What Happens When a CEO Pays a $70k Annual Minimum Wage?

Only a few months ago David Price announced his experiment of paying everyone in his company the same annual minimum wage. Already we are seeing results.

Back when it was first announced, both Mark Horne and Bob Allen commented on Dan Price’s new payscale. Mark was a bit more pessimistic. He wrote in part:

What we don’t know is whether his business will make it under this new scheme. Hopefully it will. But it will bring certain challenges. For one thing, is Price going to expect everyone else in the corporation to be satisfied with $70,000 a year? If so, what happens when they move on to other companies where they can get paid more?

We can be sure that not every company could possibly follow this model, even if it works for Price. This is a commendable work of charity on Price’s part but it is not a workable model for every business.

But it turns out that it may not be a workable model for Price’s company. His minimum wage has proved costly.

Some of his problems were clients who quit using his company, Gravity. A couple did it for ideological reasons—they didn’t like the politics of the $70,000 annual salary for all employees. Some others left because they didn’t believe the assurances that fees would not rise. However, he also got a great many new customers because of all the new publicity.

This seems to have resulted in an unforeseen consequence. New clients don’t actually produce income right away, but they required immediate new hires. According to the New York Times,

While dozens of new clients, inspired by Mr. Price’s announcement, were signing up, those accounts will not start paying off for at least another year. To handle the flood, he has already had to hire a dozen additional employees — now at a significantly higher cost — and is struggling to figure out whether more are needed without knowing for certain how long the bonanza will last.

But, what I think is more interesting is that Price also lost employees.

Two of Mr. Price’s most valued employees quit, spurred 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.

This is exactly what Mark mentioned. And it also addresses Bob’s more positive piece with its questions about how CEOs should treat their employees. Is it really right for CEOs to compensate those who actually are essential to the company’s survival and growth no more than people who don’t do anything nearly as important?

Maisey McMaster was also one of the believers. Now 26, she joined the company five years ago and worked her way up to financial manager, putting in long hours that left little time for her husband and extended family. “There’s a special culture,” where people “work hard and play hard,” she said. “I love everyone there.”

She helped calculate whether the firm could afford to gradually raise everyone’s salary to $70,000 over a three-year period, and was initially swept up in the excitement. But the more she thought about it, the more the details gnawed at her.

“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,” she said. To her, a fairer proposal would have been to give smaller increases with the opportunity to earn a future raise with more experience.

A couple of days after the announcement, she decided to talk to Mr. Price.

“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.”

Already approaching burnout from the relentless pace, she decided to quit.

The problem with fixing income inequality seems to be that it involves rewarding people unequally. Some people put more effort and make more sacrifices. Some people are “on the job” almost constantly—thinking about solving problems, fielding emails and phone calls at home, late at night, while supposedly watching a son’s sports game. Others take jobs that involve being at the job for set hours and then leaving and not worrying about work until they have to go back. If you pay everyone the same the first group will not believe they are being treated equally. They will go to a company that rewards their hard work.

Another problem is that Price is now involved in a lawsuit. Price told the New York Times, “We don’t have a margin of error to pay those legal fees.”

That is exactly why it is so wrong to judge a company for the size of its profits (unless it is bilking the taxpayer through government subsidies). Price has calculated a pay system for a perfect unchanging world where his margins cover the salaries and other expenses he expects. But the unexpected happens. You have an obligation to try to build up reserves or otherwise you jeopardize the job of everyone who works for you.

Price’s intentions are noble, but he looks like he is becoming an example of the peril of ignoring reality.