap on the largest salary. The highest paid employee makes $275,000, which creates an extremely rare and low ratio between the highest and lowest paid employees. When I ask if he would match an offer coming from say, Amazon, going after his most valuable employee, he says he won’t.
“I will let her go,” he says emphatically. “Today, I understand much more deeply the problem of the pay gap and inequality and I am not willing to participate in this game.”
What happened to the Gravity employees who took a massive pay cut back in April?
In July, Price assessed that the company had returned to stability and announced that workers would get back the amount deducted from their respective salaries.
It’s a heartwarming story for the holiday season.
And it’s true.