Dan Price, CEO of Gravity Payments, was motivated to make this huge change because he was angry that the world had become such an unequal place.
"Do you pay what you can get away with? Or do you pay what you think is ideal, or reasonable, or fair?" asks Andrew Hafenbrack, assistant professor of Management & Organization at the Foster School of Business, the University of Washington in Seattle. He poses this question with reference to the approach Dan Price, CEO of Seattle-based credit card processing company Gravity Payments, has chosen to take to keep his business thriving. And it was an unusual approach, one that people thought would lead to the downfall of Gravity Payments.
Six years ago Price decided to pay all his employees $70,000 a year. He even slashed his own salary by $1 million to be able to give his employees a pay raise. Many people believed this would bankrupt him and it was a risky change to make. Instead, his company has been thriving. The company has tripled and he is still paying his employees $70,000 a year. He also draws the same salary as his employees. He believes his gamble paid off and proved successful even. He hopes more companies would follow suit. Considering how the average compensation of a CEO is 320 times more than the salaries of their typical workers.
CEOs of big companies now make, on average, 320 times as much as their typical worker, according to the Economic Policy Institute. In ‘89, that ratio was 61 to 1.— David Axelrod (@davidaxelrod) April 25, 2021
From ‘78 to ‘19, compensation grew 14% for typical workers. It rose 1,167% for C.E.O.s.https://t.co/lgm9XQxbcT
As per the Economic Policy Institute, this exorbitant CEO pay is a major contributor to rising inequality. CEOs are getting more because of their power to set pay and because so much of their pay is stock-related, not because they are increasing their productivity or possess specific, high-demand skills. The economy would suffer no harm if CEOs were paid less or were taxed more. Case in point, this is what Price has done with Gravity Payments. His motivation to undertake this was also from the anger that the world had become such an unequal place.
"People are starving or being laid off or being taken advantage of so that somebody can have a penthouse at the top of a tower in New York with gold chairs," Price told BBC. "We're glorifying greed all the time as a society, in our culture. And, you know, the Forbes list is the worst example - 'Bill Gates has passed Jeff Bezos as the richest man.' Who cares!?" He was given a wake-up call by a working-class friend of his, who was struggling to make ends meet despite working 50 hours a week. He then realized many of his own employees may be going through the same thing as well.
So Price crunched the numbers and arrived at the $70,000 minimum salary. He also realized he would have to give up his luxurious lifestyle to do so and went ahead with it anyway. He had to sell a second home, downsized his lifestyle, and tapped into his savings. But at the end of the day, it paid off. "I would say that's the failure of this. You know, I feel like I've been shouting from the rooftops like, 'This works, this works, everybody should do it!' and zero big companies are following suit because the system values having the highest return with the lowest risk and the lowest amount of work," Price told CBS News.
"This shows that isn't the only way for a company to be successful and profitable," acknowledges Hafenbrack. Price believes Gravity's returns are up because bigger paychecks have led to fiercely loyal employees. The turnover was cut by half and Price explained, "When you have employees staying twice as long, their knowledge of how to help our customers skyrocketed over time and that's really what paid for the raise more so than my pay cut." Even though the company took a hit when the pandemic struck, his employees voluntarily took a pay cut till things got better. Additionally, to repay Price for his sacrifices, his employees decided to all chip in and buy him a car. A gesture that meant a lot to Price.