After reading a 2010 Princeton study, which attempted to answer the eternal question Can money buy happiness?, Gravity Payments CEO Dan Price concluded that the answer is might be yes. The study, which is based on massive survey data from Gallup, concludes that people with higher incomes reported happier moods and less stress. However, once someone hits the $75,000 earnings mark, more money did not improve their mood or disposition.
Based on this study, Price decided that all of the 120 employees at Gravity Payments, a Seattle-based credit card processing company, would earn at least $70,000 a year; quite an increase considering the current average wage at the company is $48,000 in annual pay. Some 70 employees will be affected by the company's new "minimum wage," and 30 of those will have their salary doubled. The changes will be phased in over the next three years.
The wage increases have been both lauded as a smart business move that will increase the company's competitiveness and success, and also criticized as an unsustainable business model that would make employees lose the incentive to work for promotions and salary raises. Price has made it clear however, that he believes the gap between his own pay and that of his workers is untenable. Price, who currently makes an annual salary of $1 million, will slash his personal annual pay down to $70,000 in order to help pay for the pay increases. The 29-year-old CEO claims that the disparity between CEO and worker pay is "ridiculous" and "absurd," and he openly criticizes the practice of determining executive pay by bringing in consultants who recommend compensation after focusing only on the highest paid segments of chief executives.
Most Americans are not even truly aware of the immense inequality between executive and worker pay. When surveyed, people approximated that the difference between CEO and employee pay is about 30:1. But they have drastically underestimated the figures; in actuality, CEOs make more than 350 times the average worker (The Washington Post, 9/25/14). And while worker pay has shown only minimal growth since the recession, pay for chief executives has continued in an upward trend. From 1978 to 2013, CEO compensation (when adjusted for inflation) increased 937%, while typical worker compensation grew only 10.2% during the same period (Economic Policy Institute, 6/12/14).
The vast inequality between executives and workers has emerged as a major policy issue, and there is a growing movement to curb the runaway train that seems to have become CEO salaries. In 2010, the Dodd-Frank law ordered public companies to reveal chief executive-to-worker pay ratios, but the numbers for these organizations has still not been disclosed. Three states have proposed legislation that would seek to limit CEO compensation; in California, for example, a state senator proposed a bill that would tie a firm's corporate tax rate to its executive-worker pay gap – in other words, the wider the gap, the higher the rate. Massachusetts introduced a bill that would prevent companies from claiming tax deductions for CEO bonuses over $1 million if employees are not given raises that keep up with cost of living. Although neither proposal has gained enough momentum to be turned into law, CEO compensation has increasingly come under heavy scrutiny and criticism. Hillary Clinton, who announced her bid for the Democratic nomination last week, has already attacked exorbitant CEO pay.
Economists assert that an enormous CEO-worker pay gap does not do those companies or the economy any good. Huge imbalances between executives and lower-level workers weaken loyalty and reduce productivity. Enormous wealth that is concentrated with a small percentage of the population curtails spending of the lower- and middle- classes, the consumers who ultimately drive the U.S. economy and make up the majority of GDP. Despite growth in the job market, consumption has fallen due in large part to the fact that many workers are not making enough to have disposable income to spend on consumer goods.
Although other CEOs have taken pay cuts in order to boost earnings for employees, Price and these types of chief executives are the exception, not the norm, and it may take intervention to minimize the widening income gap.
Readers, do you think that the gap between CEO and worker pay has become too vast? Will Gravity Payment's decision help or hurt the company? Comment and let us know!