Company bets on $70,000 minimum wage
How Gravity Payments boosted its revenue by boosting its pay.
About a year ago, Gravity Payments CEO Dan Price turned the national debate over a $15 minimum wage inside out by announcing that he was raising the salaries of his 100 or so employees to at least $70,000.
With shoulder-length hair and Brad Pitt looks, Price, then 31, made international headlines and was lionized as a hero of the working class. Most of his employees rejoiced. Two quit in anger, saying the raises unfairly rewarded some of the weakest performers. Rush Limbaugh denounced him as a socialist.
Months later, Price’s motives were questioned as a result of a lawsuit that his older brother and partner filed against him. On the eve of the trial, Gravity, which processes credit card transactions for small businesses, provided its financial results for the past year to USA TODAY. “We want a chance to tell the story rather than having it come out as bullet points” at trial, company spokesman Ryan Pirkle says. The narrative provides a case study on the impact of big raises on a company’s bottom line.
In a nutshell: It’s complicated. Revenue at the Seattle-based firm has soared, though that largely appears to be due to the worldwide publicity generated by the announcement. Profits surged as well but have dipped so far this year, in part because of the higher labor costs but mostly because of other one-time factors. Employees describe more comfortable, stress-free lives, allowing them to better focus on their jobs. And some other firms inspired by Price to lift wages dramatically are reporting positive outcomes.
The lesson? Big pay hikes may yield surprisingly beneficial results, especially in the current tight labor market. But the outsized, across-the-board increase Price shelled out should not be a benchmark for most companies, experts say.
Price says he wasn’t primarily
CEO Dan Price vowed to hike pay gradually to $70,000 by the end of 2017 for all staffers. In the past year, the average salary has risen 42%.
thinking of the bottom line when he announced the raises on April 13, 2015. “It was so people who are giving their blood, sweat and tears for our clients can live a normal life and pay their bills,” he said in an interview.
Price said he would boost minimum pay gradually to $70,000 by the end of 2017 for all staffers, including low-paid customer-support representatives. Those above that threshold got $5,000 raises. The past 13 months, the average salary has risen 42%, from $46,200 to $65,700. To cover half the cost, Price slashed his own compensation from $1.1 million to $70,000.
Yet with America bemoaning wage stagnation and a yawning gap between the pay of CEOs and their employees, the swashbuckling move struck a national nerve.
Price says the idea began bubbling a few years ago when he read research that showed happiness improved as incomes grew but only up to about $75,000. Then, a couple of weeks before the announcement, he went hiking with a friend who was struggling with how to pay a $200 monthly rent increase on her $40,000 salary. Price says he resolved then to set a $70,000 minimum salary at Gravity.
Shortly after his announcement, however, Price’s brother, Lucas, sued him, saying Dan paid himself “excessive compensation.” He demanded that Dan buy out his minority share. Here’s the rub: A Bloomberg
Business Week article last December revealed that Price was served with the lawsuit on March 16, two weeks before the hike with his friend and a month before he announced the raises. The pay increases appeared to be an effort to deflect claims that he was greedy and perhaps tie up profits in salaries to avoid a big payout to Lucas, the story said.
“I think the facts and sworn testimony flatly contradict that,” Price told USA TODAY. He notes he began writing online of his concerns about income inequal- ity well before the announcement and doled out 16% average raises from 2012 to 2014 after a conversation with an employee. The trial, set to begin Tuesday, could lay bare the timeline.
What’s not in dispute is that the raises have been a bonanza for the company. Gravity was inundated with 4,600 customer inquiries the first two weeks after the announcement, vs. 30 a month previously. The company added 4,155 new clients last year, a 55% increase from 2014, compared to typical 5% growth. Some were inspired by the raises; the news made others aware of Gravity’s discount prices. Customer attrition fell to about 5% from 9%.
The privately held company’s revenue also leaped 35% to $21.8 million last year. And despite a $2 million increase in payroll costs, profits jumped from $3.5 million to $6.5 million.
The picture is a bit fuzzier this year. Through April, Gravity has added 1,643 clients, up from 1,057 in the year-ago period. Yet customer attrition also has edged up to 6.6% — at least a small part of which can be traced to fallout from the Bloomberg Business
Week story and others. In the first quarter, revenue rose 33% vs. a year ago to $5.7 million, but profits fell 7% to $1.3 million. Pirkle largely blames a one-time $250,000 software investment. Without the raises, profits would have been up, but they’re expected to increase in coming quarters.
Price acknowledges that the media firestorm played a role in generating the new business but argues that alleviating employee stress also has been a factor.
“When you remove the distractions, you become significantly more capable,” he says.
Pirkle says the raises let employees move closer to the office and cut commute times and stop living paycheck to paycheck. Retirement account contributions are up 130%, more employees are buying first homes and 10 are expecting, up from a typical zero to two each year.
Cody Boorman, 23, and his wife decided to have their first child a year early after his salary at Gravity vaulted from $42,000 to $60,000 the past year on the way to the $70,000 salary in 2017. He was able to finish paying off the balance of his $83,000 debt and is contributing $18,000 a year to his 401(k) account, hoping to retire at 33. The raise “really did take the stress away” of worrying about tomorrow,” he says.
Alyssa O’Neal, 22, a single mother, says her days were marked by an undercurrent of anxiety before the customer support rep’s pay jumped from $35,000 to $50,000. Now, she’s poised to move into a pricier apartment that cuts her nearly two-hour commute by more than half, plans to start college next spring and can buy a daily cup of coffee without stressing. “I’m able to afford the small (things) that put my mind at ease,” she says.
Tim Low, vice president of PayScale, a Seattle-based compensation consulting firm, says that over time, paying above-market salaries can help hold onto employees, improving customer service and retention. But he says the instant spike in new customers at Gravity was more likely a result of the publicity.
Still, some other employers inspired by Price’s gambit to enact significant but more measured increases are pleased with the results. Megan Driscoll, CEO of Pharmalogics Recruiting of Boston, boosted base pay for her 62 staffers from $37,500 to $50,000 early this year. The company, which recruits employees for drug companies, is now meeting its goal of adding 10 recruiters a month; before it fell short by half, she says. Revenue is set to reach $11 million this year, up from $6.7 million in 2015, and profit margins will nearly double, she says.
Mount It of San Diego, which sells electronics and wall mounts, raised the average wages of its 25 employees by 15% this year. Coowner Firat Ozkan says an average of one warehouse worker used to quit every two weeks, increasing costs, but no one has left in several months. Workers also have cut down on misdirected packages and breakage. Profits are up despite higher labor costs.
Low says dramatically lifting salaries can be an effective strategy to attract employees. But notwithstanding the public relations benefits Price realized, he says raises should be market-based and not alienate staffers.
Customer attrition has edged up to 6.6% — at least a small part of which can be traced to fallout from the ‘Bloomberg BusinessWeek’ story and others.