Seattle C.E.O. Who Promised $70,000 Salaries Wins Suit Filed by Brother
nytimes.com
nytimes.com
Edit: Dan Price made his announcement of the $70,000 pay plan a month after he was served, making matters even more troubling is his denial about the timing.
http://www.bloomberg.com/features/2015-gravity-ceo-dan-price...
>When Lucas left the company, Dan raised his own salary (from $50,000 to $1 million in one year), causing a rift between the two. And so on March 16, one month before the famous $70,000 announcement was made, Dan was officially served a notice that Lucas was suing him. Court documents prove that Dan signed the papers and knew of the lawsuit. However, Dan claimed that he was being sued after the wage announcement because Lucas was jealous of the press.
>Price raised his employees’ wages to $70,000 so his brother wouldn’t receive his fair share of Gravity Payment’s dividends, not because he want to improve his employees’ lives
http://thehustle.co/dan-price-the-ceo-paying-everyone-70000-...
The facts seem to dispose completely of Dan Price's argument: the suit was prepared before Lucas Price even knew about the min-salary proposal.
Though if that was the case, it seems to have backfired spectacularly if the article is to be believed about increased profits.
My memory might be failing, or the post back then might have been not based on facts (IANAL, nowhere near that). But that's what I remember :)
Maybe somebody can correct me?
"When Dan announced his plan to pay everyone at Gravity Payments a minimum salary of $70,000, Lucas objected, saying he was not informed of the decision until shortly before it was made public. A company spokesman said the lawsuit was filed two weeks after Dan announced the salary plan, which brought the company an unexpected crush of attention."
This lawsuit, even though it isn't explicitly about the well-above-market wages paid to the employees, seems like a century-later version of Dodge v. Ford, given that context.
Ouch.
Sometimes I think to myself that if I got into business with members of my family, things would somehow be different for us. Stories like this at least have the silver lining of an unambiguous answer: no.
In 2014, the median per capita income in Seattle was $36,854[0] meaning that half those represented in this data earned less than that.
I think we're in kind of a bubble on HN where we don't realize how much richer we are than the average person.
From the article:
On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses. The judge also ordered Lucas to pay Dan’s legal fees.
If the CEO also owned 100% of the company, or if the CEO was helping the employees with his own personal money, and not the company's money, there's no problem of course. But that isn't what he's doing. A cynical interpretation would be that the CEO is giving up 60% of the profits, in return for national fame and glory, while the brother is forced to give up 40% of the profits and gets nothing at all.
Obviously this is a simplification / wishful thinking. But maybe it's what we should strive towards :)
There is some mental dissonance however, as I imagine this train of thought would be "obvious" to those in power, yet we see regular evidence of wage stagnation/suppression. If we don't assume incompetence, some optimum of balancing pay and churn has been found and accepted, and if I trust that they are making a self interested decision, there may NOT be a benefit to paying more. However, I'd really like to see the numbers, because my following intuition from a long time of watching the best engineers hop from job to job is that I probably wouldn't agree with their choice of calculations.
However, like you say, it has to do wonders for corporate culture! (ignoring the jealous folks who think they deserve to be paid more than a janitor. I believe I remember a few such people when I originally read this announcement)
You are lucky to be working in an industry with a position and skillset that allows you that luxury. And yes it is a luxury, and one that many employees don't have.
Two sides of the same coin.
Over my career, the saddest, most stuck employees have been those whose salaries outstrip anything they could get if they go back on the market. It's wise to think carefully before accepting a salary that is much higher than normal, because it's likely that you'll have a very difficult time leaving.
Otherwise you should have a huge safety net when you finally decide to switch jobs to something that makes you happier.
It's almost as if people enjoy luxuries.
I assume you live in a rented bedroom and eat mostly packaged ramen while saving 90% of your take-home pay?
When someone says something like "I don't understand why people spend all their money", it's just pretension. They know exactly why people spend all their money. Money buys nice things and nice experiences. It's a good idea to live beneath your means, but it's a different thing to pretend that typical behavior is somehow incomprehensible.
Also, buying quality doesn't stop you from spending all your money. It is extremely easy to spend all your money on quality stuff that you don't really need and justify it as "buying quality" or "buying once".
> The reality is that people tend to spend most or all of what they earn. People like to own nice homes and nice vehicles and take nice vacations etc etc.
Aren't these statements contradictory? My point was that it's obvious that a lot of people don't know this, and you CAN avoid living from paycheck to paycheck.
I did it when I was a student (with no help from parents) and had at most $400 a month after rent, and I do it now that I make a lot more. I however still don't go out a ton, and I don't have a fancy car, or purchase anything on a contract, because the luxury part doesn't give me any happiness. I still eat great food and have people over and travel as much as I can.
I find this obvious. You do to. My OP was about people not.
Go ask any general practice doctor whether people do what they "should" and whether the reason when they don't is actually ignorance. People have lots of trouble prioritizing long term benefits over immediate pleasures.
It does: it means financial independence -- and the freedom to work on what I really want to do -- comes quickly as opposed to never coming at all.
> The reality is that people tend to spend most or all of what they earn.
Read Amy Chua's _World on Fire_, on the question of market-dominant minorities -- i.e., peoples who have too much sense to waste their money like this.
> quality stuff that you don't really need
The difference between old money and the rest of the US is the difference between checking the time on your cellphone (the old-money way) and buying, or wanting to buy, a $20,000 Patek Philippe mechanical watch.
What's insane is some of the lawsuits that succeed.
If he made a change on compensation not based on the interest of the company, then the other shareholders should be allowed a say.
You do need committed investors, but even if you have investors cashing out it may be better for the company that they leave when you look at things on a 5-year or longer timescale.
I'm not saying that paying min 70k is beyond this point where paying them won't help you on T time scale, but it needs to be evaluated. You can't just assume that paying someone more will be more than made up for in increased long term efficiency.
It's interesting that you critique gp's comment for being binary, but you also make an absolutist comment yourself by stating "there's no reason" in:
>But there's no reason that a company paying out 100% of earnings to its employees can't outperform a company paying out less year-over-year. ... it may be better for the company that they leave when you look at things on a 5-year or longer timescale.
Instead of "no reasons", there are several reasons why a company paying out 100% of the profits to employees for 60 months will make it underperform another company that retains some of its earnings. A company can use its retained profits to spend on future expansion, speculative research & development, acquiring a company, etc. In many industry segments, if the company doesn't grow, it becomes irrelevant and dies. (At that point, the jobless employees get 100% of $0 profits.)
I can't think of any example in business history of a company that paid 100% profits to employees and therefore had $0 in retained earnings year-after-year ... outperform its competition.
Any education or education in specific fields or courses of study?
I suspect you'd get the most RoI on education related to what the economy needed at the time. However if the market is compensating employees fairly* then students will likely pick what enjoy doing which also best fits the needs of the economy (as dictated by the benefits of the job).
*For example, when you have to hire employees from out of nation requiring that they make 2X or more of the median pay for the job in that area, and also allowing this valued employee to freely take any other similar offer (2X median pay in the area of the job) as well as have a fast track to citizenship.
The problem being that much education has a minimum of 4 year lag time. So one could go into a degree program when the market is hot, only to see it cool off by the time they graduate.
Citation? As I understand it this company is not doing specactularly (revenue up, but profit down a bit), but, more important, employee happiness is down to pre-$70K levels.
http://www.usatoday.com/story/money/2016/05/26/does-70000-mi...
So, at the cost of growing a little less quickly than they might have, the employees that are building the company up are enjoying a drastically improved quality of life.
The company isn't failing, the investors aren't losing their shirts, and the human beings who are making the day-to-day operation of the company possible, are better off. Sounds like a win-fucking-win to me.
> Employee turnover fell 19% last year compared to the average of the past six years. Gravity has been flooded with 30,000 applications, up from an average 3,000 or so a year. A monthly company survey that gauges employee happiness found a bump just after the announcement but then a drop to pre-$70,000 levels – consistent with a widely-held theory that people return to a baseline level of happiness despite positive or negative life events.
Still, Pirkle says the raises have allowed employees to move closer to the office and cut commute times, and plan for the future without living paycheck to paycheck. Retirement account contributions are up 130%, more employees are buying first homes and 10 are expecting, up from a typical zero to two each year.
Except in this case, quite the opposite happened. All of the company's best employees quit and walked away within a few month's time.
This left only the newest hires running the ship - collecting, in some cases, more salary than the seasoned crew that had been there from the start and had to work their way up the pay ladder.
[1] http://www.businessinsider.com/dan-price-gravity-payments-em...
http://www.businessinsider.com/dan-price-gravity-payments-em...
The CEO got really good personal PR. The new hires got huge raises. The employees that had toiled long hours and built the platform got nothing.
That's not somehow petty, nor jealous. Let's not demonize the employees that decided they were not going to be part of that company anymore - a company that showed it wasn't going to reward hard work and dedication. Most of us would have made the same choice.
No one bats an eyelid when a company hires a new unicorn, 10x developer. It's equally possible that raising the salary also allowed them to hire 10x employees and the old hires were feeling threatened so left.
We work with data, if I don't feel I'm compensated fairly I write a letter complete with numbers saying what my renumeration should be. And forward that to the manager and HR.
We're discussing previous articles about this company.
> No one bats an eyelid when a company hires a new unicorn, 10x developer. It's equally possible that raising the salary also allowed them to hire 10x employees and the old hires were feeling threatened so left.
That's not what happened here. No "10x developer" was hired. It was literally just a huge pay raise for the newest employees, and shafting the ones that had been there for years.
It turned from a merit-based system into one that valued everyone equally - and while this sounds great on the surface, not everyone contributes equally. Those that built the platform really felt like they got the short end of the stick. New hires, who put in none of the effort to get the startup up and running, had none of the knowledge nor domain expertise, suddenly were earning as much as the most senior engineers.
Not to mention the entire thing reeked at the time as one big PR stunt, since it didn't "just happen" one day, but rather the media was notified and it turned into a big fuss. It seems the stench had some credence given this lawsuit.
> We work with data, if I don't feel I'm compensated fairly I write a letter complete with numbers saying what my renumeration should be. And forward that to the manager and HR
This statement seems like hyperbole to me. I imagine few managers respond well to threats or begging via email about salary. Nevermind pointing to what other people get in a market for compensation is a terrible way to value yourself. You should start these discussions with how much value you bring to the table, not what others at other companies may or may not bring to theirs.
No, it wasn't. There was no "shafting" involved. Phrasing it that way shows that you're just as petty and jealous as those others. Someone else getting paid well does not take away from your worth.
"It turned from a merit-based system"
Payroll has almost never been a merit-based system, so any arguments about that are deeply flawed.
If "the best" employee in a company quit because they were philosophically opposed to a new client's business, most would cock an eyebrow, think they were inflexible or committed, and move on. I find it extremely interesting that instead, a philosophical disagreement about cow-orkers' salaries is apparently considered very differently by some.
So I looked at Glassdoor[0] and the trend looks like after 8/2015, when this article was published, there is a sharp uptick in employee reviews. So far it appears almost everyone is happy with the change (customers, employees, and management).
[0] https://www.glassdoor.com/Reviews/Gravity-Payments-Reviews-E...
Isn't more driven by market forces of supply and demand. Why should CEO make his business to interfere with systems that are in place to deal with this.
A more convincing argument is 'publicity'.
The CEO may very well be able to make a case for higher wage workers even in the "greed-above-all" context of shareholders.
FWIW, 70K "min wage" might not mean so much if most employees are line workers and there are contractors for the support jobs (eg IT-dept, janitorial, secretarial, etc).
The company in this case also generated a lot of good will, something that is hard to get, hard to value, but very important none the less.
Too many corporations are so focused on quarterly performance they fail to account for the long term.
"Six months after Price's announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have also doubled. " http://www.inc.com/magazine/201511/paul-keegan/does-more-pay...
No such duty exists. What does is the annual general meeting where shareholders vote on proposals put forward by the board, such as the mission statement and a company vision.
If these state "we aim to remunerate employees on a flat rate equal to the highest current salary" then you can't cry later.
Quoting: "If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that.
Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular."
[1] http://www.nakedcapitalism.com/2013/10/why-the-maximizing-sh...
Oh and Dan has 60% ownership so he makes that call and every other. Sounds open and shut to me.
Umm....I'm a little shocked you're not aware of this but 60% ownership doesn't give you the right to use the corporate credit card for personal expenses (which is what the suit is about[1]). How on earth is that open-and-shut just because he has 60% ownership?
[1]From the article: "On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses."
That's an iffy assertion. You could argue that no corporation should pay above minimum wage for any position because to do otherwise is to eat into profits unnecessarily. But the reality is that for many positions you cannot attract or retain employees without paying them far above minimum wage.
It's not hard to argue that it's in the best long-term interests of the company to pay wages that make it easier to attract the best employees and that make its employees very loyal. Whether those wages are $40k/year, $70k/year, or $200k/year is not objectively very clear.
Roughly 130 people - let's assume 100 of those people got a $30k raise - this is ~$3m more per year. The CEO went from $1m/year down to $70k, so... approximately $2m/more per year invested in paying people a decent wage.
What affect will this have on retention, employee commitment, training costs, better focus at work by not having to look for a second job, etc.? I would think at least some of the $2m diff would be made up just by reduced hiring/training costs, though it's probably hard to measure that accurately.
These numbers are not much more than a WAG, so perhaps I'm WAY off here...
And... from an article last year
=================
Gravity had about 120 employees, and they earned a little less than $50,000 on average. He found it would cost about $1.8 million to increase wages to $70,000 in steps over three years. Cutting his own pay would cover much of that, and if the wage hikes made his staff more productive, he figured, the whole move just might work.
=================
So that seemed to be the plan (well, the plan that's made its way in to the media stories)
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term, (b)the interests of the company's employees, (c)the need to foster the company's business relationships with suppliers, customers and others, (d)the impact of the company's operations on the community and the environment, (e)the desirability of the company maintaining a reputation for high standards of business conduct, and (f)the need to act fairly as between members of the company.
And that's pretty much it. This gives directors massive wide ranging latitude to act. Delaware's duties are similar, they give the directors huge latitude - companies are not legally mandated to e amoral profit machines.
Just my pov though.
"Most large businesses buy their corporate charters from the state of Delaware. And the law of Delaware is clear about corporate purpose. The chief justice of the Delaware Supreme Court, Leo Strine, put it simply in a recent law review article: “Directors must make stockholder welfare their sole end.” In cases where directors have acknowledged sacrificing shareholder interests for other groups, Delaware courts have found those directors violated their fiduciary duties."
http://www.nytimes.com/roomfordebate/2015/04/16/what-are-cor...
I've also read articles by "authors" arguing otherwise, so maybe the answer isn't all that clear. But my tendency is to believe what a legal professor says, and the above paragraph sounds pretty convincing.
"Delaware's duties are similar, they give the directors huge latitude"
In the UK law is basically exactly the same as the Delaware law. As long as the directors are acting in good faith they can do pretty much what they like. It is up to the shareholders to show bad faith/gross negligence on behalf of the directors
As long as the directors can show they have made a "good faith" attempt to manage to the benefit of the shareholders then they are covered.
This part is key. When the directors actually admit that they are harming shareholder interests, they are opening themselves to a lawsuit. When they make a plausible claim that their actions are in the shareholders' interest, even if some of the shareholders disagree, they are fine. Courts do not second-guess business judgement.
To overrule the directors in court, shareholders have to show that the directors are acting in bad faith, not just that the actions will seemingly harm the company.
Hell, the exorbitant executive salaries are "detrimental to the interests of the shareholders". Where are the lawsuits against those companies?
And there's quite a strong argument that the CEO was acting in their financial interests, just on a longer time scale than many people today can be bothered with.
The issue here is largely attributable to statements from Milton Friedman and people who like to quote him, which leads to the mistaken belief that companies are legally obligated to provide blind, hell-bent, maximum short-term-return-no-matter-the-long-term cost "value" to shareholders. Which in turn has all but driven out the idea of providing consistent long-term profit to shareholders, and to "I bought a bunch of your stock Monday, gut your company to give me a payday Tuesday or I'll sue and overthrow your board on Wednesday" somehow being enshrined as a noble endeavor.
The history of corporate charters provides an interesting context because the limited liability was initially reserved for very risky but important activities like exploration. The original corporate charters were grants of both monopoly and limited liability offered by a monarch or sovereign for a specific approved business activity. Overtime society has expanded these grants to any and all business activity so we forget the original rationale for allowing these privileges.
Event the LLC is a relatively new entity. Historically business was conducted by partnerships. The partners were on the hook for the debts and actions of their partners and often put a lot of effort into limiting the risk of their business activities.
There is a strong argument that allowing investment banks to shift from a partnership to corporate structure allowed them to pursue much riskier activity. Goldman Sachs went public in in 1999 but was a partnership for 130 years before that.
The same motive applies to shareholders, if we allow them to benefit from limited liability it should be with the understanding that the company and its management have a duty to act appropriately which means the interest of Soviety at large and related concerns balances against profit concerns.
That's debatable. You'd have to set up a number of companies side-by-side in order to establish whether or not paying everybody such a high wage would lead to one or the other group of companies doing statistically better for their shareholder in the longer term.
I can see all kinds of reasons why paying employees more might actually work out to be a benefit in the longer term.
> Given that the CEO legally has a Fiduciary duty to the shareholders to protect their best interests, I can understand the brother filing suit.
Can we please stop perpetrating that myth?
The myth comes in where people believe that means the burden of proof is such that they have to blindly serve short term financial interests of shareholders. There is no such rule at all, in fact it's quite the opposite:
https://en.wikipedia.org/wiki/Business_judgment_rule
The business judgment rule is a case law-derived doctrine in corporations law that courts defer to the business judgment of corporate executives. It is rooted in the principle that the "directors of a corporation... are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge".[1] The rule exists in some form in most common law countries, including the United States,[1] Canada,[2] England and Wales,[3] and Australia.[4]
To challenge the actions of a corporation's board of directors, a plaintiff assumes "the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty — good faith, loyalty, or due care".[5] Failing to do so, a plaintiff "is not entitled to any remedy unless the transaction constitutes waste... [that is,] the exchange was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration".
With that said, the basic principle is that managers are considered to have a presumption of good faith in their business judgement with regards to disputes with shareholders over business strategy.
>On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses. The judge also ordered Lucas to pay Dan’s legal fees.
This seemed like one way to "over compensate" one of the two partners in a business partnership and a cautionary tale. In a partnership, generally, all profits and distributions from the business pass through to the partners at the percentage of their ownership stake. Most partners (myself included) take minimal salaries in order to prevent extra taxation on payroll taxes and the bulk of the compensation comes in the form of partnership distributions. In this case IIRC the CEO became a 60% shareholder then started paying himself a salary of $1,000,000 a year. This is considered a business expense in this case and not part of the partnership distributions.
IE if the business was making 3M a year in profit and the brothers took no salary they'd split it 1.5M each (in this case 60/40 but lets say 50/50 for ease). In this case now the one brother takes 1M in salary and the profits are now $2M, split both ways and Dan gets 2M a year in salary and distributions and the brother gets $1M.
Thats how I read the case anyway.
here is a basic argument in favor of it, from the fiduciary perspective: employee retention, loyalty, and morale are essential for the business to operate effectively.
but detrimental to the interests of the shareholders
I'm not sure how you drew any conclusions about the lawsuit from the points you're trying to make in this paragraph; in fact I can't see how any of what you're saying has anything to do with the lawsuit? From TFA:
> On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses.
He wasn't getting sued for paying his employees $70k. It's a short article: you could have read the entire thing in less time than it took you to write an uninformed comment about it.
The following paragraph of the article hints strongly that the brother was upset by the 70k/year decision, and that it played some role in their conflict.
"When Dan announced his plan to pay everyone at Gravity Payments a minimum salary of $70,000, Lucas objected, saying he was not informed of the decision until shortly before it was made public. A company spokesman said the lawsuit was filed two weeks after Dan announced the salary plan, which brought the company an unexpected crush of attention."
You asserted with great confidence that the lawsuit was about the $70K salary, when it wasn't at all, as even a cursory glance at the article would've told you. wutbrodo did not insult you personally; he called your comment uninformed, which is pretty indisputably true. You don't really have any grounds to be angry here.
I didn't mean to "insult you personally": I did express that it seemed like you hadn't read the article but I tried to do so politely. The reason I assumed that it was likely you commented without reading the article is 1) it's hardly a rare behavior in Internet boards, HN included and 2) your comment pretty explicitly reads like someone who thinks that the lawsuit was about the pay raise, when none of the facts of the article support it (though the clickbait headline implies it).
> The following paragraph of the article hints strongly that the brother was upset by the 70k/year decision, and that it played some role in their conflict.
Given how incredibly unrelated the actual complaint in the suit is, it borders on conspiracy theory to assume that a fraudulent suit is being filed as a roundabout way to sue for the salary raise. Especially when the lawsuit would be purely vindictive, since even a legal victory wouldn't address the salary increase at all!! Just because the article is trying to grab clicks with a misleading headline and creating a weak "isn't this suspicious" justification for doing so[1] doesn't mean that I'd expect commenters here to blindly buy it. Thus, the most reasonable explanation for talking about something implied by the headline but completely unsupported in the article was that the headline was read and not the article.
At any rate, sorry for assuming that you didn't read the article, but frankly it seemed like the _less_ insulting assumption.
[1] "nudge nudge, hey he didn't like being kept out of the loop about the raise and he filed a not-remotely-related lawsuit soon after, something fishy is going on here...or at least something that gives us plausible deniability to misrepresent the story"
I am surprised how many young CEOS themselves forget this. My friend is a VC who invests in startups in India. Recently he invested few million dollars in an Indian startup and then invited the founders to SF. Later he learned that both the founders traveled business class and stayed at a beachfront resort. While this VC himself has been traveling econ class to India and staying with friends and family.
My understanding is that the Indian startup space and VC ecosystem is pretty vindictive towards any founder who would have behaved that way and the rest of the world would have all heard about it if it were true. Care to name the startup and the founders so that we can verify that this story is true?
Losing brother: “I am shocked and disappointed with the decision and I will be considering my options.”
Winning brother: “My love for my brother is unconditional...I’m thankful for the opportunity to put this challenging time behind us,”.
One of my biggest concerns the past 10 years or so has been the difficult of technology's distinguishing between "building stuff to make the world better" and "chasing nickels". This is clearly an example of the latter. Brothers in court? Disgusting.
I have always been a big proponent of free markets and sure, everyone has a right (and responsibilty) to earn for their good work, but this is just beyond any of that. Stories like this one demonstrate the worst behavior in a world full of blessings.
Frankly, I would sooner give it all up and do volunteer work before I would go to court against my own brother. Obviously, not everyone feels this way. What a pity some of us have lost our way and in the name of "something else", forgot what's really important.
I don't think it's super complicated. It just became complicated as people that were decidedly not making the world better wanted the cachet of doing so.
To me: unintentional positive externalities are still unintentional. Rationalizing profiting as a societal good basically makes someone the devil.
YMMV I'm sure.