Social Entrepreneurship Approach.

March 16, 2016

Social Entrepreneurship Approach.

Minimum Salary Defies Gravity at Price’s Company

Professor Dennis R. Shaughnessy; Spring Term 2016

On April 13, 2015, Dan Price set the minimum wage for his employees at $70,000 a year. And then the fireworks began.
He’s a socialist, or maybe even a communist! A job killer. Unaffordable. A publicity stunt. He’ll just pass the costs on to his customers.
Dan Price is the founder of Gravity Payments, a processor of credit card payments for small businesses. The privately-held Seattle company has 120 employees and is growing at more than 15% a year, with a $150 million revenue base and a 1.5% net margin (after dividend payments of 40% to the founder and his then co-founder brother, Lucas).
Price was taken aback one day talking with a phone customer service employee who told him that he couldn’t leave a decent life on his $35,000 a year salary. At that time, Price was being paid $1.1 million a year in salary and bonuses. The average salary at Gravity was about $45,000.
In response to this and other employee concerns about compensation, Price began to increase everyone’s salary by 20% per year. Much to his surprise, profits grew at a faster rate than the salary increase. Customer prices remained largely the same.
After talking with friends from Seattle who were also struggling to make ends meet in an increasingly high cost city, Price reached an epiphany. His approach to raising salaries was helping, but it wasn’t enough.
On April 13, he announced his decision to raise every Gravity employee’s base salary to $70,000 a year over a three year period. He would reduce his $1.1 million compensation to $70,000 to help to cover the additional costs. He would also no longer pay a dividend to himself and his brother, using those funds to pay for the higher labor costs. About 70 of the 120 employees would receive a salary increase of at least $10,000, and many would see their salary double.
In order to raise more funds to keep his company afloat during the salary increase period, Price sold his home and cars to generate $3 million in cash to invest in the company.
More than 500 million comments followed in various social media outlets. Gravity received nearly 5,000 resumes in the days following the announcement. He was hailed by some as a “Robin Hood” of business, who was robbing himself to pay the least among his employees. A great deal of media attention followed, with the popular media praising his unselfish and generous act and the business media criticizing this unsustainable if not socialist publicity stunt.
Which is it?
The story gets a bit more complicated, over time. Price’s brother sued him to force a buy-out of his shares, saying that the high salaries were unjustified and robbing from the share of profits that belongs to shareholders. Some of the higher paid employees complained that they earned their salaries while those receiving the unprecedented bump in pay did not.
Today, Price reports that his business is thriving, with continued revenue growth, improving margins and a “doubling” of profits. Both customer and employee retention rates are at an all-time high.
On the other hand, as a privately held business, with no obligation to be transparent on financial results, some wonder if the business’ financial health is as strong as its founder suggests.

Discussion Questions:
1. Was Price’s decision to increase the minimum salary to $70,000 a good business decision?
2. Is Dan Price a morally righteous business leader, or merely one in search of publicity?
3. Is Gravity a model for a more socially responsible business, or an outlier that few businesses can or will follow?
4. Can you structure a salary or wage model that creates a more equitable workplace but with perhaps a more sustainable model for the pricing of labor?
5. Would you like a job at Gravity? Why or why not?

Online Resources
Here are just a few of many online stories about Dan Price and Gravity’s $70,000 minimum salary.
Bloomberg
http://www.bloomberg.com/features/2015-gravity-ceo-dan-price/
Inc. Magazine
http://www.inc.com/magazine/201511/paul-keegan/does-more-pay-mean-more-growth.html
ThinkProgress