Voluntary Pay Raises and Minimum Wage

Dan Price is one of the founders of Gravity Payments. He started up the credit card processing company in 2004 in Seattle and continues today as the CEO. 

Price was awarded the “National Young Entrepreneur of the Year” award in 2010 by Barack Obama. He has become known as a generous CEO who is in touch with young working people.

The company claims that employees are not limited in paid time off. In 2013, Price announced a 2% increase in salary for all employees earning less than $100,000 per year, which was most of them. This was to help offset the increase in the payroll tax, which had previously been temporarily reduced.

Price’s biggest claim to fame came just a few months ago in April 2015. He held a meeting with his employees and announced that he was phasing in a company minimum wage of $70,000. Unsurprisingly, the reaction was a little bit of shock and a lot of cheers.

The details of his new plan stated that all employees would immediately be bumped up to a salary of at least $50,000. By the end of 2016, the minimum would be $60,000. Finally, by the end of 2017, all employees — regardless of their position — would be earning $70,000. He also said that anyone already earning a salary at that level would get a $3,000 raise.

In his speech to his employees, Price said he was cutting his own salary down to $70,000 per year, at least until profits were back up. Until that point, he had been making close to a million dollars per year.

He recognized the major pay gap between CEOs and employees and wanted to do something about it. And instead of just talking the talk, he actually walked the walk.

I have no idea where Dan Price is politically, but I can guess that he favors government intervention in the labor market. He probably favors a government minimum wage, which happens to be quite high in the state of Washington. He is also bothered that there is a major wage gap between business owners/executives and employees, although I don’t know if he favors government intervention to correct this.

Voluntary Action

I believe one of the keys to liberty is providing alternatives through voluntary action. The best way to undermine a government program is to offer an alternative. 

The Internet has undermined the U.S. Post Office. Private carrier companies such as FedEx have done the same. The Post Office is not obsolete yet, but it is getting there.

What about the public (government) school system? Who is more effective: someone who attends school meetings to change the system, or someone who opens up a private school? Who is more effective: someone who attends city council meetings and school board meetings, or someone who starts a home school curriculum?

I realize that not everyone has the money or talents to start a company, but entrepreneurship and innovation have an important role in advancing liberty.

When Dan Price started Gravity Payments, he recognized that small businesses were paying high fees and not always receiving great service by other credit card processing companies. So Price started a company to help small business owners by charging significantly less.

This is how you become rich and successful: Find a problem that others have and solve it for them.

Price has taken it a step further. Instead of asking the government to hike the minimum wage, he voluntarily hiked his own company’s minimum wage. Instead of griping about a major wage gap, he voluntarily reduced his own wage, which may eventually equal that of his lowest-paid employees.

I would much rather see this kind of voluntary action than see someone attempt to use the force of government to enact such policies.

Now the Bad News…

Unfortunately for Dan Price and his company, the story doesn’t end there. I don’t know his motives for dramatically increasing his employees’ pay. He may just want attention lavished upon him, or maybe he sincerely wants to help the people who work for him.

Even though this was a voluntary action, you can’t ignore the laws of economics. You also can’t ignore human emotion.

Some of his employees were earning less than $40,000. Many received an almost instantaneous raise of 25% or more. Some will double their salary over the next couple of years. That sounds great for them… but what about the people already making over $70,000? Will they be satisfied with a raise of $3,000?

Actually, the fallout has already begun. At least two of his most valued employees have quit their jobs because they see it as unfair. They were getting paid more due to their experience and talents, yet they personally saw little in the way of an increase.

How would you like working with someone who knows a lot less than you and yet is making close to the same amount? I’m sure it happens all the time, but this will essentially be the new policy at Gravity Payments.

There is a reason companies have different pay grades and even give different percentage pay raises: They want to reward skills, hard work, and experience. It is a more just system, even if it isn’t perfect.

I have my many criticisms of government minimum wage laws. I do not believe they should exist. Two voluntary parties should not be prohibited from entering into a contract. 

If the mandated minimum wage is low enough, it might not have any effect. If the minimum wage were currently at $2 per hour, it would have almost no impact because almost nobody would be willing to work for that little. It is interesting, though, that there are unpaid interns who do so, and yet it is legal in most cases.

Have you ever wondered about employees making just over the minimum wage? What happens to a small business owner who has an employee making $7 per hour and another making $9 per hour? Let’s say the government raises the minimum wage from $7 to $9. The business owner has to decide whether to retain the employee making $7 per hour. But if he decides to retain the employee, now he is dealing with a situation where the person making $9 per hour is being paid the same as the other employee, even though he is worth more in productivity. 

Despite what many think, government minimum wage laws do not lead to wage inflation across the board. If they lead to anything, it is more unemployment for workers with fewer skills.

Charity and Business Don’t Always Mix

I believe many companies make a mistake in not paying their most talented employees enough. It is expensive to find a good replacement if someone valuable quits. It tends to be profitable to have good long-term employees.

In the case of Dan Price, his incentives are almost backwards. The good employees will want to leave. They will become frustrated with the employees who are less skilled or who don’t work as hard. Meanwhile, the worst employees will never leave unless he forces them out. If you are not as skilled and you don’t want to work as hard, where else can you go that will pay you $70,000 or more?

It is a good idea for a company to take care of its employees. It is good business to provide a good work environment. And it is especially important to pay your most valued employees well. 

Gravity Payments is currently having some financial trouble. Dan Price’s brother, who originally helped start the company, is suing the company, which is now piling up legal bills.

It is usually better if you don’t mix charity and business. Business owners should concentrate on making honest profits by providing goods and services to consumers. You can be charitable with the profits you make, but you shouldn’t jeopardize your business with charity. In the long run, that serves nobody well.

I also believe it is not good to mix charity with investing. Some people like to buy certain stocks because the company may be charitable or focus on being environmentally conscious or help fund certain programs. 

It is better to make investment decisions based on profitability — unless a particular company is doing something you find morally deplorable. Otherwise, focus on making money with your investments. If you want to be charitable, you can do so with your profits.

I’m afraid Dan Price may find out the hard way that charity and business don’t always mix well. And when he has job openings, I would hate to be the one who has to sort through the thousands of resumes.

Until next time,

Geoffrey Pike for Wealth Daily