When Dan Price, CEO of credit card processing company Gravity Payments, decided to raise his entire staff’s salaries to a minimum of $70,000, skeptics questioned whether the plan could possibly succeed. At a time when executive compensation is at least partly blamed for driving the widening income gap in America, Price emerged as a crusader for economic equality. It all sounded great — raise pay, get happier workers — but could Price, 31, and his company actually afford it?
The New York Times followed up with Price last week, and it became clear his critics might have been right to scoff. Having reduced his own salary from $1 million to $70,000 in order to finance the salary hikes, Price was now renting out his Seattle home and found himself facing a host of unforeseen complications. Two weeks after his headline-making announcement, he was hit with a $2.2 million breach of contract lawsuit by his brother and former business partner. Then his own workers turned on him.
Price’s plan called for each worker to earn a minimum of $70,000 per year by 2018 —resulting in a 30% raise for the average worker, who earned $48,000 at the time. For some entry-level staff, the raise would double their pay, while staff whose pay was already near or above the $70,000 threshold would enjoy much lower raises, if any at all. This rubbed some workers the wrong way. Two employees quit in protest, including Price’s financial manager, Maisey McMaster, who told the Times she believed 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.”
It was exactly the kind of drama Price’s critics had warned him about — that his mission, which Price said from the beginning was intended to make his workers happier, would instead incite internal discord and eventually blow up in his face. His haters might disagree, but it’s probably too soon to say whether Price’s quest has failed or not. Only two workers out of more than 100 quit, and his business has been adding 350 new clients per month, up from 200, according to the Times. What’s interesting is that when some economists and activists are calling on CEOs to slash their pay and implement wage hikes, Price’s struggle proves that solving the wage gap isn’t quite that simple. True, he never promised to solve income inequality — his primary goal was to give his workers a wage high enough to be able to cope with rising fixed costs like housing. The fact that he reduced his own salary wasn’t to make a statement about out-of-control executive pay, but rather a necessary sacrifice in order to satisfy his new payroll expenses. But Price might actually deserve more credit than he’s gotten for taking on the challenge unapologetically, while other corporate leaders have balked at the notion that they have any role to play in the fair wage game.
A plan like Price’s can work, says Ken Abosch, compensation practice leader at AON Hewitt, a global HR consultancy firm. However, Price may be learning the hard way that the key lies in its execution.
Equity vs. Equality
Too often, business leaders tend to conflate two separate ideas: wage equality and wage equity. Wage equity, a theory developed in the 1960s by psychologist J. Stacy Adams, argues that workers will be happiest when they feel they are paid according to their relative skill and experience level. Wage equality is when managers attempt to institute a one-size-fit all compensation level, without considering the individual talents of each worker. (To be fair, Price has said that employees can earn more than $70,000 based on their skills and talents).
“The notion of trying to make everybody equal is sort of a flawed concept to begin with,” Abosch says. “That’s what gets them upset … If employees know somebody is more experienced or a better performer and they’re not getting paid based on that.”
The best way to institute a pay raise while preserving equity is to judge individual workers based on four factors, according to Abosch: training/experience; education level; past performance; and future potential. In the case of a company-wide wage increase, which is generally implemented in stages, workers who rank high on all four categories tend to get salary bumps first. If that means two workers are paid differently for doing the same job, so be it. Where some managers fail is in communicating to workers how their compensation package was determined.
Timing is everything
The first step for a manager who wants to close a perceived wage gap among his or her workers is to figure out how wide the gap is. At Gravity Payments, the average employee’s wage will be raised from $48,000 to $70,000 — a 31% bump. Price gave his team three years to make it happen. A wage increase of 10% to 20% typically takes at least three years for a company to implement, Abosch estimates. On such a short timeline, Price might not have enough time to generate the revenue needed. He has already committed to using 75% to 80% of the company’s 2015 revenue to bankroll the first round of raises, but with rising legal costs courtesy of his brother’s lawsuit, it’s unclear how much of his own earnings or company profits will be diverted toward those expenses.
It’s for reasons like this that most companies don’t rely on revenue alone to fill in wage gaps, Abosch explains. If you give someone a $1,000 raise, a common way to pay for it is to divert funding from employee benefits. For example, a company may lower the match for employee 401(k)s or switch to health care plans with higher deductibles. In an e-mail, Price told Yahoo Finance they are planning no such cuts*, nor will they be raising prices for their clients. He remains committed to his plan, no matter the sacrifices. “[Raising wages to] $70,000/year was the right thing to do,” he said. “As a team we have been proud to sacrifice in service of independent businesses. Any sacrifice this program necessitates will be worth it, and we are determined to make this work.”
In the meantime, we’ll be waiting — and rooting — for him to succeed.
*This article has been updated to reflect additional comment from Mr. Price on his plans to fund the pay raises.