Money Well Spent?

Whether you listen to NPR or watch Inside Edition you may have heard of Dan Price, CEO of Gravity Payments.  If not you can read more about his recent decision in this article by David Burkus (Use Chrome not IE).  Dan is famous for raising his company’s minimum wage to $70,000.  He wanted to provide a happier lifestyle for his employees.  What a noble thought with little foresight on the outcome.  Wouldn’t we all love to get our first real job and take 70K to the bank, I know I would have.  If I immediately made 70K as the new guy on the block with little experience and provided little marginal increase to the firm, what incentive would I have to better the firm and actually earn that wage?  My first job paid much less and if I wanted to make more I had to prove that my marginal contribution was higher than the marginal cost.  That is only the beginning; while Gravity nearly doubled their low skilled workers salary they did little to increase their high skilled workers wages.  Now admit it, we are selfish, self-interest serving, and competitive.  As a manager that works 60 hours per week dealing with high stress and high pressure you would expect to be compensated for it.  Regardless of being happy with their wage prior to the decision, they now know that a much lower producing employee makes nearly what they do.  Call me cynical but who wouldn’t get a chip on his shoulder?  Do you really want to lower the wage incentives for your entire work force and cause resentment among your highest producing employees in an attempt to better the life for your lower producing employees?  You aren’t actually robbing Peter to pay Paul, but Peter is pretty ticked anyway.  Don’t get me wrong, I am all for paying more and especially earning more but there is probably a better way.

Gravity is not destined for failure and I agree that happy employees can make better employees, but let me share a personal experience.  In a prior job of mine we recognized two “Black Friday’s” in one year.  First was the traditional day after Thanksgiving and the second was a day with major layoffs.  A new CEO had just started and he began by firing multiple employees as well as drastically reducing pay raises.  You can imagine the variety of feelings that spread through the company.  Other employees quit as a result and there was some uneasiness for a few months.  Since then the company has had 17 quarters of income growth and plans to go public in the near future.  The employees that produce the most marginal revenue are doing better without those that didn’t cover their marginal costs.  


Dr. Tufte said...

Captain Jack: 94/100 (missing a question mark)

This is an interesting case. Unfortunately for us, it will get a lot of press up at the beginning, and perhaps not enough analysis down the road.

I think one problem is many people will conflate a minimum wage with a minimum salary (Captain Jack does that explicitly in the 3rd line, but I'm not sure that this isn't just a little bit of carelessness). They're rather different things.

This becomes an issue when we start to assess marginal benefit vs. marginal cost of an employee. Lost in most discussions of minimum wage increases is that businesses typically don't have any problem paying anyone more if they're more productive. The problem with a legislated wage increase (minimum or not), is that it leaves the open-ended problem of how to justify the new wage through increased productivity. Typically, we presume that productivity won't go up by much, and therefore some workers will be let go under the new wage. But that doesn't have to be the case. Management has a lot of tools to increase productivity: adding capital, reducing shirking, reducing perks, and so on. In freshman classes I like to describe these as "yelling more", which resonates with kids on their first job.

But then we come to this case of a minimum salary. The thing is, with a salary, there's no maximum hours. So Gravity Payments is free to say something like "work however many hours you need to produce more than some amount of value to the firm, and we'll pay you $70K". That's a very different thing from a increasing a minimum wage, which puts the onus on the manager to figure out how to get the productivity.

So, while this is an interesting case, I think it's a mistake to conflate it with current debates about increasing the minimum wage. Unfortunately, my sense is that most people are doing exactly that.

LightningMcQueen said...

There has been a lot of new coverage about this in the Boise area because Dan is a local from Nampa. One of my coworkers (who went to high school with Dan) shared this article about him on Facebook.
Here is an excerpt from that article:

It was late 2011. Haley was a 32-year-old phone tech earning about $35,000 a year, and he was in a sour mood. Price had noticed it, and when he spotted Haley outside on a smoking break, he approached. "Seems like something's bothering you," he said. "What's on your mind?"

"You're ripping me off," Haley told him.

Price was taken aback. Haley is shy, not prone to outbursts. "Your pay is based on market rates," Price said. "If you have different data, please let me know. I have no intention of ripping you off." The data doesn't matter, Haley responded: "I know your intentions are bad. You brag about how financially disciplined you are, but that just translates into me not making enough money to lead a decent life."

This is a phone tech. A phone tech! He fielded phone calls, probably gave some unsatisfactory answers to customers problems, and if an issue was escalated he passed them off to a supervisor. I don’t think this is about the minimum wage at all, this is about feeling entitled. Some individuals and groups want higher minimum wages and higher salaries but the real driver here is feeling entitled. Solve that problem and a whole host of other issues go away.

P.S. I can't figure out how to link in a comment. Is there a way to do that?

Brett Bodily said...

I agree with you Captain Jack when you mention, “who wouldn’t get a chip on their shoulder?” This point really hits home for each one of us going to school for our graduate degree. We work so hard and sacrifice so much for something we believe will help make our lives better and then all of a sudden, employees with a high school diploma are getting paid the same or close to what you are making. That would be hard to swallow. The employer would definitely need to come up with a way to solve the agency problem that would arise. Controls would need to be put into place, such as supervisors walking by employees at random times to make sure they are being productive with their time.

As a potential result of making everyone’s wages the same, universities and other higher learning opportunities could possibly suffer. People would value going to school a lot less because they wouldn’t see the need.

While I doubt this business strategy will go anywhere, it is interesting to think about the potential consequences.

Dr. Tufte said...

Lightning McQueen: 50/50
Brett Bodily: 50/50

Lightning McQueen: how does entitlement fit into what we do in this class? Try to keep your next comment on topic.

As to how to comment, there's a link at the top of the blog with directions. If those don't work for you, let me know.

Brett Bodily's comment is a little better. It touches on ManEc, but could do so much more. Yes, there's an agency problem(s), but what is it? How will it change?

And I like the bit about raising the minimum wage changing people's valuations. In economics, the word we use to describe that is distortion. As in, raising the minimum wage distorts the incentive people would otherwise have.

Let's run with that: Brett Bodily is saying that it distorts preferences to favor a high school education over a college education. Maybe so. If that's the case, the deeper question is why politicians are spending money to make it easier for people to afford college? If politicians are both pushing people away from choosing college, and pushing them towards choosing college ... then maybe they really don't know what they're doing at all? That's a far deeper insight than raising the minimum wage is bad because it goofs up incentives.