Wage Increase Destroys Business

Yes, the headline for this article is audacious, but then again, sometimes fact really is stranger than fiction. A very vocal segment of society is demanding that minimum wage be raised to $15 per hour without considering the impact this will have on not only the economy but on businesses specifically.

The best way to understand what the impact of such an increase can be seen by what is happening at one business in Seattle (WA): That business is merchant service business, Gravity Payments.

Nearly four months ago, to great fanfare, a Seattle CEO announced he was slashing his own paycheck to $70,000 USD per year and raising the pay for everyone in the company he ran to $70,000 USD per year … to address the wealth gap and in support of the $15 per hour minimum wage movement.

This isn’t, however, a feel-good story of how small business David slew corporate Goliath and everyone lived happily ever after. No, this is actually a cautionary tale that all business owners, entrepreneurs, employees, and consumers should hear and take to heart.

Life Is Hard At $70,000 per year

In an interview with the New York Times just two weeks ago, the CEO admitted that he’s struggling with his own personal finances and living on a salary of $70,000 per year that he’s been forced into the uncomfortable position of having to rent his house out to make ends meet.

On the other end of the scale, those who had previously qualified for government subsidized housing now found themselves on the receiving end of termination notices. At $70,000 USD per year, they were expected to shoulder the full cost of housing.

But those raises filled a few with apprehension … not because they didn’t believe they deserved a raise, but because they sensed that their increased good fortune was unsustainable, and that they might need to add their families back to the bottom of the long wait list for government subsidized housing when the dream ride came to a sudden and unexpected end.

The Saga Of The Shorted Shareholder

A series of events over the years between the CEO and a minority shareholder (who also happens to be his brother) has resulted in a lawsuit where Lucas Price alleges that Dan Price breached contracts as well as his duties by violating the rights of minority shareholders.

What used to be a going concern is now in shambles with all of the previous year’s profits ($2.2 million USD) re-allocated to pay for the salary increases Dan Price promised the 120 people the company employed, and no money to pay legal bills or make long-term capital improvements in the company.

Gravity’s Not So Distant Past

Back in 2004, Dan and Lucas Price created a merchant services company called Price & Price. Two years later, Dan Price because the company’s CEO. And according to lawsuit documents recently filed by Lucas Price, in 2008 the company was restructured due to numerous disagreements between the two brothers, and was rebranded Gravity Payments. Lucas retained 30 percent ownership of the company with protected minority shareholder rights agreed to in legal and binding contracts between the Price brothers.

Reward Offered For Slackers

Some of the company’s valued employees submitted their resignations because large raises were given to employees with “the least skills” and who were “least equipped to do the job.”

Still others felt that by rewarding less motivated and unmotivated employees with $70,000 per year ate away at the self-esteem and motivation of highly motivated, skilled employees. To make matters worse, those unmotivated and unskilled workers continued to kick back and let their motivated, more skilled team members do the bulk of the work since they knew everyone would be getting the same paycheck at the end of the pay period.

While some employees saw their paychecks double in size with no added responsibilities, others saw no pay raise or negligible pay raise for shouldering the majority of the work per their job descriptions. How was this fair to those nearer to the top of the pay scale?

Radio talk show hosts took to the airwaves and pointed out that overpaying Gravity Payments’ employees would encourage laziness and lead to resentment among colleagues. By making everyone equal in pay but not equal in output, the imbalance would be keenly felt by all.

The Heartache Of The Undeserving

Some people who were interviewed in the New York Times article said that they were under a great deal of pressure. They were earning $70,000 per year and felt they didn’t deserve to be earning $70,000 per year for the job they were doing.

Others worried that the money would make it easy for them to go with the flow and become complacent as their drive to compete for better pay was replaced with the knowledge that they could count on that $70,000 USD per year regardless.

Marketing and business professors across America were quoted, saying this was a bad business move on the CEO’s part. Patrick R. Rogers of the School of Business and Economics at North Carolina A&T State University has written that while happiness in the short-term would increase, it would not improve productivity and that it would negatively impact on the long-term viability of Gravity Payments as a business. His insight proved correct to that end.

Expectations And Planned Resentments

Those who worked at Gravity Payments experienced a new kind of discrimination outside of work. Other service industry workers expected to share in Gravity Payment’s largess to their employees.

Instead of enjoying those raises, many were pressured into injecting much of their new-found financial win-fall into the economy. Not doing so saw them on the receiving end of prejudice and allegations of having joined the cheap and miserly dreaded “rich” people with money to burn.

Business began to expect that those higher wage earners from Gravity Payments would help bridge the gap between mandated minimum wages and what productivity could actually afford as a minimum wage. Soon business and employees alike began to resent rigged prices, subsidized prices, and the promise of trickle down economics Gravity Payments style.

It wasn’t long before some began to feel that they were no longer the masters of their own ship.

When Your Customers Don’t Trust You Anymore

If customers couldn’t trust the CEO to set proper wages for himself as the chief executive as well for his employees, it led them to call into question the company as an entity and as a business partner. They questioned whether the CEO understand basic economics.

It’s not that the average salary at Gravity was below the poverty level. It wasn’t. The average salary for an employee at Gravity was $48,000 USD per year.

But many business owners and entrepreneurs were able to grasp what Gravity Payments’ CEO seemed unable to grasp, and that the unsustainability of paying 120 employees $70,000 USD per year regardless of output. At some point, despite assurances from the CEO that there would be no fee increases, there would have to be fee increases or the business would fail completely.

On a secondary level, business owner and entrepreneurs heard rumblings from their own employees who felt that if Gravity Payments could afford to bump everyone’s paycheck up to $70,000 per year, that all business owners and entrepreneurs could afford to do likewise. This was a bad business decision for people who weren’t even doing business with Gravity Payments!

Final Note

It would seem that the dream of making $70,000 USD per year was meant to be short-lived for 120 employees and one CEO.

I’m not against paying a good day’s wages for a good day’s work. I’m not even against paying out a bonus for work that’s exceptional.  I believe that people should be paid well and encouraged to excel at what they do best.

But when all is said and done, I’m also not for pulling incentives out from under people’s feet. When you remove the reason to push one’s self to get ahead in life, life just isn’t as rewarding as it could be.

Elyse Bruce

SUGGESTED READING

CEO Cuts Pay To Give Higher Salary To Workers
http://www.msnbc.com/morning-joe/watch/ceo-cuts-pay-to-give-higer-salary-to-workers-428365379728

A Company Copes With Backlash Against The Raise That Roared
http://www.nytimes.com/2015/08/02/business/a-company-copes-with-backlash-against-the-raise-that-roared.html

Giant Minimum Wage
http://www.nytimes.com/aponline/2015/07/21/us/ap-us-giant-minimum-wage.html

Gravity Payments CEO Sued By Brother
http://www.seattletimes.com/business/gravity-payments-ceo-sued-by-brother/

Millennials Will Be Worse Off Thanks To New York’s $15 Per Hour Minimum Wage Hike
http://www.forbes.com/sites/realspin/2015/07/28/millennials-will-be-worse-off-thanks-to-new-yorks-15-minimum-wage-hike/

Owner Of Gravity Payments Is Setting A New Minimum Wage
http://www.nytimes.com/2015/04/14/business/owner-of-gravity-payments-a-credit-card-processor-is-setting-a-new-minimum-wage-70000-a-year.html

Praise And Skepticism As One Executive Sets Minimum Wage To $70,000 A Year
http://www.nytimes.com/2015/04/20/business/praise-and-skepticism-as-one-executive-sets-minimum-wage-to-70000-a-year.html

Seattle CEO Who Set Firm Minimum Wage To 70G Rents House To Make Ends Meet
http://www.foxnews.com/us/2015/08/01/seattle-ceo-who-set-firm-minimum-wage-to-70g-rents-house-to-make-ends-meet/

Seattle Mayor Details Plan For $15 Per Hour Minimum Wage
http://www.nytimes.com/2014/05/02/us/seattle-mayor-details-plan-for-15-minimum-wage.html

Seattle’s $15 Per Hour Minimum Wage Law Just Came Back To Bite Them In A Totally Unexpected Way
http://www.westernjournalism.com/seattles-15-minimum-wage-law-just-came-back-to-bite-them-in-a-totally-unexpected-way/

Why The Minimum Wage Fight For $15 Per Hour May Be The Wrong Battle
http://www.cbc.ca/news/business/why-the-minimum-wage-fight-for-15-may-be-the-wrong-battle-1.3168793

Workers In Seattle Have Their Precious $15 Per Hour Minimum Wage But Now They Want Fewer Hours
http://chicksontheright.com/blog/item/30040-workers-in-seattle-have-their-precious-15-minimum-wage-but-now-they-want-fewer-hours

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One Response to “Wage Increase Destroys Business”

  1. cairennhouse Says:

    I can fully understand the CEO’s desire to help all his employees, but he took action before fully investigating all the possible consequences. He’s admitted it was an experiment he embarked on that was not well thought out. He could quite possibly have attained at least a part of his primary goal if he’d better educated himself on the issues involved rather than just following an idealistic impulse. He also made the mistake of not fully involving others in his management team…and taking their opinions and ideas into consideration. Idealism sprung into action without pragmatic planning is a perilous path to take.


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