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

by Thorondor • 11 years ago

18 37 11 years ago

wtbob• 11 years ago

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.

smt88• 11 years ago

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.

asn0• 11 years ago

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.

GeoDeV4• 11 years ago

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.

rdancer5• 11 years ago

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.

GeoDeV4• 11 years ago

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.

evanpw3• 11 years ago

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?

illumen• 11 years ago

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.

biomene• 11 years ago

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.

camelNotation• 11 years ago

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.

kspaans2• 11 years ago

he has sold all his stocks, emptied his retirement accounts, and mortgaged his two properties -- including a $1.2 million home with a view of Puget Sound

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?

rdancer5• 11 years ago

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.

kspaans2• 11 years ago

Cool!

linkregister• 11 years ago

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?

rdancer5• 11 years ago

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.

GeoDeV4• 11 years ago

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.

rdancer5• 11 years ago

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.

Jtsummers4• 11 years ago

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.

Here's What Really Happened at That Company That Set a $70,000 Minimum Wage

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