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Woes of a Well-Intentioned Living Wage

Three months ago, Gravity Payments CEO Dan Price announced he would cut his own wages to give all employees a $70,000 wage. This decision earned Price instant acclaim, but it also had its costs. While the media widely praised this move, its fallout has received comparatively little attention.

Price recently lost two of his star employees—not because they didn’t receive a raise, but because they thought the policy destructive. While business is booming, not all Gravity Payments employees are enjoying the spotlight. Price’s brother has brought an expensive lawsuit against him, perhaps ironically reinforcing the idea that CEOs may need a higher wage than their workers.

Filthy Capitalists or Concerned Employees?

26-year-old Maisey McMaster, who joined the company five years ago and worked her way up to financial manager, chose to leave due to the new policy. While she worked hard, leaving little time for her husband and extended family, others got the same raise.

[pq]If you don’t pay more for better work, people will lack a strong incentive to grow.[/pq]

“He gave raises to people who have the least skills and are least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump,” McMaster told The New York Times.

When she shared her concerns with Price, the CEO allegedly berated her. “He treated me as if I was being selfish and only thinking about myself,” McMaster said. “That really hurt me. I was talking not only about me, but about everyone in my position.”

Gravity’s 29-year-old web developer, Grant Moran, also chose to leave. Even though his salary rose from $41,000 to $50,000, he found the policy unacceptable.

“Now the people who were just clocking in and out were making the same as me,” Moran complained. “It shackles high performers to less motivated team members.” This injustice, coupled with Moran’s desire to use his web skills at a digital company, pushed him away.

Media Attention: Blessing or Curse?

Moran also listed another reason for his decision to leave—unwanted attention. “I was kind of uncomfortable and didn’t like having my wage advertised so publicly and so blatantly,” he explained. Much like winning the lottery, the spotlight on employees now making a higher wage encouraged mooching and a sense that rich workers were not sharing the wealth.

“It changed perspectives and expectations of you, whether it’s the amount you tip on a cup of coffee that day or family and friends now calling you for a loan,” Moran recalled.

Similarly, thousands of job seekers instantly flocked to the company—now seen as a goose laying golden eggs. The impact on customers proved less inspiring, however, as some left, dismayed by what they viewed as a political statement, or fearing higher costs.

While a stream of new clients flowed in, their attention overwhelmed the small company—and new accounts do not start paying off for at least a year, the New York Times reported. Price has already had to hire a dozen new employees—now at significantly higher cost—to meet the rising demand.

Personal Problems: A CEO’s Need for a Higher Wage

Many CEOs may receive exorbitant wages far above the value they add to the company, but someone in such a high position may need more than $70,000 a year in order to handle the responsibilities of institutional leadership. Price has fallen into deep financial trouble because his responsibilities outweigh his now-modest wage.

Shortly after Price announced the new policy, his older brother and Gravity co-founder, Lucas Price, filed a lawsuit against him. Lucas Price accused his brother of violating his rights as a minority shareholder in Gravity Payments, breaching duties and contracts. The unique nature of the lawsuit potentially threatens the company’s existence by undermining the agreements of its shareholders.

With legal bills mounting and most of his own paycheck and last year’s $2.2 million in profits redirected to salary increases, Price told The New York Times, “We don’t have a margin of error to pay those legal fees.”

“I’m renting out my house right now to try to make ends meet myself,” Price told the Times. “I’m working as hard as I ever worked to make it work.”

Conclusion: Noble Goal, More Finesse Required

Price’s efforts to pay his employees a better wage have borne good fruit as well as bad. Jose Garcia, a 30-year-old equipment team supervisor, could now afford to move into the city and replace the tires of his car due to the wage increase. 22-year-old Cody Boorman said the raise gave him and his wife the financial security to start a family.

Mario Zahariev, head of Pop’s Pizza & Pasta, was inspired by Price’s self-sacrifice to pay his employees more. When Zahariev switched to Gravity, his monthly processing fees dropped from $1,700 to $900, and he decided to use the savings to give a raise to his eight employees.

Contrary to the arguments of some, the Bible does not specifically call for employers to give their workers a “living wage.” It does, however, emphasize helping the poor and attack bosses who refuse to pay their employees. CEO and worker salaries are market-based compensation for valuable work, and the right price for that work is not written on tablets of stone. Each worker adds value in his or her own way, and so should be rewarded according to that value.

Price’s example reminds us that CEOs need to make a lot of money because of their unique position—they are the figureheads who get sued and take flack for their organization. Board members, not laws, should determine how much CEOs make, and let’s hope it’s higher than $70,000 a year.

Price’s sacrifice—decreasing his own salary from $1 Million to $70,000 in order to pay his employees more—proves noble, and a shining example of Christian charity (Price was raised in a Christian homeschooling family). Nevertheless, it is not immoral for him to make enough money to cover his legal bills, and—with today’s high unemployment rate—he may have done well to hire more employees rather than give everyone a raise.

Ideas of social welfare have a place in business, but it is not immoral to make a profit, or to compensate CEOs at a higher level than other employees. Gravity Payments shows us the noble heart of private redistribution schemes, as well as their failings.

While Rush Limbaugh was wrong to call this raise “socialism,” he was right to see in it the same flaw that condemns the ideology of Karl Marx—if you don’t pay more for better work, people will lack a strong incentive to grow. In a free market, we see the errors in this policy, and companies adapt. But if government enforces a “living wage,” the resulting problems will be much harder to fix.