9.05.2015

Gravity Payments

Perhaps the most striking illustration of economic inequality in this country is the pay gap between C.E.O.s and workers at their company. Gretchen Morgenson writes (Times 4/10/15) that despite federal regulations most companies fail to report this measure.

She cites an academic study that reported the C.E.O pay as a multiple of the average worker ‘s pay increased “from an average of 20 times in 1965 to 295.9 in 2013!”

Acknowledging that their estimates are imprecise, two labor economists, Dean Baker and Nicholas Buffie, have nevertheless calculated pay gaps in specific companies. They found that the Walt Disney had the widest pay gap in 2014. Their CEO received $43.7 million last year, while the median worker received $19,530, a C.E.O. worker ratio of 2,238!

Microsoft was next on the list. Their C.E.O. pay package last year was $84.3 million, 2,012 times the estimated median employee earnings of $41,900 at Microsoft.

And so it goes, down the list of enormous compensation for C.E.O.s and comparatively modest salaries for their employees. Is it any wonder public companies fail to report the C.E.O. pay ratio comparison with their workers. While efforts have been made to require them to do so, not surprisingly the rule met an avalanche of opposition.

Occasionally you read about a company that significantly increases the salary of the people who work there. The most recent example is the decision of Dan Price, the founder of Gravity Payments, a credit-card processing firm, to raise the salary of even the lowest-paid clerk to a minimum of $70,000.

A company spokesman said the salary of 30 of the 70 employees will double. The average salary at the company is $48,000 a year. So with one exception, the salaries of all the employees will increase. The exception is the salary of Dan Price who will pay for the wage increases by reducing his own salary from nearly one million to $70,000.

How many other C.E.O.s would be willing to follow suit? Clearly there aren’t many, a sad commentary on the state of capitalism in this country.

So who would have believed that Dan Price’s policy of guaranteeing each of his employees a minimum salary of $70,000 would cause the backlash it has? At least, I never imagined the controversy it has produced as described in Patricia Cohen’s article in the Times (7/31/15).

First, several long time clients withdrew their business because they didn’t agree with Price’s new policy. Others left because they anticipated a fee increase, in spite of assurances there wouldn’t be one. In addition, other companies in the Seattle area complained it made them look stingy.

Then employees started to leave because long serving staff members only received small or no raise. A few others left because of burnout, they simply didn’t much like Price or because it shackled high performers at the expense of less motivated staff.

Worst of all, Price’s older brother and Gravity co-founder filed a legal suit that threatened the company’s existence. Price simply didn’t have the money to pay the eventual legal fees. So he would had to scramble or consider borrowing heavily.

Even though the new minimum $70,000 salary plan generated many new clients, a great deal of publicity, and thousands of job applications, the effort to deal with all this was exhausting and distracting.

Price’s original goal had simply been to take a stand against income inequality in the only way he could. He had no idea of the brouhaha it would give rise to or that it would affect his personal life and financial condition so greatly.

Note: Dan Bertolini is the only other C.E.O. that I know about who has taken a somewhat similar action. I quote his example from an essay I wrote on economic inequality.

“It was a breath of fresh air to read that Mark Bertolini, Aetna’s C.E.O, announced (New Yorker, 2/2/15) that his lowest paid workers would receive a substantial raise, as well as improved medical coverage.

Even more remarkable was the reason he gave for the decision. He framed it in terms of the growing economic inequality in this country, mentioning Thomas Piketty’s influential Capital in the Twenty-First Century and that he had given a copy to each of his top executives.

Bertolini also said it wasn’t “fair” for a company as successful as Aetna for its employees to be struggling to get by, while his senior personnel were paid lavishly.

Companies are not just moneymaking machines. For the good of the social order, these are the kinds of investments we should be willing to make.

I suspect that an employee who is paid more will work harder, remain in the company longer, be absent from work less often, and, in turn, that the company’s productivity and profits will increase. Bertolini’s decision is an investment with an immediate and highly beneficial outcome for his company, as well as its many workers.


4 comments:

Stefanie said...

Wow, I had not heard about the backlash from Price's decision. It's plain crazy. Was he able to go ahead with it or did the law suit from his brother put an end to it all?

I understand salary being a marker of the value of the work someone does, or the amount of money a person makes for a company, but being compensated $43 million dollars a year? Who needs that kind of money? It's ridiculous. And it also says the people who actually do the day-to-day work that makes sure the company runs and the products get made aren't worth anything.

Richard Katzev said...

Thank you, Stefanie. As I understand the current situation, Gravity Payments is still operating, with many new users, as I mentioned. I am sure Price is trying to do everything he can to deal with the legal case, and other threats to the company. I will go to their website to check.

The entire compensation scheme of CEOs in this country is outrageous. Fundamentally, I view as a moral issue. There are no grounds for the extraordinary pay and benefits of CEOs. There was a time not long ago, when there was considerable discussion of this issue, largely due to Piketty's book. But that has died down now, rarely do we hear much if anything about it.

What is it going to take to do something about the matter? The only person who has spoken out with some eloquence is Bernie Sanders. While I am with him wholeheartedly, his chances of defeating Clinton are slim, let alone getting a progressive Congress to support his policies.

And so it's going to go on until we have a revolution in this country, which is about as unlikely as a warm day in January in Minneapolis.

Linda said...

Once again - no good deed goes unpunished. And it seems in this case the severity of the punishment is relative to the worthiness of the deed unfortunately. Too bad. What is wrong with our society?

Richard Katzev said...

What is wrong with our society? Important question. Why not try to answer it?