money happy

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A year ago, Gravity Payments CEO Dan Price announced plans to raise the salary of every employee to $70,000 by 2017, even entry level staffers.  In order to help offset the increased labor costs, Price announced his intention to lower his own salary from $1,000,000+ to $70,000 (he apparently made around $2,000,000 in 2012).  Needless-to-say, Price achieved instant celebrity status and even graced the cover of Inc. magazine.  Some, on the right, labeled him a socialist. 

Insane, right?  (Do the math:  assuming a work-year totaling 2,080 hours, that is an hourly rate of $33.65.  Overtime amounts to just over $50.00 per hour!)  No way a company can survive if it overpays what the market demands by that amount of money, right?  This must have been a ploy.  Some doubted Price’s true motivations.  It seems that not long before Price’s seemingly mind-boggling announcement, his brother (who also appears to be his partner) sued Price alleging that Price’s personal compensation was excessive, and asked the court to force Price to buy out his minority interest in the company.  Price decided in advance of the trial to turn over company financials to USA TODAY so company performance would be within the public realm.  And the financials offer an interesting glimpse into how the raise has impacted company performance. 

Rather than driving the company into bankruptcy, USA TODAY reported that the raises had, in many respects, a positive impact on company performance.  Revenue reportedly soared, profits increased (though not as much so far this year), and employee satisfaction enjoyed a surge following the announcement (that has since returned to pre-announcement levels).  Also, employees reported that they were better focused on their work and that their lives are less stressful overall. 

Now, if you, like me, tend toward the cynical side, you will likely write off this improved performance to the national and international publicity generated by the announcement.  (And, to be sure, I count myself among those who cringed when the initial calls for a national $15.00 minimum wage began. More on that below.)  But as USA TODAY also reports, in at least two instances where other companies have also significantly increased wages (minus the national and international publicity, apparently) they have seen positive results that they attribute to the wage increases.  Pharmalogics Recruiting, of Boston, and Mount-It!, of San Diego, both significantly increased compensation for their employees. Both companies reported that as a result they are seeing performance improvements across several metrics, including increased revenue and profit, decreased turnover and improved employee performance in ways that are measurable (year over year) by each respective company.  Regardless of his motivations, could Price may be onto something? Yes and no.

It is one thing for a business owner to make a decision to raise wages based upon the company’s ability to tolerate – and hopefully benefit from – the wage increases. It is an entirely different thing for politicians to arbitrarily impose wage hikes – read: $15.00 federal  minimum wage – on businesses they know little or nothing about.  Indeed, a decision to raise the federal minimum wage to an arbitrary amount may harm the very people politicians are hoping to help.  A case in point is the day when robots replace employees as a means to counteract the cost of doing business that could result from, among other things, quickly raising the minimum wage.  Walmart recently announced that it is experimenting with drones to take inventory in a day that takes current employees a month and fast food executives see a day when robots may reduce the number of employees needed at each outlet. Royal Caribbean has been using robots as bartenders on its newest ships.

Ultimately, the rhetoric regarding a national minimum wage increase needs to be considered by businesses not from a purely political standpoint (which in this election year it certainly is), but from a shareholder value standpoint.  In other words, if a correlation exists between not merely raising wages, but raising them dramatically, and improved overall company performance, it seems to make business sense to at least carefully analyze that option.  Now I certainly am not saying that this is the right approach. Many factors affect employee performance and satisfaction. When analyzing  its pay structure, each employer must be sure that it is consistent with the overall business means and objectives. But if there truly is a correlation between substantial wage increases over a one to three year horizon and increased annual revenue and profit, improved employee job satisfaction and performance (in quantifiable terms), and a decrease in attrition – both with respect to employees and customers – not to mention a potential public relations windfall, it may be worth taking a look.