They might be less happy when they have to have layoffs because they can't actually afford to pay people more than the value they provide the company.
I'm not sure if he is still head of the board or what, but this is definitely a bold move. Still, $70k in Seattle is only like $52k in my lowly city of Myrtle Beach, SC. It isn't a whole lot of money for any professional salesperson, clerk, or the like to make. It will certainly be a big win for morale and one would expect, performance, and retainment/turnover.
I guess we will see.
Personally, I think it's a noble but foolish move.
Why is that? While some people might be that petty, it's very possible that Gravity never hired those kinds of people in the first place.
> It also removes the incentive to improve for the lower tiers, since they have further to move up the ladder before they see an increase in pay.
Why is that? I don't think the idea here is to raise everybody's wage and then institute some kind of 30 year wage freeze. It's to establish a baseline living wage so that none of your employees need to be hustling for other opportunities just to pay their living expenses. They can focus on their work and their lives. Rewarding exceptional behavior is a small cost once that's out of that way, and I don't see why we shouldn't expect to see it here.
It may be petty for someone making several hundred thousand a year to resent someone who's market value being 30-40K being bumped up to 70K but for the vast majority of college graduates that is a slap in the face. Your giving everybody the rewards they worked their asses off for. I don't consider that petty, I consider that basic human disposition. Especially in a place like a credit card payment processor. I doubt many people working there go home and take pride in telling their family and friends about the work they did that day and how its making the world a better place. The majority of them are probably working for the paycheck.
Now don't get me wrong. I do admire the guy for what he is doing. Its a great selfless act. But I'm just saying its completely reasonable and understandable for those employees who where currently making ~ 70K to feel resentment and it does not make the petty or bad people. I would hope they thought this side effect through and have plans to deal with it. Since its not going to just be one or two bad apples but the vast majority of people in that position.
E.g. in the UK a prime example is law school. The average pay for a UK solicitor is well below the national median salary.
Yes, that petty university graduate with thousands of dollars of debt and many years invested in his craft should just be a better person.
Until the world is a very different place, return on investment is a huge factor in people's career.
All those who had to go through a lot of effort to get a job requiring higher education, are now earning the same as those who put less effort. They're certainly not going to by happy about this.
In fact, they might be so happy with their job that they want to improve so they aren't replaced with the better candidates the job is going to attract now that it is paying much more.
Personally I think it would make more sense to raise salaries by whatever he wants to cut his salary, and then add some profit sharing in as opposed to just removing all the profit and adding significant risk to the business.
And then, after three years, hopefully the ROI on this will be quite high, and then at that point, yes it becomes an expense.
It appears the people working at this company company are providing enough value for the company to be able to pay them this amount. If it can sustain revenues, who's to say it has to return its profit to the shareholders rather than to its employees.
[edit] removed duplicate word
Isn't this an implicit admission that the company was underpaying them before?
We know that your first assumption is wrong, and I don't think any of us are in a position to know if your second assumption is wrong or not. It certainly doesn't seem unreasonable.
The current average salary is $48k (x70 employees == $3.36m/yr).
If the CEO drops his salary to $70k and ups everyone's salary to $70k it will be a net increase in expenses of around $600k.
Their profit of $2.2m can more than deal with an extra $600k.
I'm also assuming they're still growing and will grow a little more due to some publicity from this.
There are 120 employees total and you're only accounting for salary paid directly to employees (good rule of thumb is employer pays an additional 25-40% of your actual salary in employer taxes/expenses).
Under your scenario (assuming the 120 employees figure from the article is correct) a jump in average salary from $48k to $70k minus the CEO's old salary results in a net increase of $1.7mm (or about 75-80% of this year's profits as the article stated).
This scenario isn't correct though, because an average salary of $70k means there are still a significant number of employees still making below $70k. A more realistic estimate is the average salary will be well north of $70k, and if we include the additional cost of payroll taxes (let's say very conservatively 10%), then we're talking about:
($80k new avg - $48k old avg) * additional 10% payroll taxes * 120 employees = ~$4.2 million in additional wages
Granted, that's over 3 years, but this is a very conservative estimate assuming 10% payroll taxes, no additional employees hired, and the new average wage will be $80k which is also very conservative.
I'm going to work this out a little different though than you assumptions, given the types of jobs that are here, I don't think the average will jump a huge amount though.
The average for a callcenter employee in WA is around $30-35k. There are 70 employees that are going to receive an increase and I'm going to assume that they're all on $35k (even though there will probably be a proportion of those closer to $70k), even though this is overly conservative. Even minimum wage in Seattle now is about $32k/yr.
70x ($70k - $35k) is a net $2.45m increase in wages.
Payroll tax in WA is 5.5% on salary expenses above $800k/yr.
5.5% of the additional $2.45m is $135k.
The net increase in wages is therefore around $2.6m.
His salary will be brought down to $70k.
Their current net profit is $2.2m, the additional gain from his pay cut is around $900k.
Therefore this increase (even if done in year 1) will still have their net profit (assuming the $2.2m is before tax) at $500k. Sure, not as good as my original math, but still sustainable in a predictable business like this probably is at this stage.
You are assuming too many things and you HAVE to account for the fact that the minimum wage is going to be $70k, so the minimum average wage possible is $70k (i.e. everybody is making 70k). Thus, there is a net increase of at least (70k-48k)*120 = 2.6m
This assumes everybody will be brought down to $70k salary, which we know is not going to happen.
Also, 5.5% for total payroll taxes is wayyy low. Did you include FICA/medicare/SS/unemployment insurance (federal and state)?
The maximum is around 5.84% But seems the average is around 1% or less.
Medicare is 1.45% from employer (the additional 0.9% on amounts of $200k don't really count here).
Social Security is 6.2%
So my total tax rate was off, but it still seems to be around 8.65%. Even less if their unemployment insurance figure is lower.
By the way, there were only 70 employees that were going to get an increase in salary. Hence my estimates of people who would be under $70k at all. I took what I thought would be the lowest figure for employees in a company like this (as well as the doubling comment in the original article) and estimated the total maximum increase at $35k to $70k (even though the actual increase will be lower).
Not that our figures are really that different in that case. My $2.45m increase versus your $2.6m. Plus an extra 8.65% tax ($220k).
You also mention that this is a highly competitive market. You're right, but it's also one that scales disproportionally compared to staffing. What do you think Stripe & PayPal in San Francisco pay their staff? I'm heavily involved in the finance sector (in AU anyway) and I can assure you that these businesses (especially in the USA) have significant margins on their average retail fees. 2.9% + 30¢ might seem like a great deal to most of everyone on here, but their top-line margins are > 30% on that, moreso for small transactions, as that 30¢ fee doesn't really exist anywhere but the gateway.
As an example (in AU), a business doing mediocre credit-card volumes of < $1m/year will be paying less than 0.4% + the Visa/Mastercard interchange fees (which is about 0.33% for the vast majority of card types… 1.023% for platinum cards).
My math was very naive (no tax impacts positive or negative) but even if he phased in the change on day one (as opposed to the 3 years he is planning on), it would move his $2.2m profit (assuming that is before tax) to $1.6m.
As the only (majority?) shareholder, wouldn't that be sufficient to live comfortably off… assuming stagnant growth?
[edit: sorry, my above comment was meant to originally be posted to the parent, rather than the comment I posted this too… if only I could reassign it!]
The whole premise of making money by providing capital and hiring labour is that you do not pay according to value created/contributed, but as little as the labour market will allow.
Some people think that the invisible hand of the market will ensure that the difference approaches zero. These people often tend to believe that unions are worse than hiring right-wing thugs to bust up unions, too.