One of Those Newfangled Experiments

Newfangled:  Different. Recently invented and hard to understand.  A polite way of saying something is unpleasantly weird or unacceptable.'

I’m referring to Dan Price, CEO of Gravity, who recently announced to all 120 employees that their pay will be increased to $70,000 over the next three years. The new minimum pay will be $70,000. 

To fund this initiative Price’s own pay will be cut from $1 million to $70,000. Additional funding will come from using 75% to 80% of the company’s anticipated $2.2 million in profit this year.  He plans to keep his own pay at $70,000 until the company earns back the profit it had before the new pay scale practice.

The trigger for Price was a study he read by psychologist Daniel Kahneman and economist Angus Deaton.   The $70,000 figure is just below the $75,000 salary pegged in their 2010 Princeton University study as an ideal benchmark for achieving happiness

In other words, if you make less than $75,000 a year, you are constantly worried about money to the point that it affects your overall happiness. On the other hand, if you make more than that, money is no longer such a pressing concern.

Price insists this is a capitalist solution. He believes the pay raises are an investment. In theory, workers motivated by higher salaries will ultimately attract more business and handle clients better.

While the overwhelming majority of responses are positive, there are also skeptics and naysayers*:

1) Everyone is getting a ‘trophy’ even if they don’t deserve it.

2) Low-skilled workers will be paid a much higher salary than the market requires.

3) Paying everyone the same will reduce motivation and lead to decreased productivity.  There’s no evidence that happy workers are productive workers.

4) Gravity will ultimately go out of business as competitors with lower cost structures will offer customers lower prices.

5) Overpaying lower skilled workers may create resentment among higher skilled employees who feel they are more valuable and therefore worth more.

Is this just a marketing gimmick?  Perhaps.  Will he fail?  Probably --- but there is always failure at first.  Is he naïve and idealistic?   Most likely.   

But this isn’t the only newfangled crazy scheme going on currently.  Here are some others:

1) Elimination of  merit pay (Lear, Netflix, Kelly Services)

2) Google’s pay raise of $10,000 to all employees

3) Ben and Jerry’s setting a pay ratio between highest and lowest paid

Why on earth are these companies, including Gravity, doing this?  They aren’t located in Colorado so we can’t blame it on pot!

In my opinion one of the biggest reasons for all these new practices is the huge increase in Gen Y and Z in the workforce.  They have different views of work.  They will "walk away" if a company doesn't match their ideals.  And those ideals include fairness, social justice and a less competitive/more collaborative/caring work environment.

I for one am pleased and excited to see traditional practices being re-examined in a business environment that has dramatically changed.   Makes sense when all functions are being forced to re-examine all of their models, operations and long-held assumptions.

What do you think?

*Space doesn’t permit an in-depth discussion of how this conflicts with traditional Compensation principles.

Jacque Vilet, President of Vilet International, has over 25 years’ experience in Human Resources assisting companies with both domestic and international HR issues.  The companies she has worked with include start-ups as well as major multinationals. Jacque’s expertise includes compensation, benefits, wellness, learning/development, strategic workforce planning and mergers and acquisitions.  She has a B.S. and M.S. in Psychology from the University of North Texas and an MBA from Southern Methodist University.  She has been a speaker at conferences in the U.S., Asia and Europe.  In addition she is a regular contributor to various HR and talent management publications and conducts frequent webinars. 

Comments

[Darcy]

I think a big part of the reason that we're seeing so many people trying something different is because the status quo hasn't been working. Especially with the overall economic situation over the last few years, giving "low" performers a 2% increase and "high" performers a 4% increase, hasn't really felt much like merit pay.
It's also really difficult to accurately identify the top performers (thus my quotes above) using traditional performance management, especially when performance and pay are intertwined.
So while some of these initiatives are unusual and many likely won't pan out and/or will have unintended consequences, it's completely understandable why people are looking for a different solution. I'm excited to see how some of these play out over time.
Also, Colorado is a wonderful place to live, and that statement has nothing to do with pot either!

[Chris Dobyns]

I saw this announcement from Gravity previously, and thought it was a neat challenge to some of the existing paradigms and assumptions on pay.

I'm not sure I was totally witting about the linkage to Daniel Kahneman, and the purported linkage to the salary dollar and threshold to happiness - driving this decision. Although we need to acknowledge that nobody can "make" someone happy, we can only create the conditions that allow someone to approximate a state of happiness, themselves.

I wondered how I would feel, if I were a Gravity employee. If I'm in the group formerly less than $70K, I'm pretty "jazzed". I guess if I'm in the group greater than $70K, I'm still feeling pretty happy for my co-workers, and if I think/believe/know I'm being paid competitively, maybe I permanently delay forming a posse, to hunt down the pay inequity perpetrators.

[Jacque Vilet]

Darcy --- agree you gotta' love these trailblazers. And I'm sure there will be more.
And I know Colorado is a great place --- just maybe a tad better with pot! Of course if I were there I wouldn't imbibe.

Chris --- Many of the employees in companies trying new things (not all)are Gen Y and like I said have different values. Dan Price is 29 for example. I truly believe such a practice at Gravity would not "fly" at a company like P&G or any company where most of the employees are older. I may be wrong -- but that's my opinion.

[Trevor Norcross]

I applaud any one that wants to think differently and try new approaches. The problem with these stories is that they get a lot of press at implementation and then no follow up later to see how it played out.

This story also focuses on base pay and not about his potential ownership holdings. Even if his base pay is the same his total earning potential is very different. I have also not heard about other programs they may be implementing to support the approach longer term. Do they have incentive plans to differentiate performance with?

Just a fun side, Gravity is in Washington where they have legalized recreational pot as well.

[Jacque Vilet]

Trevor --- agree with you that we don't have all the details. As with many new endeavors, they may fail or need tweaking with time.

Look at Motorola's old MBO program that created a real problem when it had to pay out when there were no profits. There was no profit threshold built in to the program.

I think that some of our cherished rewards programs will change due to dissatisfaction as well as change in workforce demographics.

Forgot about Washington! That may explain Gravity. Maybe the CEOs of the other companies were Price's frat brothers???

[E. James (Jim) Brennan]

As Trevor noted, Gravity Payments Company is based in Seattle, where a $15/hr minimum wage was recently decreed (http://www.compensationcafe.com/2015/04/15-an-hour-in-seattle.html). That center of progressive thought also produced the majority of the voters who approved pot legalization for WA State, too. More money buys bigger tokes.

[Jacque Vilet]

What's a toke??? LOL :-)

[E. James (Jim) Brennan]

CEO Dan Price is apparently the sole owner of Gravity. It was said that his income from the profits was much higher than his old "salary"; so maybe it's a Sub-S, where a lower guaranteed pay rate saves him in payroll taxes while not affecting his profit distributions.

Every employer has unique circumstances and few act for the same reasons.

[Tony Bergmann-Porter]

It follows that there will be a movement (among those who flunked or did not take Econ 100) requiring the "minimum wage" to be $75K...

the consequences of which will be that several more tranches of the lower end of the labor force will discover that the true minimum wage is $0.

[Dan Walter]

One definition of insanity is to do the same thing again and again while expecting different results. Let's face it. The old paradigms have failed many companies. Compensation consultants, survey providers, internal compensation experts and outside influences have not really improved engagement in at least 25 years. Pay disparity continues to worsen. Employees still decry the lack of understanding of their pay programs. The list can go on. But that's not the only reason.

The biggest reason is that companies differ from one another. Their employees suffer as well. Many companies have paid in uniques ways for decades or longer. They have avoided participating in surveys. They have avoided discussing their plans on social media ( largely because it is still relatively new). They have simply created their pay programs and have successfully gone about their business. They didn't tell us. We didn't know (and likely didn't care). The comp industry writes them off as outliers and anomalies and the companies are just fine with that.

As a consultant who does a lot of "unusual" pay programs for my clients I can confirm that these are not as rare as some imagine them to be. They are also not as risky, wierd, or ineffective as many in our little world might think.

[Dan Walter]

When you read the comment above please replace suffer with differ.

Fat fingers tiny iPhone keyboard.

[Jacque Vilet]

Dan--- thanks for your comment. I almost included a quote of yours I have kept. "Even though there are great ways to do almost everything there are very few absolute ways to do anything ". Agree there are companies that have implemented unusual practices---JP Morgan Chase was providing egg freezing before Facebook but kept it quiet. Wish more of these outliers would be open about what they're doing because we could all learn something from them.

[E. James (Jim) Brennan]

Many outliers do not want to be lightning rods attracting unwanted attention. Can't count the number of cases over the years where the enterprise kept the lid on really excellent "different" practices because exposure would simply endanger their success.

The obligation of the innovator is generally not to the outside world but to the client, or the employer or their work force. Consultants or marketing types might want publicity, but premature celebration can easily backfire. Announcing new approaches can attract hostility, criticism and unwelcome interference with what is smoothly working in relative silence. Seen it happen. Creativity tends to flourish in the quiet shadows.

Plus, why give away any significant competitive advantage? Smart folks keep it to themselves. Even consultants want to sell their "secrets" rather than donate them for free.

[Karen Kervick]

You mean we should come up with our own ideas that work for our own companies, rather than looking at survey results and purported best practices? Hmmm....

What impresses me about these stories is that not all leaders take the bull by the horns and suggest drastic changes with regards to employees. Usually we are having to convince our leaders of the right thing to do when it comes to employee compensation.

It is refreshing to hear about leaders who do put employees first - there is strength in numbers so it would be nice to hear about others doing the same. Of course, most CEOs can afford to be generous. How much do they really need to earn once they have taken care of their basic needs? (granted that level is probably higher than most people as it is all relative)

From a comp perspective I'm interested to hear what the guidelines will be once they reach $70k. It's the new minimum they said, not a flat rate, so presumably there are still ranges with annual increases, performance reviews etc. Do you know if the salaries will continue to go up from there?

If so, I'd like to hear if he also establishes a maximum rate. That is the discussion I'd like to listen in on.

[Dan]

This looks like another social experiment to drive everyone to mediocrity. One way to pay for this program, is that he won't need a Compensation person. Your article says nothing about bonuses. Is the differentiating factor on performance going to be bonus awards? Also, what is the demographics of the people from Gravity who commented negatively on this experiment? My prediction - that it will work out just fine for them, since most of his work force is of the age that they have lived this way in their public schooling career - learning/working at the speed of the slowest learner/worker.

[Jacque Vilet]

Jim --- agree companies don't want to create publicity. But it would be great to learn of all these unusual practices. Unless of course learning them leads to more . . best (?) practices!

Karen --- I'm not a big fan of best practices.
http://www.compensationcafe.com/2014/01/best-practice-or-best-fit-1.html
Articles you read on these new practices don't ever go into detail. They are only writing what will grab people's interest and that's the broadbrush. Mostly it's only the compensation specialists that are interested in details.
Anything new is bound to have problems. It will take these companies time to decide whether the idea is "all wet" or if they just have to tweak it some.
Again, wish we could get more details.