Here's What Really Happened at That Company That Set a $70,000 Minimum Wage(inc.com)
inc.com
Here's What Really Happened at That Company That Set a $70,000 Minimum Wage
http://www.inc.com/magazine/201511/paul-keegan/does-more-pay-mean-more-growth.html
4 comments
He sold the mortgage to his company, for stock.
The company takes out a mortgage, secured by the house he owns, he gets stock in return. If the company fails to pay, house gets foreclosed on, but he still keeps the stock.
The company takes out a mortgage, secured by the house he owns, he gets stock in return. If the company fails to pay, house gets foreclosed on, but he still keeps the stock.
Are you speculating or is that substantiated?
"He sold his stocks" implies stocks in other companies.
He can't increase his equity (50%) in his company until he buys out his brother. Am I missing something?
"He sold his stocks" implies stocks in other companies.
He can't increase his equity (50%) in his company until he buys out his brother. Am I missing something?
Cool!
I suspect that the real reason for the raises is the dispute with his brother: by paying profit out to employees, he doesn't have to pay it as dividends to his brother.
That is a reasonable suspicion, unless you actually read the article.
1. The lawsuit was filed after the pay increase.
2. "Profit growth continued to substantially outpace wage growth." So basically the company is more profitable than ever.
3. This guy is an outspoken advocate of paying people an equitable wage. It'd be a lot of trouble go to through all of that charade just to pay his brother less.
4. Profits don't always have much to do with the value of a company, which is what the lawsuit is about. Furthermore, the lawsuit might be about the documents they signed (or didn't sign!) related to selling stakes to one another.
1. The lawsuit was filed after the pay increase.
2. "Profit growth continued to substantially outpace wage growth." So basically the company is more profitable than ever.
3. This guy is an outspoken advocate of paying people an equitable wage. It'd be a lot of trouble go to through all of that charade just to pay his brother less.
4. Profits don't always have much to do with the value of a company, which is what the lawsuit is about. Furthermore, the lawsuit might be about the documents they signed (or didn't sign!) related to selling stakes to one another.
1. The lawsuit was likely an escalation of the long-running dispute that started early on, also mentioned in the article.
3,4. People will go to extraordinary efforts when fighting over ownership or money. There's enough value and profit in this company to be worth a lot of trouble.
It's too early to know what Mr. Price's real intentions are. I'm waiting for the Wired follow-up in 3-5 years.
3,4. People will go to extraordinary efforts when fighting over ownership or money. There's enough value and profit in this company to be worth a lot of trouble.
It's too early to know what Mr. Price's real intentions are. I'm waiting for the Wired follow-up in 3-5 years.
Wages are subject to the law of supply and demand, just like every other aspect of economic life. Since the CEO seems to be paying well above the going market rate, I doubt that this is sustainable for the long run. Yes, he's partially compensated for the imbalance by cutting his own pay, but it won't be enough. Also, the rapid growth of the company will also buy him some time, but that can't go on forever.
The article's author seems to know little about capitalist economics beyond the conventional wisdom, most of which is wrong or non-essential.
And if Rush Limbaugh did in fact call the CEO a socialist, then Rush Limbaugh doesn't understand what socialism is.
Having said all this, I would still like to see this company succeed, just like Henry Ford did many years ago with a similar tactic.
The cost of your inputs has little to do with the price you can charge for your outputs. Those are two supply-demand curves, which have very little to do with each other. Note that there is an infinite number of business models where the inputs curves are way above the outputs curve, and those are the business models that never can possibly be profitable. Increase of minimum wage (albeit this extreme) only raises the cost of inputs, and makes the set of unprofitable business models larger; there is no qualitative difference to, say, raising the cost of oil 300%.
Wages in aggregate eat directly into your profits, so if you're happy with lower profits and lower wages for executives, you absolutely can raise wages. If you pay 70k/year in low-margin-per-employee industries, your will inevitably operate at a loss, but this company is not low-margin.
I would also love to see this succeed, but maybe giving employees non-voting stock would better stave off the possibility of running the business into the ground.
Wages in aggregate eat directly into your profits, so if you're happy with lower profits and lower wages for executives, you absolutely can raise wages. If you pay 70k/year in low-margin-per-employee industries, your will inevitably operate at a loss, but this company is not low-margin.
I would also love to see this succeed, but maybe giving employees non-voting stock would better stave off the possibility of running the business into the ground.
In an economically idealized world, if someone pays above-market wages then you would expect a competitor to appear that will charge less to their customers while making the same profits, destroying the first business.
Of course, in that idealized world, there are no "excess profits" (profits not commensurable with risk), so it should be impossible for the company to raise wages like that anyway.
So the real question is: why is this company so profitable, and can that continue indefinitely? Or does this guy just have such a high tolerance for risk that "acceptable profits" for him are unacceptable for any possible competitors?
Of course, in that idealized world, there are no "excess profits" (profits not commensurable with risk), so it should be impossible for the company to raise wages like that anyway.
So the real question is: why is this company so profitable, and can that continue indefinitely? Or does this guy just have such a high tolerance for risk that "acceptable profits" for him are unacceptable for any possible competitors?
Employees are part of that market as well. If there are two companies, one paying market wages, and one paying more, the employees will move to the second company. The second company now has a larger pool (and potentially better pool) of candidates to choose from than the first.
The first company may do better on margins per sale, but the second will have better quality/productivity per employee.
The first company may do better on margins per sale, but the second will have better quality/productivity per employee.
This is a valid point, I think the effect will usually be small.
1. If a company is paying above-market wages, then by definition there are more people who want to work there than there are available spots, so the second company will get some of the overflow.
2. The market for a particular kind of labor (e.g. phone techs) is usually much larger than whatever market for outputs these two companies are involved in (e.g., credit-card processing), so one company paying above-market wages is unlikely to change the market wage level very much.
This could definitely break down for some very specialized jobs.
1. If a company is paying above-market wages, then by definition there are more people who want to work there than there are available spots, so the second company will get some of the overflow.
2. The market for a particular kind of labor (e.g. phone techs) is usually much larger than whatever market for outputs these two companies are involved in (e.g., credit-card processing), so one company paying above-market wages is unlikely to change the market wage level very much.
This could definitely break down for some very specialized jobs.
If we bring economics on the table, we can also turn it around: when you pay higher wages, you suddenly have a pool of better qualified employees to select from, increasing productivity / profits.
It seems really strange to argue that wages are too low because business owners aren't greedy enough (to raise wages to profit-maximizing levels).
It actually appears more likely that employers have on average already set wages slightly above the market-clearing level in order to improve productivity and maximize profits. This is the theory of "efficiency wages" [1], which tries to explain why unemployment persists when companies could cut wages and employ more people.
There is no free lunch.
[1] http://marginalrevolution.com/marginalrevolution/2015/04/the...
It actually appears more likely that employers have on average already set wages slightly above the market-clearing level in order to improve productivity and maximize profits. This is the theory of "efficiency wages" [1], which tries to explain why unemployment persists when companies could cut wages and employ more people.
There is no free lunch.
[1] http://marginalrevolution.com/marginalrevolution/2015/04/the...
I'll have to think about it more, but I don't think your premise is valid, i.e. that there are 2 mostly unrelated supply demand curves. My first thought is that all prices in a dynamic economy are interrelated and are always moving towards a state of equilibrium. This company's actions are disruptive and will either fade or they will change the point of equilibrium.
Another factor, mentioned in the article, is productivity. Henry Ford was able to raise his worker's wages because his manufacturing methods dramatically increased their productivity. I don't know if this company's productivity is high enough to support a raise to 70 G's.
The employee retention is much higher than industry standard. Apparently the employees are happy.
The market seems to like their performance, since they are getting more business and making more profits.
If recruiting costs 10k, and training training 6 months + 20k. That's already 30k saved. Plus no opportunity cost loss because they had enough staff to do business could be easily more than the wage increase (according to the author). That's easily already over the 30k/year difference.
Assuming the company does not even grow, but just stays still... then this should be sustainable. Whilst they are growing, losing less staff than industry average will only increase their growth.
Note, that the company was slowed down because they had to hire more staff. Those slow downs would have been worse if they could not hire as quickly, or lost staff.
Is the employee retention solely because of increased wages? I'm not sure. But that alone could save the company a lot of money.
The market seems to like their performance, since they are getting more business and making more profits.
If recruiting costs 10k, and training training 6 months + 20k. That's already 30k saved. Plus no opportunity cost loss because they had enough staff to do business could be easily more than the wage increase (according to the author). That's easily already over the 30k/year difference.
Assuming the company does not even grow, but just stays still... then this should be sustainable. Whilst they are growing, losing less staff than industry average will only increase their growth.
Note, that the company was slowed down because they had to hire more staff. Those slow downs would have been worse if they could not hire as quickly, or lost staff.
Is the employee retention solely because of increased wages? I'm not sure. But that alone could save the company a lot of money.
> Since the CEO seems to be paying well above the going market rate, I doubt that this is sustainable for the long run.
I doubt it too. But it's not completely impossible: if a doubling of your employees salary means they increase their productivity three-fold, it might even increase your total profits (of course this depends on what the surplus rate was to begin with). The point is, since profits come from the surplus rate, which depends on productivity, increased salaries can in some cases lead to higher profits.
I doubt it too. But it's not completely impossible: if a doubling of your employees salary means they increase their productivity three-fold, it might even increase your total profits (of course this depends on what the surplus rate was to begin with). The point is, since profits come from the surplus rate, which depends on productivity, increased salaries can in some cases lead to higher profits.
Wages are set by the market, but two major market factors are revenue and how much money senior leadership want to keep in their own pockets. If he is okay making less and his company revenues are high enough to pay these salaries, then it will work indefinitely. The reason it wouldn't normally work is because management would never take a pay cut just to pay their employees more. All they'd do is increase personnel overhead across the board.
This is socialism. Paying wages that are 50k over the market creates enormous incentives for corruption. The CEO seems to be a devout Christian, and I want to hope that all the employees are strongly moral people, but to paraphrase the parable of the camel and the needle, it is extremely difficult to be both rich and righteous at the same time.
There is a pressure on the people to outsource much of their work at market price, skimming the profit. People are clever, they will find a way.
It also puts an immense value on getting the job (possibly by deception or by getting rid of the incumbent in some way), and then staying at that job at all cost. The risk-aversion will be through the roof. There will be absolutely no back-talking. The managers will never be challenged, no matter what they do, by their underlings. Morale and the working conditions will deteriorate as a consequence, with negative effect on the bottom line.
All the above used to be the norm in various forms in the Soviet bloc when I was a kid. Those of you who spent some time in a socialist country will recognize the problem.
I hope that this experiment stands the test of time, and we can all learn from it how to make employing people more humane. But I won't be holding my breath.
There is a pressure on the people to outsource much of their work at market price, skimming the profit. People are clever, they will find a way.
It also puts an immense value on getting the job (possibly by deception or by getting rid of the incumbent in some way), and then staying at that job at all cost. The risk-aversion will be through the roof. There will be absolutely no back-talking. The managers will never be challenged, no matter what they do, by their underlings. Morale and the working conditions will deteriorate as a consequence, with negative effect on the bottom line.
All the above used to be the norm in various forms in the Soviet bloc when I was a kid. Those of you who spent some time in a socialist country will recognize the problem.
I hope that this experiment stands the test of time, and we can all learn from it how to make employing people more humane. But I won't be holding my breath.
This is definitely not socialism! There is no coercive government intervention here. It is the CEO of a private company paying his employees above market rate. One of the many benefits of a free market is that you will often see experiments like this. Some will fail, some will succeed, but no one will go to Siberia.
Socialism is political system, an incredibly irrational and immoral one, but this is merely a business decision taken by a single CEO exercising his own independent judgement.
One of the aspects of socialist economies is that unlike in free-market economies, wages are not set by the market. Whether they are set by the CEO or the Central Committee is a distinction without a difference.
You can swap the word "capitalism" in for "socialism" in your comment, and those statements would still work. Socialism didn't fail because it were monstrous. It failed, because we ran out of money and the will to live in squalor.
You can swap the word "capitalism" in for "socialism" in your comment, and those statements would still work. Socialism didn't fail because it were monstrous. It failed, because we ran out of money and the will to live in squalor.
I don't get it. If I hire a housekeeper and she asks for $10/hr but because I like her a lot I offer her $20/hr, are you arguing that's socialism? It's my money and I can do whatever I wish with it - that's capitalism at it's finest.
The CEO owns the company. If he has total control, he could instead of paying his workers more simply buy himself a jet or donate it to a church. (Obviously, if his shareholders object, he'll have to convince them to go along as well). If you want to think in terms of market wage, what he is doing is paying them market wage, then unilaterally deciding to give them a "big tip" at his own expense - which happens to bring their total compensation to $70K a year. That's still capitalist, since it was his money to give away in the first place. He could give it all to Donald Trump instead, if he wanted to - the fact that he happened to give it to his employees is almost arbitrary. The only issue is whether he can afford to keep it up, but that's entirely on him.
The CEO owns the company. If he has total control, he could instead of paying his workers more simply buy himself a jet or donate it to a church. (Obviously, if his shareholders object, he'll have to convince them to go along as well). If you want to think in terms of market wage, what he is doing is paying them market wage, then unilaterally deciding to give them a "big tip" at his own expense - which happens to bring their total compensation to $70K a year. That's still capitalist, since it was his money to give away in the first place. He could give it all to Donald Trump instead, if he wanted to - the fact that he happened to give it to his employees is almost arbitrary. The only issue is whether he can afford to keep it up, but that's entirely on him.
If I understand the parent correctly, the argument is that any artificial method to establish a price to wages will lead to corruption.
Your example is talking about one housekeeper: if she notices that she can arbitrage on your generosity, she can pretty much contract someone else to do her job for $10/hour, and not even show up and still earn $10/hour. If you object to it, it is a signal that you value one's work more than the other, and then we are not talking about market-clearing prices anymore, are we?
Your example is talking about one housekeeper: if she notices that she can arbitrage on your generosity, she can pretty much contract someone else to do her job for $10/hour, and not even show up and still earn $10/hour. If you object to it, it is a signal that you value one's work more than the other, and then we are not talking about market-clearing prices anymore, are we?
If what you're saying is true, why don't Dan Price's employees arbitrage the difference between what Gravity is paying them ($70K) and their actual "market value"? If one housekeeper can make it worth her time for $10/hr, surely a large group of individuals can make it worth their time for $35/hr?
But actually I think you're on to something - basically Dan Price is saying he thinks the true market value of the labor provided by his workers is actually $70K a year. And what I'm really saying with my housekeeper is that I like her so much that in order to prevent any risk of her defecting to another employer I'm willing to pay $20/hr instead of $10/hr. She can try to arbitrage, but that means working for someone else for $10/hr, but since I assume she actually wants to work, why would she work for anyone other than the person who values her work the highest? So we're still in capitalist land.
But actually I think you're on to something - basically Dan Price is saying he thinks the true market value of the labor provided by his workers is actually $70K a year. And what I'm really saying with my housekeeper is that I like her so much that in order to prevent any risk of her defecting to another employer I'm willing to pay $20/hr instead of $10/hr. She can try to arbitrage, but that means working for someone else for $10/hr, but since I assume she actually wants to work, why would she work for anyone other than the person who values her work the highest? So we're still in capitalist land.
She can be fired, she's not entitled to that $20/hour. Cut out the middleman, though the current "free market" in the US is going to more middlemen and rent seekers so she'd be right at home here.
Yeah, but we are making assumptions about market-clearing wages and rational agents, here. Anyone that gets to the position of making above-market wages will use this arbitrage opportunity and would be fired, if we followed your strategy.
In the end, the only way to end this and to actually get your house cleaned is to pay market-level wages.
In the end, the only way to end this and to actually get your house cleaned is to pay market-level wages.
Ok, if you're assuming strictly rational agents. If they realize they'll be fired for contracting out their work, then wouldn't the rational thing be to continue working rather than contract out and retire early on the higher income?
Or to train people to do as well as you and set up your own business taking advantage of your stronger than average reputation in the field.
But doing an activity which has a high probability of costing you the income you desire is not rational.
Or to train people to do as well as you and set up your own business taking advantage of your stronger than average reputation in the field.
But doing an activity which has a high probability of costing you the income you desire is not rational.
They only get fired if you find out. So the rational thing for them to do is spend part of the arbitraged amount on deceiving you. As long as they are spending less on deceiving you than the arbitraged amount, it is rational for them to do so. Ergo, rampant corruption.
I don't get it. How does the math work out?
Let's suppose the market wage is $10/hr. If I offer a lucky housekeeper $20/hr, why wouldn't she just happily take the money and continue to work? Union workers don't arbitrage themselves (but they should, under your scheme, because they collectively bargain for higher than market wage).
If the cost of deceiving me is greater than zero, then she's being irrational. She can earn no more than $10/hr anywhere else, and hiring someone else to replace her would cost $10/hr (since that's the market rate). So lets say she hires someone else at a cost of $10/hr, and then goes to work for someone else - she's still earning $20/hr (the arbitrage amount plus the value of her labor) minus the cost of deceiving me. So assuming she wants to work for wages (which she must, since she offered to work for $10/hr in the first place) I don't see how it's at all rational to arbitrage the opportunity.
Let's suppose the market wage is $10/hr. If I offer a lucky housekeeper $20/hr, why wouldn't she just happily take the money and continue to work? Union workers don't arbitrage themselves (but they should, under your scheme, because they collectively bargain for higher than market wage).
If the cost of deceiving me is greater than zero, then she's being irrational. She can earn no more than $10/hr anywhere else, and hiring someone else to replace her would cost $10/hr (since that's the market rate). So lets say she hires someone else at a cost of $10/hr, and then goes to work for someone else - she's still earning $20/hr (the arbitrage amount plus the value of her labor) minus the cost of deceiving me. So assuming she wants to work for wages (which she must, since she offered to work for $10/hr in the first place) I don't see how it's at all rational to arbitrage the opportunity.
Another way to go around it: you pay $20/h to a job that usually takes X hours to do it, so in the end you will pay 20 times X.
I bring someone else to work with me, and we both do the job in X/2 time. I pay $10/hour for the subcontracted person.
So assume a 8 man-hour job. You will pay $160. I keep $120, the subcontracted $40. My effective rate was $30/hour. You don't think this is a problem, as you see your house cleaned just like usual.
Next time, I bring 3 other people. We finish things in 2 hours. I pay $60 to them, I keep $100. My effective rate was $50/hour.
Next time, I bring 7 other people. We finish things in one hour. I pay $70 to them, I keep $90. My effective rate was $90/hour. I use the other 7 "working" hours of the day to play videogames.
I bring someone else to work with me, and we both do the job in X/2 time. I pay $10/hour for the subcontracted person.
So assume a 8 man-hour job. You will pay $160. I keep $120, the subcontracted $40. My effective rate was $30/hour. You don't think this is a problem, as you see your house cleaned just like usual.
Next time, I bring 3 other people. We finish things in 2 hours. I pay $60 to them, I keep $100. My effective rate was $50/hour.
Next time, I bring 7 other people. We finish things in one hour. I pay $70 to them, I keep $90. My effective rate was $90/hour. I use the other 7 "working" hours of the day to play videogames.
> You don't think this is a problem, as you see your house cleaned just like usual.
How are you able to assume this, since I actually would very much see it as a problem if 3-4 people I don't trust to clean my house as much as my housekeeper are inside doing the job? Your underlying assumption is that I'm an idiot and can't see what's happening. She couldn't subcontract the work for the same reason I can't subcontract my work at my current job - my employer would see through it.
> I use the other 7 "working" hours of the day to play videogames.
Not many people would come out for $10/hr for only one hour. What about travel time? And the organization necessary to make sure the quality is still high? I think you're lampshading a ton here.
How are you able to assume this, since I actually would very much see it as a problem if 3-4 people I don't trust to clean my house as much as my housekeeper are inside doing the job? Your underlying assumption is that I'm an idiot and can't see what's happening. She couldn't subcontract the work for the same reason I can't subcontract my work at my current job - my employer would see through it.
> I use the other 7 "working" hours of the day to play videogames.
Not many people would come out for $10/hr for only one hour. What about travel time? And the organization necessary to make sure the quality is still high? I think you're lampshading a ton here.
The original rational thing to do would be for the person doing the hiring to just go and pay the $10/hour. "Because I like her" is not an economic justification for extra value.
And yet people habitually tip 15-20% on top of what they're required to pay in restaurants, almost universally. Lots of things aren't rational, but they could still be culturally accepted (and done without coercion, even).
I couldn't disagree with you more on this point. It's a common fallacy to equate political power (Central Committee) with economic persuasion (any private business). No one is forced to deal with Dan Price and his company - it's up to him and his company to offer value and stay competitive to all stakeholders and customers. On the other hand, the Central Committee's edicts are backed by political power. Disobey, go to jail, or worse.
The word "free" in free market capitalism means freedom from political coercion or force.
The word "free" in free market capitalism means freedom from political coercion or force.
He is a part of the free-market.
I find it fascinating, using Christianity to justify paying people less. The exact opposite of charity and compassion and generosity.
> It also puts an immense value on getting the job (possibly by deception or by getting rid of the incumbent in some way), and then staying at that job at all cost. The risk-aversion will be through the roof. There will be absolutely no back-talking. The managers will never be challenged, no matter what they do, by their underlings. Morale and the working conditions will deteriorate as a consequence, with negative effect on the bottom line.
Anyways, I know that my risk-aversion has gone way down as my pay has gone up. Why? Because I'm smart with my money and have more than enough stored away to make it years (literally) without needing a job. I can be an opinionated employee. Of course, my risk-aversion also went down when I was grossly underpaid. Why? Because I didn't give a shit, they weren't paying me what I was worth and I was actively looking for a way out. Being opinionated and effective was the only way to get noticed in a way that might increase my pay at the company. When was I not risk-averse? Precisely when I was making "market wages". I was making enough that I was totally content in that I could afford my lifestyle, but not enough that I could really save enough to get the FU money.
> It also puts an immense value on getting the job (possibly by deception or by getting rid of the incumbent in some way), and then staying at that job at all cost. The risk-aversion will be through the roof. There will be absolutely no back-talking. The managers will never be challenged, no matter what they do, by their underlings. Morale and the working conditions will deteriorate as a consequence, with negative effect on the bottom line.
Anyways, I know that my risk-aversion has gone way down as my pay has gone up. Why? Because I'm smart with my money and have more than enough stored away to make it years (literally) without needing a job. I can be an opinionated employee. Of course, my risk-aversion also went down when I was grossly underpaid. Why? Because I didn't give a shit, they weren't paying me what I was worth and I was actively looking for a way out. Being opinionated and effective was the only way to get noticed in a way that might increase my pay at the company. When was I not risk-averse? Precisely when I was making "market wages". I was making enough that I was totally content in that I could afford my lifestyle, but not enough that I could really save enough to get the FU money.
Maybe I'm missing something, but how is a $1.2m mortgage affordable on $70k/year? Did he not remortgage the whole value of the house?