I commend the spirit of what this CEO is trying to do, but if I am an investor, director, or just even regular employee I would have serious reservations about this business strategy.
> pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year.
I don't know what the financials for Gravity look like, but this really only makes sense from a financial standpoint if (1) the company can't re-invest the profits with a better ROI (rate of return) and (2) they aren't worried about competition - i.e. have a serious business moat. In addition, the company will have a higher payroll tax burden because of the higher salaries. (1) is somewhat justifiable as investing in your employees may garner loyalty/harder work which may raise the top-line, but (2) seems unlikely. There are a lot of credit card processing companies.
What happens if profits aren't as good next year? Are they going to slash wages to previous levels (or lower)? Or, if he's intent on sticking to the $70k minimum wage, this means he'll have to let go more people if the time comes. Did they look at alternatives - issuing more equity, special dividend, more generous bonuses??
I wonder how the conversation with finance went on this one.
You're assuming there are other investors/directors that aren't Dan Price.
At their current size/growth over the past 10 years it seems like they're a lifestyle business (urgh, I hate that phrase) where the company has grown organically from a small level of investment.
If Dan wants to provide his employees a higher level of pay from what probably seems to be a very predictable business, then that's his prerogative.
Businesses only have to act as psychopathic entities when they're run by dispassionate third-parties who's only motivation is literally increasing the profitability/value for shareholders.
Yeah, I get the sense that it's just Dan too. Which means this is even more likely to fail.
Don't get me wrong, I totally support this from a moral perspective and wish more companies would follow suit, but the economics of this move are just not favorable.
The system is structured in a way to dis-incentivize this behavior (paying above-market rates for labor), and I'm skeptical what one man/company can really do to change the system. They will have to make up the increased expense/opportunity cost of having less money for re-investment & new employee hiring somehow, while their competitors will have a significant marginal advantage.
I hope they are wildly successful and I hope this becomes a trend because, in my opinion, income inequality is probably the greatest threat to social stability going forward, but I am not holding my breath. History has shown that anything short of real organized labor and government regulations (anti-trust) are just swinging at windmills, unfortunately.
Do you think they'll suddenly get a lot of pressure to decrease their revenues?
Do you think they'll suddenly lose a whole bunch of clients because they're paying above market?
Do you think staff are suddenly going to become less productive because they're paying above market?
Do you think new staff are going to be of a lower quality than his competitors?
This business has been around for 11 years. Has 10,000+ customers. And is profitable, even with the adjusted salaries.
Given some really back-of-the-envelope guesstimates on the way this type of organic business grows and their current profit combined with Dan's current salary, Dan's probably already extracted $5-15m from the company over the last 11 years. That's a very comfortable living wage for someone who doesn't seem to live an extravagant lifestyle.
You're totally missing the point of what I'm saying.
They are putting themselves at a significant competitive disadvantage by incurring a drastically higher yearly operating expense, expenses which their competitors (in a very saturated market) don't have. They were already operating at <1% margins, and this cuts into that even more.
Dan's bet is that they can make up for this by the PR and goodwill they are getting from this story, but in credit card processing, fractions of percentages matter to the customer.
His prices are not changing, only exec compensation is being significantly impacted in a rebalancing of worth. Arguably the PR and motivational impacts should also be non trivial.
My biggest concern would be the normalising effect. If i'm a successful salesperson and it was announced that my 69k salary was going up to 70k - but so was the [lowest paid role; no disrespect intended]? I'd probably slide towards feeling undervalued despite it still being in line with market rates.
My only other concern would be the implicit pressure to outsource some services over time. I know my company gets around paying london living wage by declaring that contractors do our catering so they aren't responsible for the wages paid to catering.
It's still a cool thing done for good reasons and I hope it works out.
Let's take off our HN Goggles with +5 Cynicism enchantment for a moment! What if this CEO feels a bond toward his team, and feels a desire inside his heart to help his employees conquer their dreams?
It doesnt have to make the business more money, all it has to do is alleviate the concerns and worries in his employees that make their lives hard, and if he has a work force full of happy fulfilled people, I bet THAT is how he will measure the success of this.
I don't think competitors figure into this much at all, this is inwardly focused. This is about strengthening the whole team, starting with the weakest financial link.
It's amazing how much you are being misinterpreted. No one is saying that customers will leave Gravity because they pay clients more. BUT, what is keeping competitors from lowering prices to the point that Gravity cannot compete without either cutting salaries or running a loss?
He will be instantly out-competed by people who actually understand capitalism and markets and will die poor, alone, unloved, and unwanted by the world. The people he tried to help will be struck down with him as they lose the jobs they've scrabbled their whole lives to maintain.
Businesses only have to act as profit-seeking (that is the word you mean when you say "psychopathic") when they... want to survive.
I don't know why you chose to write your first sentence, which is so hyperbolic it makes you into a personal joke (he'll die alone and unloved? really? Why not add, "as a meth addict in a homeless shelter in Rio, on the run from the law after attempting to stick up a group of tourists with a butter knife.")
If 18 people can build a $1 billion Internet company, you can do the same while subsidizing out up to a few hundred $80K salaries (let's say $8M/year burned, which is 100 such employees) without any consequence whatsoever. Zero.
After your intro sentence, which sounds like you're attempting to get everyone to stop reading and downvote you, by writing something patently ridiculous, your second sentence is interesting.
Now that nobody is reading, you write:
>The people he tried to help will be struck down with him as they lose the jobs they've scrabbled their whole lives to maintain.
This is interesting. Yes, he is paying well above-market for these jobs. What is the consequence? Someone working as a janitor for $80K is in a job he or she could not ever hope to replace should they lose it.
What about hiring? Since he is paying above market (double), the natural result is that he should have 800 applicants for any job that becomes available. (The only reason he wouldn't is information dissemination.) i.e. if there are 100,000 janitors making $30K working a city, it would make sense for 50,000 of them to apply to him for $80K.
This could have a very large distorting effect. Or, maybe it won't.
We're still not talking 6 figures here. While doubling someone's wage is a very large step up, it is by no means the kind of step that completely distorts the market. And what if someone does scramble to keep or get an $80K job, but actually loses it? In fact, people lose cushy jobs they're happy with all the time. I think this is interesting and unfortunate, but by no means will ruin the people who enjoyed a period of unexpected windfall. In effect, they just become very moderate lottery winners. (They "win" a free excess doubling of their salary, while it lasts.)
> Did they look at alternatives - issuing more equity, special dividend, more generous bonuses??
Well it seems he specifically wanted to increase salary compensation, but I can bet that any organization making a choice this big went so far as to consider alternatives.
Paying your staff seems like a very good reinvestment of profit. In fact, it may well be what will allow them to pull ahead of their competition!
The biggest problem I see with this plan is not increased payroll tax but increased HR costs to weed through the many more job apps they're going to get these days.
If profits are unexpectedly worse next year, the compensation structure is probably the least of their worries.
What they're really doing is investing in their brand as an employer, in the belief that loyal, eager employees make a sustainable company. For a company working a space like credit card processing, that's probably a better bet than a big ad campaign or R&D investment.
I think this this sentiment is a relative of the recurring comment that 'there is a legal/fiduciary duty get investors the highest possible ROI.' I think it's neither true in practice or in theory, taken that literally.
CEOs can't steal from investors or run the company against their interests. But they have a lot of decision making capacity within those bounds. Salaries (and realistically, the more pronounced questions are around executive pay), are within that boundary. So are marketing expenses, R&D expenditure and such. Companies are run using instinct, worldview, eve morals.
It's not like investors can drag CEOs into court over every decision and demand they prove they're in shareholders' interests. If decisions are seriously, provably against investor interests they can, but in practice this means some sort of stealing. Crooked contracts with kickbacks, embezzlement. That sort of stuff. Apart from that it's 'normal' business. If investors don't like how the company is run they can replace him. Otherwise, sell.
I wonder how the conversation with finance went on this one.
If he's sensible he'll have taking his marketing director to the meeting. One of the most important things for a financial institution is being seen to be both ethical and trustworthy - setting out how you're not greedy and you want to improve the lives of your employees goes a long way to doing that. This move sets his company apart from the usual faceless, greed-driven credit card businesses, possibly to the point where they'll take a lot of the green/ethical/social business market.
Given that this move is already paid for, it seems to be a brilliant bit of marketing that also has a real positive impact.
I think your point 2 is overlooking what competition means. This, this very move is putting yourself ahead of competition and there is an overwhelming amount of research that suggests well paid (salary -- not to be confused with performance based "rewards") employees work better.
> pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year.
I don't know what the financials for Gravity look like, but this really only makes sense from a financial standpoint if (1) the company can't re-invest the profits with a better ROI (rate of return) and (2) they aren't worried about competition - i.e. have a serious business moat. In addition, the company will have a higher payroll tax burden because of the higher salaries. (1) is somewhat justifiable as investing in your employees may garner loyalty/harder work which may raise the top-line, but (2) seems unlikely. There are a lot of credit card processing companies.
What happens if profits aren't as good next year? Are they going to slash wages to previous levels (or lower)? Or, if he's intent on sticking to the $70k minimum wage, this means he'll have to let go more people if the time comes. Did they look at alternatives - issuing more equity, special dividend, more generous bonuses??
I wonder how the conversation with finance went on this one.