Dan Price’s $70,000 Gamble, 4 Months Later

Sherman, set the Wayback Machine to April, 2015. Back in that day, Dan Price set the liberal’s hearts all a-flutter when he announced that he would pay all his people, over the course of 3 years, a minimum of $70,000. At the same time, Dan, the CEO of Gravity Payments, would drop his own salary from $1 million to $70,000 as well.

Those pushing for an increase in the minimum wage loved the idea. With no more than an announcement in hand, they proclaimed his move as an example others should follow. Again, all they had was an announcement. They proclaimed victory even before the new pay scale was in place, because for these liberals, intentions are more important than results.

Now here in August, we have a few results, and they’re not looking good for Gravity Payments. First off, some clients – some put off by what appeared to be a political statement, some by a concern that the fees will rise – dropped the company. Gravity has assured clients that the fees will stay the same, but there’s a perception working against him, that you can’t raise the cost of doing business without offsetting at least some of that cost. Maybe that’s all perception; we’ll see. But if you have a vendor that could be increasing its costs, it only makes sense that you might want to look for a cheaper vendor.

On the other side of the coin, Gravity Payments got more clients who appreciated the political and social statement that Dan Price made, and signed on. It appears that they did offset the number of clients who left, but for now, the economic impact of the new clients isn’t enough. New clients take over a year to be profitable for Gravity, so it’s not just a 1-for-1 trade-off. And he’s had to hire new employees to deal with the new clients, at the new, higher pay rate, which, again, impacts the bottom line.

But here’s the effect that surprised me the least. Two of Mr. Price’s most valued employees quit. Two may not seem like a lot, but it’s a rather small company. This was in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. For a large swath of Gravity employees, there is no such thing as “merit pay”. The lower tier of employees gets the same amount regardless of their productivity. Even one of the employees in that tier quit because he saw how it “shackles” the low performers to the high performers.

In speaking about his ideals, Price had this to say, quoted in the NY Times:

“Income inequality has been racing in the wrong direction,” he said. “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.”

No, see, that’s the issue, and it’s why some of his better employees are leaving. These raises were not based on how hard you worked, and that’s going to give observant workers some cause for concern.

And then there’s the big bombshell. While not directly related to the pay raise, a lawsuit brought by his co-owner and brother may be more than the company can handle. With profits going more into salaries, there is a decreasing amount available for a rainy day, or for a buyout demand. Y’know, regardless of the merits of the case, sometimes a business needs cash sitting around to be able to handle such situations. Otherwise, any hitch in the revenue flow could put them, and their well-paid employees, out of business. Sometimes those big profits are a cushion to keep any bumps in the road from causing folks to lose their jobs. Those who dismiss that don’t, I think, understand the gravity of the situation.

Dan Price might be learning by experience, but I fear the lesson is being lost on others.

Filed under: Economics & Taxes

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