Reference no: EM133292531

High Pay for Workers: Doing Well by Doing Good?

Earlier we saw that companies like Amazon and Target have raised their minimum pay to $15/hour and Costco recently went to $16/hour. American Family Insurance raised its minimum to $20/hour. Taco Bell was experimenting with paying its store managers up to $100,000 per year. Walmart did not raise its minimum starting pay beyond $11/hour, but did raise pay for some other jobs. These increases were typically framed as hard-headed business decisions to better enable these firms to recruit and retain quality workers, something that was more challenging with the low unemployment rates prior to (and presumably following) the pandemic. In some cases, using a higher wage to recruit/retain higher quality workers was with the aim of having that translate into better customer experiences.

A number of these companies have experienced substantial growth, making recruiting and retention even more of a challenge. Again, the common denominator was a focus on raising wages to increase profits. As the Costco CEO said, "this isn't altruism." Rather, "we know that paying employees good wages ... makes sense for our business and constitutes a significant competitive advantage for us."

However, one firm that has received a lot of attention says it did raise wages out of altruism. At Gravity Payments, a Seattle-based credit card payments processing company, founder and CEO Dan Price decided in 2015 to pay everyone a minimum salary of $70,000/year. (That works out to roughly $37/hour.) Why? As he tells it, he was walking with his friend Valerie in the mountains and she shared with him that her landlord had raised her monthly rent by $200 and she was struggling to pay her bills. Mr. Price said it made him angry that Valerie, who served 11 years in the military and was working 50 hours a week in two jobs, was put in such a financially precarious position. "She is somebody for whom service, honor and hard work just defines who she is." He did not think she should have to live that way. Price was 31 at the time and earning more than $1 million per year. But he began to realize that not just Valerie, but probably many of his other employees, were also struggling, especially to make ends meet in a place like Seattle. He wanted to do something about that. A number of
indicators point to the difference it made. The amount of money employees voluntarily contributed to their retirement plans doubled. About 10% of employees have been able to buy a home (versus 1% previously). Some staff have been able to afford to live closer to work, cutting their commute, reducing stress and freeing up time. And although Price did not describe the move to $70K as a business decision, his treatment of employees certainly seemed to resonate with a segment of customers as indicated by Gravity Payments' revenues almost tripling over the next five years. Not everyone was happy with what Price did and his reason why. For example, the late radio talk show host Rush Limbaugh called Price a communist and went on to say, "I hope this company is a case study in MBA programs on how socialism does not work, because it's going to fail."

Two Gravity employees also resigned because they disagreed with what Price did. Other Gravity employees felt it was unfair to raise pay so much without any clear evidence that the people receiving the raise would raise their productivity or contribution by a similar amount. Price had hoped what he did would spur other companies to take similar action. Although there were a few, Price was disappointed there were not more: "Boy, was I wrong," he said. But it worked for Gravity. Employees were better off and, as noted, company revenues grew also.

Then came the pandemic. Gravity Payments experienced about a 50% drop in its revenues. Without dramatic action, Price warned at an employee meeting that the company would run out of money in four months. He said he was not going to fire anyone, but they all needed to figure something out and fast. After considering options (e.g., an across the board pay cut) that did not seem like good choices, an employee made a suggestion: All employees would anonymously write down how much of a pay cut they were willing to take. In April, employees met again, with 98% agreeing to a cut. Ten said they would work for no pay and several dozen said they would work for 50% less. The solution Gravity actually adopted limited pay decreases to 50% and to 30% for those making less than $100,000. That saved the company. By July 2020, the company's situation improved enough to rescind the pay cuts.

Please read the above article and respond to the following questions.

1: There is an expression that a company can do well by doing good. Is that what happened in this case? Explain.

2: What do you think was the motive for increasing minimum pay to $70,000? Was it altruistic? Was it a business decision? Does it have to be one reason or can it have been done for multiple reasons? Explain.