A Socialist Experiment Gone Awry: Gravity Payments

The small credit card processing company Gravity Payments based in Seattle, Washington announced three months ago that the base salary for any employee will be $70,000. So, in essence, the girl answering their phones and fetches coffee for the CEO Dan Price will be earning $70,000. Gravity Payments is a company of 120 employees, a small company in the startup hub of the country, the city of Seattle and also a very liberal part of the country, where the city’s minimum wage has just been increased from $11 to $15 per hour.

The CEO Dan Price, after talking with a friend who earned about $40,000 per year, said he had a hard time paying rent, keeping up with bills and paying off his student loans. Though $40,000 is not a bad salary, it was hardly enough to keep up with the high living expenses. So, four months ago in April of 2015, he decided to increase the base salary of his company’s employees to $70,000 per year. He did this without considering if all the people getting a $20,000 to $30,000 raise at one time really deserved such a raise, if their skill set, education and training, dedication and motivation garnered these huge raises. Dan Price’s point of view is if his employees are paid better and can afford better housing and pay their bills with money left over each month, they would be less stressed at work and would work harder and the raise alone would motivate them to work harder.

Price was accused by people in the business community of having a political agenda or political ‘aspirations’ and conservative radio hosts such as Rush Limbaugh outright called him a socialist. Some of his existing clients quit in disgust believing that he had turned communist. In all, the good publicity honeymoon was short. Price is a natural entrepreneur and risk taker, he knew this was a risk but he wanted to shake things up and address the income inequality issue that is plaguing America right now and so he decided to put the money where his mouth is. He also took a substantial pay cut to make this happen.

Price claims that he drew no inspiration from Karl Marx or any other socialist advocates, but from one Russell Conwell:

Russell Conwell, the Baptist minister and Temple University founder, whose famed “Acres of Diamonds” speech fused Christianity and capitalism. “To make money honestly is to preach the Gospel,” Mr. Conwell exhorted his listeners. To get rich “is our Christian and godly duty.”

Regardless, his actions smack of socialist ideals. On paper, socialism is a great idea, it’s a great way to address the chronic poverty and uneven distribution of wealth and resources that has plagued human history from the very beginning, which is also the cause of untold suffering and untold deaths. Many scholars, economists, philosophers and social scientists have spent years studying the causes of poverty and how to solve it. Various governments in rich and developing countries have tried numerous anti-poverty schemes but the results are at best mixed. There’s not really one country that’s ‘solved’ the poverty problem when taken all factors into consideration.

The Scandinavian countries are democratic socialist havens which have worked well and by that I mean, it’s achieved it’s outcome of alleviating extreme poverty and everyone given an equal chance at getting a good education and moving ahead should they choose to apply themselves. But they are only able to do this is due to a unique set of circumstances, small homogenous populations (schools do not have to deal too much with people from too many different cultural backgrounds), equal contribution by all people (i.e. few tax cheats) and secure borders, they don’t have many people who are illegally benefiting from the generous welfare state. These circumstances are unique and not applicable to the rest of the world. It’s definetly not applicable here in the United States.

Many extreme liberals also fail to recognize that no matter what, Americans (regardless of party affiliation or political identification) do not believe in a large welfare nanny state (Many right-wingers say that we already have a bloated nanny state, they have no clue what bloated is, they want bloated, they should go to Europe and see what bloated is) where citizens are required to handover large chunks of hard earned income to the state to fund all of these lavish benefits. The fundamental creed of America is for one to work for what one wants, it’s not handed over on a silver platter. Otherwise, why bother working for it? The hallmark of Americanism is dedication to hard work and that hard work will one day pay off for you. Even though there was rarely a time in history where this was true (hard work paying off), the idea of hard work is very much ingrained in the American psyche. It’s character building to work hard, to earn your keep.

The fatal flaw in Karl Marx’s prolific life’s work ‘Das Kapital’ (Doomsday of Capitalism) is that he failed to factor into his theories that most ‘proletariats’ are fundamentally upwardly mobile or aspirational. Meaning, given a chance, the proletariats who are decrying unfair treatment and wages and are striking and picketing their place of employment demanding to be treated fairly: those same people if given an opportunity to earn more than their other fellow proletariats by working longer hours, doing work that requires higher set of skills, taking on extra training to fulfill a more important role in the factory, they will. All that proletarian solidarity will evaporate in a New York minute. This is also why despite Marx’s correct diagnosis of the problems of the Industrial Revolution and the income inequality that resulted, his ‘predictions’ never came true, which was there would be a major revolt by the proletariats in major industrial hubs of the 19th century like England, Germany and America and those countries would then adopt Socialism and then Communism as their form of government. And the communist government is the ‘utopia’ for mankind according to Karl Marx.

Most people do not want to just earn the same as the guy they are working next to for their whole working lives. Everyone is always looking for that raise or promotion wherever they can. Humans by nature are aspirational. Aspiration is how civilizations are built, it is how impossible feats of architecture was created, to stymie aspiration would be the death of innovation. Most people aspire to do more, to be better than they were last year or 5 years ago. So the idea that everyone should earn the same wage, regardless if you are a nuclear scientist or if you scrub toilets at the lab, why would people want to become nuclear scientists? To endure all those years of discipline of study, testing, getting qualifications so that you can earn the same as the guy scrubbing toilets? What’s the motivation in that? Even in the ‘halcyon’ days of Soviet communism, it was not all ‘equal’ as they like their people to believe. Certain Communist Party members had perks. People who made and built nuclear bombs got better accomodations, their children got better education than the local children whose parents worked at the shoe factory.

For Gravity Payments, the repercussions (good and bad) was swift. The CEO made his announcement 3 months ago, two weeks after his announcement his older brother who is 30% owner of the company sued him and is asking for damages and pay out, of which he can’t right now because he just promised everyone raises, effective immediately. He’s renting out his own house right now so that his company can be kept afloat. Perhaps, most regrettably, two of his best employees resigned because they felt that this policy was flawed and was unfair to people who have stronger skill sets who got a smaller raise than those who didn’t.

Maisey McMaster who was the financial manager for Gravity Payments, was the one that crunched the numbers for this new raise and she was supportive of it at first but over time she said:

“He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump,” she said. To her, a fairer proposal would have been to give smaller increases with the opportunity to earn a future raise with more experience.

And when she brought it up to her boss about it:

“He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.”

She took this experience as it’s her time to go and so she resigned.

What Dan Price doesn’t realize is that by giving your receptionist a $70,000 per annum salary, he has just capped her salary as an administrative assistant for in perpetuity unless she decides to change job titles. And perhaps what’s obvious but not explicitly stated is that the folks who just got a $20,000 – $30,000 raise, they will not see any bonuses or raises for a long time to come. Which means, ten years from now, they could still be making $70,000 but they can’t switch jobs either because no other company in their right mind would pay a receptionist $70,000 or any other position in which the salary is overinflated.

There is a tricky balance between paying appropriate salary which commensurates with an employee’s skill sets, dedication and motivation but also covers living expenses then plus some but that salary is not so overinflated when compared with what the ‘market’ salary is for the same position. The painful and uncomfortable truth is as Roger Reynolds, owner of a wealth management company in Seattle said, “Everyone may have equal rights, but not equal talent or motivation.” And to reward people who are not as talented or motivated is demoralizing to those that are. Not everyone is built the same, there are those with far more ambition than others, some are content with punching in and out of a job as long as the pay is decent. There is nothing wrong with either scenario, but what is wrong is if the person who is punching the clock is getting the same salary as the person working towards his next goal or promotion within the company.

Salaries and benefits for employees are usually the biggest costs a company has, but employees are also a company’s best assets. The biggest challenge for a business owner has always been of how to make a company profitable and keep costs down. The whole labor versus capital is still being debated almost 200 years after the Industrial Revolution.

Gravity Payments is a good case study on implementing the ideals of ‘socialism’ even though that wasn’t the motivation of Dan Price. But for all intents and purposes, his decision to make the base salary of his company at $70,000 is a socialist one. The jury is still out on how all this will work out. He’s gotten over 350 new clients for the month of June, which will more than cover the ones he lost but he won’t be seeing profit on these clients for another 12-18 months. Besides his new overhead of salary raises, he also has the lawsuit with his brother to contend with and lawyer fees aren’t cheap. Any profit the company makes will go right to the lawyer’s pockets. Dan Price’s decision may have been misguided and one not rooted in economic reality or principle but his determination to see this through should be applauded.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s