Illustrate either effective or ineffective handling of a managerial situation

GRAVITY PAYMENTS: $70,000 MINIMUM SALARY COMPANY1   Won-Yong Oh and Youngkyun Chang wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208;  www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-01-21   In April 2015, Dan Price, the 30-year-old chief executive officer (CEO), and founder of Gravity Payments, announced an increase in every employee’s wage to US$70,000.2 Every employee, including the lowest-paid clerk and newly hired staff, would receive a minimum annual salary of $70,000 over the next three years. The announcement stunned the employees and triggered a wave of high-fiving and clapping. With this decision, one young entrepreneur in Seattle, Washington, became an instant hero when he issued a direct and adventurous challenge to the long-standing problem of U.S. income inequality.3 However, at the same time, he was experiencing unexpected challenges from different people only a few months after his bold move. Income inequality has been racing in the wrong direction. I want to fight for the idea that if someone is intelligent, hard-working and does a good job, then they are entitled to live a middle-class lifestyle.4 —Dan Price, CEO COMPANY OVERVIEW Gravity Payments was a private credit card processing and financial services company. It was founded in February 2004 by brothers, Dan and Lucas Price. Dan Price, who grew up in Nampa, Idaho, was 19-years old at the time, and a freshman at Seattle Pacific University, a small Christian college. He started the company after finding that small business owners were being overcharged by credit card companies and paying as much as 5 per cent to process their payments. While in high school, Price had worked as a salesperson in a payment processing company in California. Gravity Payments provided a variety of processing and financial services, including credit card processing, POS (point of sales) systems, mobile payments, working capital financing, and gift and loyalty cards.5 The company’s customers were mostly small and medium-sized businesses. By 2008, the company became the largest credit card processor in the state of Washington, serving more than 15 per cent of small businesses in the Seattle area. In June 2010, Price was honoured with the National Small Business Administration’s “Young Entrepreneur of the Year” award.6 His company’s success was mainly due to its low-cost strategy and word of mouth publicity. The company charged less than half of the industry-average processing rate.7   Gravity Payments had had a philanthropic mandate since its beginning, and launched the “Gravity Gives” program in March, 2008. Through this program, 2 per cent of the company’s revenue had been donated to charities, including World Vision, the Fred Hutchinson Cancer Research Center and Northwest Harvest. “We feel that by contributing to organizations that provide aid to children whose basic necessities are not being met, such as food and water, we can help enrich the future,” said Price. “Gravity Payments believes in the benefits of focusing on poverty on both a global and local scale and that it will help encourage our employees as well as our community to commit to creating change so that children everywhere have an equal opportunity to thrive.”8 THE DECISION It was the right thing to do. I want everybody that I’m partnered with at Gravity to really live the fullest, best life that they can. I think that’s the [income level] where you can start to check off those life’s goal boxes — saving for college, buying a home, some of the basics, starting a family. I want everyone to have those basic opportunities.9 —Dan Price, CEO Announcement of the $70,000 Minimum Salary In April 2015, Price set a new minimum salary of $70,000 for all of his 120 employees at Gravity Payments. The idea struck him when one of his friends shared her worries about trying to pay her bills and student loans on an annual income of $40,000. Some of Price’s own employees earned that amount or less. Price decided upon the amount of $70,000 based upon a 2010 study conducted at Princeton University by economist, Angus Deaton and psychologist, Daniel Kahneman, a Nobel laureate.10 According to the study, those who made less than $75,000 were likely to experience emotional pain and job dissatisfaction. However, even if people made more than $75,000, they did not feel any greater level of happiness. Simply put, the study suggested that emotional well-being increased with economic compensation, but only up to the amount of about $75,000. The study concluded that “low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone. We conclude that high income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.”11 Before Price initiated the salary increase, the average salary at Gravity Payments was about $48,000, with the lowest salary at around $34,000. Due to Price’s decision, about 30 employees had their paycheques nearly double overnight, and others also received raises to reach the $70,000 level. Ryan Pirkle, the spokesman for Gravity Payments, mentioned that this new minimum wage policy would increase the salary of about 70 employees. The ground-breaking move was met with applause and shouts of joy by many employees. Kevin, a customer operations associate, said in an interview with the media, “I was there at the meeting . . . honestly, I could not believe what I heard, and I think that’s what a lot of people felt. I kinda felt that we needed to get that repeated.” Phillip Akhavan, a staff member in the merchant relations team, who earned an annual salary of $43,000, also said, “My jaw just dropped.  This is going to make a difference to everyone around me.” Jamie June, in the marketing department, said, “Dan is just an incredible man in general. He has a really amazing moral compass.”12 The new salary would change employees’ lives. Maria Harley, vice-president of operations said, “I’ve heard things from, ‘I can finally afford to move out of my parent’s home,’ [to] ‘I can finally afford to have a baby,’ we have some people that are parents and really want a good education for their children and feel like they can finally afford that.”13   Overnight, Price became a hero and the “world’s nicest boss.”14 He was portrayed in the media as a young entrepreneur who took the issue of income inequality into his own hands. Most responses were positive, and the company had received overwhelming support through emails from other businesses. Huge publicity from all major national media had generated clear public-relations benefits for the company. After Gravity Payments became a front-page media story, it received more than 5,000 resumes in just one day. Before the announcement, Gravity Payments added 200 clients per month on average. In June 2015, the number grew to 350. Nick Hanauer, an entrepreneur and venture capitalist who supported an idea of a $15 minimum wage, commented on Price’s move, “These individual acts can make a new kind of perception of what’s possible and what’s righteous.”15 The Downside of the $70K Minimum Salary Plan There’s no perfect way to do and no way to handle complex workplace issues that doesn’t have any downsides or trade-offs. I came up with the best solution I could . . . I know the decision to pay everyone a living wage is controversial. —Dan Price, CEO The implementation of this wage increase was not easy. In order to pay for the increases in employees’ salaries, Price cut his own remuneration from $1 million to $70,000. Also, about 75 to 80 per cent of the company’s $2.2 million profits had to be used. Many questions were raised: Was this a social experiment? Was it a public relations stunt? Or was Price just a nice guy? In addition, not everyone was pleased with his move. Other local business owners and some entrepreneurial CEOs in the same, close-knit, entrepreneurial network complained that his decision made them look stingy. Steve Duffield, CEO of the DACO Corp., who had met Price through the Entrepreneurs’ Organization in the Seattle area, said, “I worry how that’s going to impact other businesses. We can’t afford to do that. For most businesses, employees are the biggest expense and they need to manage those costs in order to survive.”16 Some customers were against the “socialist” gesture and stopped their business with Gravity Payments.17 Other customers withdrew their business due to an anticipation of a fee increase, in spite of the repeated assurances from the company that this would not happen. Complaints even came from Price’s own employees. While 30 or so employees would see their pay nearly double overnight, and about 70 employees also got raises, the remaining 50 were already paid more than $70,000. In fact, according to the New York Times, the company’s two best employees left the company because of Price’s decision.18 For example, Maisey McMaster, who joined Gravity Payments five years earlier and had worked long hours that left little time for her family, was one of them. She said, “He 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.”19 McMaster talked to Price after contemplating a fairer proposal. From her view, a fairer proposal was offering smaller raises with the opportunity to gain a future increase with more experience. “He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.” 20 Grant Moran, a web developer whose salary increased from $41,000 to $50,000 (due to the first stage of the pay increase), also expressed concerns, even though he would receive a substantial pay increase from this plan. He opted to leave the company. “I had a lot of mixed emotions. Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.” He added, “I was kind of uncomfortable and didn’t like having my wage advertised so publicly and so blatantly. It changed perspectives and expectations of you, whether it’s the amount you tip on a cup of coffee that day or family and friends now calling you for a loan.”21 From McMaster and Moran’s points of view, it was not fair to double the paycheque of someone with the lowest skills, while the longest-serving and highest-skilled employees received a small or no salary increase. Furthermore, even employees who were exhilarated by the raises had new concerns and indicated they were facing a lot of pressure. “Am I doing my job well enough to deserve this? I didn’t earn it,” said Stephanie Brooks, 23, who joined the company as an administrative assistant two months before the decision.22 Lawsuit Filed Dan has taken millions of dollars out of the company for himself while denying me the benefits of the ownership of my shares, and otherwise favouring his own interests as the majority shareholder over my interests.23 —Lucas Price, co-founder and shareholder Lucas Price, Price’s older brother and co-founder of Gravity Payments, owned a 30 per cent share of the company, even though he had not been involved in operational decisions for years. He filed a lawsuit less than two weeks after his brother’s surprising announcement. In his view, this decision was a potential threat to the company’s long-term survival and violated his rights as a minority shareholder. He believed the company was profitable, but not profitable enough to justify such a significant move. It had annual revenue of about $150 million from $6 billion in transactions processing, and the expected profit was only $2.2 million in 2015. Most of the $2.2 million yearly profit would be ploughed into the salary increases. Credit card processing companies had a relatively thin margin structure.24 This family fight over a business became messy and ugly. Dan and Lucas were very close before the former’s surprising move, and Lucas was the best man at his brother’s wedding. However, the lawsuit changed their relationship entirely. Price said, “being in business together was the worst thing for our relationship,” and he asked the rest of the family to give love and support to both Lucas and himself. Their younger brother Alex, who also worked at Gravity Payments, had an up-close view of this family’s legal fight.25 WHAT’S NEXT? It’s the great paradox of our era. Productivity is at record levels, innovation has never been faster, and yet at the same time, we have a falling median income and we have fewer jobs. People are falling behind.26 —Erik Brynjolfsson, professor, MIT Sloan School of Management When Price made the decision to raise his employees’ salaries, he probably did not anticipate the clamour of the political debate over raising the minimum wage or the growing income gap between the rich and the poor. In the U.S., the average CEO earned nearly 300 times more than average employees, one of the largest disparities in the world. It seemed that Price took the first step to address this problem. On the company’s website, there was a question, “Would you give 90 per cent of your salary away? Will it pave the way for wider pay equality?” Price answered, “I hope so. My goal when making this decision was for other business leaders to recognize you can pay a living wage and not only survive, but thrive.”27   News of his bold move went viral, causing concern and debate over employee morale, work ethic, compensation plans, and the wealth gap in society in general. At first, there was applause for his radical actions. However, with a few employee-relations problems and a lawsuit filed by his brother, opinions were shifting in a more critical direction. Price was experiencing unexpected challenges, only a few months after he made his decision. What should he do in order to deal with different reactions from the company’s employees, customers, media and his brother. 1. What are the potential problems of a minimum salary increase as a compensation plan? How can you minimize these problems and motivate employees? 2. What is your understanding of ‘income inequality’? 3. What are the advantages and disadvantages of hierarchical versus egalitarian reward cultures?