For some employees at a Seattle-based company, money does buy happiness.
For those making an average of $48,000, there was plenty to be happy about. For Gravity Payments founder Dan Price, it’s going to mean a pay cut from his annual $1 million down to this new wage, and is a matter of principle. The 29-year-old says he spends his disposable income on snowboarding and bar tabs. Price maintains the disparity between CEO and employee salary is “ridiculous” and “absurd” and believes that the pay raise will enable his staff to buy homes and pay for educating their kids.
The move was prompted after he read a 2010 study by two Princeton researchers that polled more than 450,000 U.S. residents. They asked if money could by happiness in two ways: one by measuring overall satisfaction with life and another with how it affected their day-to-day life.
Overall, people said they were happier with each doubling of income, even beyond the six-figure salary. But on a daily basis, measuring money against laughing or getting angry, stress or enjoying activities, the dollar figure that encouraged happy vibes hovered around $70,000.
Price insisted this was not a publicity stunt, and the fact that he is also going to pull from company profits to make up the salary differences could be problematic during years that the balance sheet isn’t quite so stellar.
To discuss the sustainability of such a solution we turned to the experts.
Shawn Casemore, president and founder of Casemore and Co., isn’t convinced this will work in the long term. As head of a management consultancy that helps business owners and executives increase business value and performance, Casemore says the outcome of eliminating the wage gap between a CEO and employees would ultimately result in a reduction in productivity.
“Although money is not the only motivator, it is still a motivator and at the end of the day eliminating the wage gap in this example would reduce motivation,” he argues.
Casemore posits that productivity would plummet because of three discrete factors:
1. Employees would lose the incentive to strive for the next promotion and accompanying wage level.
2. Employees who put in additional effort over other employees would lose the incentive to do so. In other words, “why should I work harder then them if we all get the same pay?”
3. The CEO would lose the incentive to put forth the physical and emotional effort to move the business forward based on witnessing these employee reactions.
Karissa Thacker, PhD, an organizational psychologist and executive coach who has consulted with UPS, Best Buy, and AT&T, among others says that, while research shows that money isn’t as powerful a motivator once people’s basic needs are met, she believes Price is sending a message that everyone at the company, even junior staff, will be able to meet those needs.
“The fact that he is using his own salary to bridge the gap sends the message that he is motivated by something else besides just money. Authentic leaders are driven to meet intrinsic goals such as excellence and inspire others to broaden themselves as well,” she says. “Good for him,” she adds, noting that it will be a challenge for the staff responsible for compensation figuring out the logistics of this new pay scale.
Thacker admits she’s not sure how viable this solution will be in the long term, but with variables like employee engagement that are related to financial performance, she says the company is likely to benefit. “Boldness like this never appears easy or feasible,” she asserts. “But as the war for the best talent heats up, you will see more of this type of leadership,” Thacker says.
As Casemore observes, this could pose a problem for other staff. In February we reported on Baltimore-based software startup Figure53 and its radical decision to level the pay rate for everyone in the company.
Figure53’s founder Chris Ashworth believes the move is working well so far for the 12-person company. Indeed, Lola Pierson tells Fast Company, “I don’t think I think about it as directly as ‘it makes a difference in my commitment to my work’ because I like to think I’m always committed to my work.”
Ashworth admits that this system isn’t perfect. “We don’t currently have a way to offer a truly entry-level position where it would be unfair to pay someone the same base salary as, say, a senior designer or developer,” he says. But he does set aside a portion of profits for year-end bonuses. “I ran a small script to calculate the percentage of time each person had invested in the company to that point,” he explains. “The bonus pool was then split according to that calculation.”
Thacker says that it’s important to remember that, if a company plans to go down this path, middle management–the segment of staff that has been the most drastically downsized in the last decade–is going to have to be completely on board.
“The path needs to be clearly outlined and the reasons behind the shift need to be clearly and simply articulated,” she advises. “The CEO needs to take the time to get all managers on the same page or the potential positive effects of such a bold move will not be realized.”