CEO cuts his pay by almost $1M to give his employees big raises | Hacker News Reader

CEO cuts his pay by almost $1M to give his employees big raises

latimes.com

128 pointslavamantis102 comments

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This is the third time in a week that this article is posted on hn

See:

https://news.ycombinator.com/item?id=9371854

https://news.ycombinator.com/item?id=9375978

It seems to be a real hot-button to say the least.

The NextDraft effect ?

Dave Pell is really influential among people who read hn imho, so yes NextDraft network effect could have played a role here.

That said I think jurnos really like this kind of narrative and subject, since it's really appealing to theirs audience.

It's a sort feedback loop that time will help to "break".

this one is a different article, but same story.

I responded to this in a previous thread, but I think I can simplify it down to the perception versus reality of the change the CEO has enacted.

What many people believe: The CEO has set a minimum compensation bar to help those with market wages below $70k.

What has actually happened: The CEO has determined that going forward, he'd rather hire people with higher market wages and more experience versus paying lower wage workers.

Over the next few years, the company will slowly shift to one with a more experienced workforce. This could pay off, and would not be that unusual. What is different is he drew a specific line in the sand and grandfathered in his hires prior to the change.

The NYTimes article clearly states that this was motivated by concerns about inequality rather than shifting what kind of people are hiring. If you have a source that contradicts this, it would be great to see it.

"His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000."

"“They were walking me through the math of making 40 grand a year,” he said, then describing a surprise rent increase or nagging credit card debt.

“I hear that every single week,” he added. “That just eats at me inside.”

Mr. Price said he wanted to do something to address the issue of inequality, although his proposal “made me really nervous” because he wanted to do it without raising prices for his customers or cutting back on service."

Source: http://www.nytimes.com/2015/04/14/business/owner-of-gravity-...

Sometimes we don't reveal our true motives to The New York Times.

Sure, but without a source this is just baseless cynicism.

HN is supposed to be a place for intelligent discussion: giving unsourced cynicism equal weight as evidence is creating an echo chamber for pseudo-intellectuals to parrot their beliefs.

Or is this baseless trust of a CEO in an interview with the New York Times? Surely what you propose is not a trust model for a robust organism.

Also, because somebody doubted the honesty of a CEO, you decide to talk about how they are a pseudo-intellectual in an echo chamber who parrots their baseless cynicism?

The burden of proof is on the cynic, not the person who is citing sources.

Assume I hire you as a manager in my organization and give you a hiring budget of $200k. You could decide that you want to hire 5 new college grads at $40k per year or 2 senior candidates at $100k each. Now assume that I tell you the minimum salary for any of your hires is $100k. My question to you:

What would be your incentive to hire two college grads you'll need to invest in training versus candidates with years of experience and skills?

You know what's terrible? How very unwilling nearly every company is to hire and train inexperienced workers while simultaneously complaining about not being able to find talent.

Especially true in software, isn't it? I kind of get it, though. We tend to jump ship a lot. So a company isn't willing to invest time and money to train me and then I jump ship a year later to greener pastures.

I get that, but at the same time, if I wasn't treated like a disposable cog, maybe I wouldn't jump ship even if I was actively being poached? Just an idea.

I agree. We went through hundreds of interviewees who didn't pass the coding tests and it really stifled the growth of the company. At the same time, the wage rate being offered was below average because that's what we could afford at the time. I saw some potential in some folks but other team leads felt otherwise. There's a difference between being able to code and not having enough experience in a particular domain to solve the problem in 20 minutes.

Hire and train vs hire talented is a very different strategy. Training requires more resources up front and it comes with a higher risk; it's suitable in some situations, but it certainly isn't for everyone.

My previous company hired and trained college interns and new grads, but they made the mistake assuming some sort of loyalty and didn't bother to give them a significant raise after the first full year. It's crazy, but a developer with 1-2 years experience is worth 20-30% more than one fresh out of college.

Even if he didn't decide it, it would make similar effect: higher salaries would attract more people, and the company would eventually hire better workers (if they aren't complete idiots and are capable of selecting the best of the people applied).

The implication here is that (incapable of selecting the best applicant == complete idiot).

From what I've seen/heard/experienced, hiring is amazingly difficult, and the main reason most professions don't suffer a lot is that there is a large pool of sufficiently capable people that accuracy isn't necessary, and where tech and other profession particularly suffer (and thus expose the problems that are otherwise universal) is that demand far exceeds supply.

I'm hijacking your comment a little, since I agree with your base point that attracting better people would improve their applicant pool and I fully expect they'd see a benefit from this (whether my point is correct or not), but I did want to point out one of my pet areas of concern: We all suck at hiring.

Given this is the fourth time I have seen this on the front page I think it must be worth it for the free advertising alone.

If it's genuine, then it's working as intended if it's going to get more CEOs to follow his example.

Bumping a salary is an ongoing expense and commitment, and it has several serious long-term consequences. You can buy 900k in publicity outright and be done or 900k in publicity by bumping salaries and have an ongoing commitment with very substantial HR and tax implications. They'd have to extract a lot more publicity than they could've gotten by paying a PR firm a million dollars to make it worthwhile. I doubt that's happened.

well, for a storry, covered in times, buzzfeed, cnn, herald, huffingtonpost, vox.. countles other, and even on the christianpost, i guess its not that surprising.

this is my second time seeing it, and i still dont remember the company name... soooo maybe not

That's because no one is mentioning the company name -- it's just nameless CEO gives nameless employees more money. The company is Gravity Payments.

This is a valiant effort but I wonder how the practical allocation of the jobs is determined. If the market salary for an employee is 50k, if you raise it to 70k, you will probably have a lot more applicants than positions. Do the current employees get grand-fathered into the job despite more qualified candidates? When hiring new employees, how do you decide among the increasing rank of equally qualified candidates?

That being said, a bump in pay will almost certainly help reduce costs associated with retention and retraining and may turn out to be a good business decision, not to mention the publicity.

Think about it: how much does the lowest paid staffer make there? 25,000? 30,000? These lower-paid staff will be very loyal, because they're getting a very significant and possibly life-changing raise. They're not going to quit on you, and they're not going to kill the golden goose.

Recruitment has real costs. Hiring and training, and dealing with the hiring mistakes you make, all cost money. Having a happy staff saves a lot of money, time, and headaches.

If you really want to trap someone into working for you forever, pay them way more than they could make anywhere else. The goodwill and loyalty that engenders are really only minor components in keeping the person on-board; since people tend to spend (and get debt based on) however much money they make, you're essentially buying lock-in and making it so even if they want to quit and get an analogous position at a competitor, they probably won't be able to afford to do so.

> They're not going to quit on you, and they're not going to kill the golden goose.

Especially if by going somewhere else they have to take a significant cut.

I also wonder if this company even has low paid staffers. The business I work for doesn't directly employ anyone under ~60k. Instead the kitchen staff, the cleaning people, the mail room, document processing people, etc. etc. are all contracted out.

Actually, it's a significant chunk. From the article:

> After Monday's announcement, anybody making less than $50,000 -- more than half of the company's 120 employees -- immediately got bumped up to at least $50,000, according to a company spokesman. The minimum will increase to $60,000 by the end of 2016 and $70,000 by the end of 2017.

can we really make this assumption? if everyone is paid the same where is the incentive to do more? how is morale affected in the reverse when you know you make as much as someone else who decides to slack?

while there are some benefits to increasing salary very large increases may negatively affect those already at a higher pay scale and some may dissociate effort with reward.

now if you dangle the carrot out there as a truly obtainable reward for meeting fair targets, then it truly becomes incentive for both retention and reward

>if everyone is paid the same where is the incentive to do more? how is morale affected in the reverse when you know you make as much as someone else who decides to slack?

The U.S. federal government has this in spades. Lots of people making the same salary, and no incentive to do more, and no way to weed out poor performers. Yet the government bureaucracy is still able to perform, sometimes admirably.

The private sector has an important tool: fire the slackers. If someone is not performing well at a higher-than-average salary: lay 'em off. Hire someone motivated to perform and make a higher-than-average salary.

Are otherwise qualified employees fired the moment a more qualified candidate expresses interest in their job? I don't see that being an issue. Perhaps what determines "qualified" will increase along with pay? I think it will certainly increase the overall quality of employees over time, and this may push out the least capable folks over time.

Has there been any comment by the higher-paid-but-by-no-means-rich contingent of the company? I imagine there are quite a few developers, engineers, and other technical folks in the $90-125k+ range there whom this does not affect directly, but may impact their ability to get raises? The article states company profits are going from $2MM to $500k so the odds of this impacting someone's 3% raise if they make $125k is slim but still a possibility depending on team size and composition (I would think).

This kind of broad policy will almost certainly have unintended consequences that will be interesting to watch play out.

I agree. Realistically I think this will be a short-lived experiment; everyone who got the raise will keep it, but I wouldn't be surprised if they go back to paying new hires a market-competitive salary within 12 months.

>a bump in pay will almost certainly help reduce costs associated with retention and retraining and may turn out to be a good business decision, not to mention the publicity.

I was thinking about this when reading the article myself. It has to help retention as it instantly becomes less desirable to move company if the market salary is far below what your current company is paying, which is what this will do.

For the time being it's great for all involved. The employees benefiting from it should be careful in terms of how they adjust their lifestyle based on the extra income though, because if the company went under or there were redundancies or similar they are almost assuredly going to experience a significant drop in their earnings.

Is there a direct correlation between higher qualifications and better performance and output? If having two equally qualified employees, is their salary requirement the only decisive distinction?

I think this experiment will have quite a few positive net outcomes (publicity, reduction of cost with recruitment and retention, etc) but on the longer run employees making 70k will automatically know that they are on the lowest pay scale so I'm unsure how that will work out.

It can definitely foment discontent when, say, a low-mid-level software engineer pulls the same as clerical workers. I wonder if that will have any effect on the company's ability to hire professionals. Maybe they'll expect a commensurate salary bump; if you're paying 1.8x the normal salary for a clerical or support worker, shouldn't you pay 1.8x the normal salary for a professional? What kind of message does that send about how much the company values professionals, and will pros be more comfortable at companies with more conventional pay structures (even though I doubt any would admit that publicly)?

That could be one way of doing things (all salaries raise in proportion to the minimum). It would make the company highly attractive for prospective employees and raise the stakes for current staff so would be an interesting "experiment".

Imagine if you were paid $500K/yr, but you knew it was the lowest salary paid to anyone in your company. How would that affect your morale? I know, personally, I would go home from work every night, absolutely thrilled at being the lowest paid person in my company :)

As an employee, your compensation is always tied to your notion of self-worth, or so I believe. Granted that the 70k seems like a very good salary for most entry level and some of the mid-level positions at any company but I think that the perception would change over time.

Let's say you are a developer making 70k and you know the receptionist makes at least the same. Or imagine you were paid 5K/yr and you knew you were paid the same as the CEO. Would you be happy with that too?

I think that if you're looking at the entire field and see that, in terms of the entire market, you're being well-compensated, you probably wouldn't spend a lot of time being resentful of other people in your company. I guess I could be wrong.

That would be definitely the case if your salary is way above market standards, but if ~70k is around what you would be making anywhere else, then it would like be a stress factor.

I mean, this is just a supposition I'm making. Maybe all salaries raise in line with the minimum.

Pay? Do thy mean total compensation or salary?

There are too many stories of CEOs dropping their salary to $1 just to find out later they got huge bonus, stock, and option grants.

I don't care how much CEOs make. I do care about the bogus self congratulatory PR stunts meant to dupe the heard into thinking this company is inline with their thoughts on "social justice".

Well he owns the entire company, so theoretically he could take a disbursement of 100% of profits if he wanted to. Realistically a large portion of that is almost always reinvested in the business. Besides, which one is "more fair" of the two options (from this story specifically):

- A CEO makes $1MM and owns 100% of a company making $2MM in profits every year.

- A CEO makes $1.00 and owns 100% of a company making $500K in profits every year.

Regardless of how large his profits disbursement is, he's intentionally putting himself in a worse financial position so that the majority of his employees get a massive pay increase in an expensive urban part of the country.

Just because it's a good PR move doesn't mean it isn't also a good move in general and a good move as a human being.

>a good move as a human being.

Giving people more of what they want is not automatically the correct move. It may sometimes be the correct move. You can cause a lot of harm by giving people what they want when they shouldn't have it. Look up info on how most people handle lottery winnings if you doubt this.

There are many less optimistic ways to interpret this change, and there may be some fallout down the road. I wouldn't jump straight to "a good move in general and a good move as a human being".

Then just ignore his reduced salary and focus on the raises he's giving the lowest paid staff. His salary reduction is "just" part of how he's paying for this in the short term.

The team as a whole becomes less sustainable. Profit margins went from 2m to 500k. That's a lawsuit away from being in the red. Is the entire team going to take pay cuts if profits aren't coming in? Does someone get fired?

I think those lauding this as a morally virtuous move aren't basing this on principle. Hiring 1 employee for 100k isn't better than hiring 2 employees for 50k assuming equal qualifications. The team with two employees will be more productive and stay in business longer than the competitor (who spends twice as much on everything and won't stay in business).

If the gambit is that, in the recent future, they expect new business from the publicity to increase profits and cover part of the loss, I think the hit is not so large. And ultimately if it doesn't pan out, he can sell the company to a larger processor and cash his 100% stake out.

> And ultimately if it doesn't pan out, he can sell the company to a larger processor and cash his 100% stake out.

Do you honestly think that isn't plan A? He's going to flip the company, pocket the cash, and all those employees who experienced a temporary rise in salary will be unemployed. When Mr.CEO doles out equity instead of cash I'll give into the warm fuzzy feelings.

I think its worth noting that he owns the entire company so the increase in pay will directly affect his bottom line.

From the article: > The company made $2 million in profit last year, and that will drop to about $500,000 with the new pay increases, according to company figures.

This company is not big enough to generate that kind of media attention organically, which tells me they made it into a press event.

In that sense it rings hollow because it is clearly a publicity stunt.

I think this is a general issue with all of these activities, and really any activity in a company, that you shape the message that you want to send to the world rather than there being an accurate representation of what is actually happening.

I wonder if there is a way technologically to bring radical transparency to the workplace so that this kind of stuff is discoverable without the company needing to put out press on it.

So in your world, nothing grows organically unless it's about a big company?

Success Kid has a bone to pick with you.

Granted, it's not ruled out that this is a paid publicity stunt, but frankly, it has all the right bits to be an attractive story without any sinister manipulation:

* CEO makes 1 mill - that's a very special number to people's minds. * The little guys make bank - everyone loves that!

I'm sure the company is happy to reap the rewards of attention (I'm sure their HR dept has no problem drawing applicants now!), and likely even tried to capitalize on the announcement in general, but frankly, this is exactly the sort of story that all my relatives* would tell everyone they know about, no push needed.

*Funny how "relatives": serves as a placeholder for "the non-savvy/cynical/technical masses". Guess I have my own streak of cynicism.

So in your world, nothing grows organically unless it's about a big company?

Definitely not what I said, cause this isn't about "growth" or product. Internal accounting and salary changes at small tech companies don't find their way into all the major tech papers organically - especially not with accompanying video etc...

If the effect is that

1. he'll actually take $50,000/year in direct salary, and

2. that all of the call center etc. employees got bumped up to $50k/year immediately, and

3. that, as the article states, it indicates cutting profit from 2MM to 500K,

I don't know that I'd call it a publicity stunt.

What then is the purpose of making such a press event out of it? It's clearly them promoting their brand by jumping onto the fairness bandwagon. That doesn't mean the CEO doesn't actually believe in it - he probably does - but it means that they wanted to do it in a way that makes a spectacle out of it.

As others have pointed out though, all it's doing is moving up the skillset requirements of people they hire in the future. So while it helps the few people who are already on-board by getting a raise (which is great by itself), it likely wont help an entry level person who now won't be hired in at 70k.

Why on earth would a janitor position 'move up in skillset requirements'? That's speculation that I don't see supported, and can't quite imagine how it would work.

I don't understand - he's giving up salary (not profit), so why does profit change at all?

Only part of the total cash needed to make the raises will come from his salary; the other 1.5MM, apparently, will come from profits.

Previously https://news.ycombinator.com/item?id=9371854

Henry Ford did something similar a century ago:

https://en.wikipedia.org/wiki/Henry_Ford#The_five-dollar_wor...

A question that springs to mind when reading this (and stories like it) is

"Could the company have gotten to the point of $2m in profit by starting everyone off at min $50k+?"

This blunt move can get him loyalty in return ,which itself is a requirement for taking his business one step ahead .

What about options? Does the CEO get options that raise his wage to a height that is still unfair?

"Price, who started Gravity Payments out of a dorm room when he was 19, wholly owns and operates the company . . . "

Besides, what is fair?

It's hard to define what is fair. If you're a CEO, your definition of fair will likely be different from a person working at minimum wage. In fact a CEO's definition of fair could be different from 99% of the population. People in advantageous but unfair situations will justify the situation, while people with the short end of the stick will do the opposite.

With wealth inequality higher than ever before, most people see a CEO's salary as astronomically unfair. Do CEO's really have some super power that a minimum wage worker doesn't have? Can one man's intelligence, good looks, charm, or physical strength actually be worth 1000% more than another man? Hard to say.

Although capitalism promotes incredible growth and works for the most part, there is a reason why communism became popular in many countries. It stems from a fundamental discontent about the definition of fairness and wealth among the proletariat.

So if you want the real answer to the question of "What is fair?" I would say "Ask the majority."

No it's not fair, he doesn't deserve that company he put his whole life in! Nobody deserves such a thing!

Makes perfect sense. Because his company isn't built on the shoulders of multitudes of employees. He alone built the entire company with his bare hands and his "LIFE". Therefore all employees deserve nothing and he deserves 100%.

What most people don't realize is that, working in a startup, he probably holds a large amount of equities.

When/If there is an exit, he will cash out a LOT more than his employees. That's his real 'bonus'.

In Wall Street/corporations, executives are less prone to have exits so they give themselves tremendous bonuses.

A totally different case.

Imagine where our species would be if all efforts were contributed to betterment of society. Right now the missing piece to researcher A's puzzle is sitting on researcher B's bench because company X hasn't figured out a way to extract profits yet. If we managed to move toward an Ubuntu(I'm talking Michael Tellinger not Canonical) contributionist social model we would make more technological advancement in 1 year than we've seen in the past 50, maybe even 100, years. CEO's coming to the realization there is more to the human experience than profits is just the start.

I think they've tried that in a couple places already.

Please don't conflate contributionism with socialism or communism.

Ten bucks says gravity payments will be for sale within a year. This is an obvious PR ploy and I'm surprised HN is vulnerable to it.

It would be a silly PR ploy for the purposes of preparing the company for sale to announce how he's going to be drastically cutting into profits for the foreseeable future.

frequently, a business' goodwill is worth substantially more than their profits. if this successfully gains persisting goodwill for gravity payments, it might be worth the acquisition.

Great! Here's hoping the PR pays off. Imagine if other companies noticed it was a net gain to do this sort of thing and the practice picked up steam (unlikely/impossible I know). The horror of it all!

The problem is it's unsustainable. The employees aren't providing $70k of market value. The CEO is changing his pay to attract attention and build customers. Companies are not going to adopt paying 2x market salary as a standard business practice. If people will work for $40k then that's where the costs will "gravitate" (hah) to.

> The problem is it's unsustainable. The employees aren't providing $70k of market value.

How do you know this? Sure, if you make the assumption that the before this one change, the world worked perfectly in line with the kind of simplifying assumptions that you might see in an Econ 101 class, then that would be true, but then, if the world worked that way, this raise wouldn't have happened.

Oh come on. I can't figure out whether you're feigning ignorance or whether you really didn't pay attention in Econ 101.

Basic economics certainly does not claim that every product will be sold at the equilibrium price. In fact, if that were so, then it wouldn't work.

In a free market, some products are sold above the equilibrium price, and some are sold below. It's free, because people can offer the product at any price they wish. What basic economics does say is that a price above equilibrium cannot be sustained without some corresponding market advantage.

> I can't figure out whether you're feigning ignorance or whether you really didn't pay attention in Econ 101.

Actually, neither, I'm saying that the claim made by the post I was responding to doesn't work unless you assume that the general assumptions of Econ 101 and the conclusions drawn from it in terms of overall outcomes are assumed to apply not to overall outcomes but to every individual decision in the marketplace.

Which I agree is ridiculous, which was my point.

Companies do made decisions that cause them to go out of business later on. If this decision doesn't work out then somehow they must cut salaries, let go of people or go out of business.

Because they were willing to work for $40k.

> Because they were willing to work for $40k.

That doesn't mean that they weren't providing $70k of market value, unless you assume that (at a minimum):

(1) they were maximimizing their pay in choice of job, and (2) they had perfect knowledge of all the alternatives jobs that they could otherwise have obtained.

These are the kind of assumptions that are typical in Econ 101, but to which real humans do not actually conform, particularly the second.

Ignoring a lot of caveats, that means that the labor they were providing was worth less than $40k to them. It says nothing about how much the labor was worth to the company. That the company was willing to pay them $40k says their labor was, with similar caveats, worth at least $40k but there is no implied upper bound.

If someone volunteers for a non-profit for no pay, does that mean they're providing $0 in value?

After all, they were willing to work for $0.

How long would they be willing to stay at that rate? Raises aren't entirely altruistic.

So you're saying that the CEO is providing $1 million in market value to the company? Maybe (and if we're being pessimistic maybe not) the CEO is doing this because he's already made $100 million and realizes it's the right thing to do. I think it's only unsustainable because of greed.

And then those overpaid employees will be laid off...

If you're buying the company for its "goodwill", why would you then very publicly torch that very same goodwill by laying off all the employees?

Because revenue needs to be greater than cost for a business to survive.

Of course, but my point is that you know this going in. The assumption was that you'd buy the company not because it was so insanely profitable, but because you reaped a PR benefit. So you buy the company for the sole reason that you look good for paying everyone well, and then take away all the money to increase profits. This makes no sense -- you look far worse PR-wise for revoking the raises than any benefit you originally got from buying them in the first place, and PR was your reason for the deal. This is like buying Santa's workshop so kids will like you and then executing all the elves.

You should have just bought a profitable company in the first place.

You're jumping to negative conclusions and making cynical generalizations. I think this is actually pretty cool.

was it a PR ploy when henry ford did it?

I'll take that bet.

You can arrange it here: http://longbets.org/

Despite the feel-good angle on this it is a horribly bad and irresponsible decision. Now, if they only have a couple of people doing just below $70K it is a dishonest yet clever marketing move.

It is a violation of a CEO's fiduciary responsibility to pay significantly more than market value for anything. That includes salaries.

Example: CEO announces the company will pay double for all office supplies. Desks, chairs, computers, etc., the company will pay double market rate.

How quickly would he or she get fired?

How many people would immediately conclude he or she was irresponsible or nuts?

Right.

The CEO also owns the company. "Don't I have the right to do what I want with my own money? Or are you envious because I am generous?"

CEO's fiduciary responsibility to whom, exactly? He's sole owner of the business.

Now, if he has loans outstanding, his bankers might raise an eyebrow about whether this move reduces his ability to repay; private investors would have a similar concern. But if he can demonstrate that his business will continue to deliver the returns he's committed to to those creditors, what does it matter to them whether he is spending additional money on his staff, or on replacing all the potted plants in his office, or on giving himself a big fat bonus?

I'm honestly glad this is one CEO who's not figuratively sucking the Wall Street c. I know* he's expected to do that for the good of Capitalism and all that junk, but, honestly, is pleasing a bunch of, basically, very-overpaid gamblers what we should strive for, as a society, as a culture, as a country?

What about happiness? Less stress? Not hating the 8-10 hours a day you spend of your life working? Why is funneling money up the chain to those that already have more than any human could possibly know what to do with, such a great thing ???

Yes yes. I know. I have a 401k too. We're all in on this, but I'm glad that somewhere, someone, decided to take one for the team, so to speak, and made a few dozen people happy. Just because he could. And if that pissed off a bunch of "investors" because the shares dropped from $82.52 to $81.88, I'm ok with that.

The CEO wholly owns the company. So his only fiduciary responsibility is to himself.

But there's no such thing as an absolute market value for chairs--it's a function of quality (among other things). There are plenty of CEOs who choose to buy expensive chairs for their employees without causing any controversy.

Employee market rates are a function of quality too. If paying twice as much gets you employees who create three times more value, that shouldn't be a controversial decision either.

I guess you could argue this if it was a publicly-traded company (although sometimes you get what you pay for). For a privately-owned company it's a totally irrelevant argument.

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