Two companies – one big, one small – have amplified the minimum-wage debate. This time, thankfully, the story-line is bereft of bureaucratic overseers with no appreciation of business specifics who wish to impose their will from above. This is organic. The two companies voluntarily imposed a minimum wage from below.
Wal-Mart is the big company. Earlier this year, Wal-Mart announced it would raise its minimum wage to $9/hour, which it did in February, and then to $10/hour in 2016. The raise lifts hourly pay for 500,000 of Wal-Mart's 1.4 million U.S. employees. (I live in a Denver suburb and Wal-Mart is advertising starting pay at $10.25/hour.)
Wal-Mart raised its minimum wage for logical business reasons – less employee turnover, better employee morale, and more productive employees. There is precedence. It worked for Henry Ford 100 years ago when his company was saddled with similar profit-draining personnel problems. (And, no, Henry Ford did not raise the hourly wage so that his employees could afford to buy Model Ts. A cursory application of math dispels this ridiculous myth.)
The small company, Seattle-based Gravity Payments, went all in on minimum wage, or minimum salary to be precise. You secure a job with Gravity Payment, and within three years you'll earn no less than $70,000 a year.
Wal-Mart's rationale on minimum wage was certainly more reasoned than Gravity Payments'. Wal-Mart had no choice but to approach its minimum-wage decision like a cogent, deliberative adult. A small increase to a large number has monumental consequences to the financial performance of an enterprise of Wal-Mart's girth. No doubt, Wal-Mart management analyzed the worker characteristics they could draw with the higher minimum wage. Increased labor cost would be more than offset by increased productivity.
Gravity Payments' compensation decision, on the other hand, appears rash and idealistic; based as much on whimsy as anything.
Gravity Payments' founder and CEO, 31-year-old Dan Price, unilaterally decided that $70,000 was a good starting point. Price homed in on $70,000 after reading a study about happiness, which concluded that an annual salary up to $75,000 significantly improves a person's emotional well-being. About 70 of Gravity Payments' 120 workers will see their pay levitated (and supposedly their well-being) over the next three years. Roughly 30 of Gravity Payments' employees will see their pay doubled. As for Price, he's bearing a considerable burden for his convictions: he's slicing his million-dollar salary down to $75,000.
The intentions appear good – Wal-Mart to increase productivity; Gravity Payments to improve mental health. But we all know what the road to hell is paved with. Both companies are now dealing with an unforeseen consequence – the problem of relativity.
Value, productivity, and fairness aren't absolutes; they are determined by comparison. Many employees unaffected by the new compensation policy are feeling less valued. The new paradigm unsettles. If a sufficient number of employees feel unsettled, the new pay policy will produce what was to be avoided – reduced morale, lower productivity, and higher turnover.
Wal-Mart is already facing upheaval. Many of of its senior workers are disgruntled. With the benefit of hindsight, the reasons are obvious.
If you've been with Wal-Mart for five-years and earn $12/hour and a new hire starts at $9/hour (soon to be $10/hour), you're miffed if the gap has narrowed. If the previous starting wage had been $8/hour, you made 50% more than the new hire. With a five-year work history, you've likely earned the premium through productivity gains imbued by work experience. You know how the joint is run. Now, the premium has been reduced to 33%; next year, it will be reduced to 20%. Even if you were given a $1/hour raise to $13/hour, the premium is still reduced. Today, the premium is 44%; next year, it will be 30%.
Gravity Payments' compensation and the issues it engenders have been elevated to an even higher plane. If you're an operations manager earning $90,000 annually and the mail clerk will soon earn within $20,000 of your annual salary, why bother? The stress of operations management is worth more than a $20,000 premium over the relatively stress-free gig of sorting and parceling out mail. You respond by parceling out resumes.
There are other ancillary issues particular to Gravity Payments that 31-year-old Dan Price failed to consider. Perception is one. One day Gravity Payments might need outside capital. What lender or equity investor is willing to place money into a company whose CEO deliberately overpays for labor? The idea is to keep cost down, not up. On an esoteric level, Price has wondered onto the unstable turf of mind reading. He wants happier employees, but compensation untethered to higher productivity is just as likely to irritate than to assuage. People have an intuitive understanding of fairness; they understand the score.
Any damage that Wal-Mart and Gravity Payments incur is self-inflicted, thus limited. Others are interest in inflicting damage nationwide. Proponents of federal- and state-imposed minimum wage should heed relativity before stepping up on their soapbox. Minimum-wage proponents breezily assume that raising the minimum-wage will increase morale and productivity and reduce employee turnover (while concurrently mitigating the dubious claim of monopsony power) at the company level. Concurrently, the economy will grow at a faster pace, because lower-paid workers purportedly spend a higher proportion of their income. (This is an old Keynesian precept.) It's all pluses, no minuses.
The proponents, though, assume too much. Leaving the spending-accelerator aspect (a dubious aspect, to be sure) aside, if everyone is mandated to be paid $12/hour, morale, productivity, and turnover will remain unchanged nationwide. Wage differentials matter inter-company as much as intra-company. The Wal-Mart employee might be more motivated if he sees he's now making $2 more than the Target employee performing a similar job. Both if they are both mandated to earn the same, where's the additional motivation? There isn't any.
Occam's Razor states that one should not make more assumptions than the minimum needed. Unfortunately, decisions are frequently made with fewer assumptions than the minimum needed.
Wal-Mart is the big company. Earlier this year, Wal-Mart announced it would raise its minimum wage to $9/hour, which it did in February, and then to $10/hour in 2016. The raise lifts hourly pay for 500,000 of Wal-Mart's 1.4 million U.S. employees. (I live in a Denver suburb and Wal-Mart is advertising starting pay at $10.25/hour.)
Wal-Mart raised its minimum wage for logical business reasons – less employee turnover, better employee morale, and more productive employees. There is precedence. It worked for Henry Ford 100 years ago when his company was saddled with similar profit-draining personnel problems. (And, no, Henry Ford did not raise the hourly wage so that his employees could afford to buy Model Ts. A cursory application of math dispels this ridiculous myth.)
The small company, Seattle-based Gravity Payments, went all in on minimum wage, or minimum salary to be precise. You secure a job with Gravity Payment, and within three years you'll earn no less than $70,000 a year.
Wal-Mart's rationale on minimum wage was certainly more reasoned than Gravity Payments'. Wal-Mart had no choice but to approach its minimum-wage decision like a cogent, deliberative adult. A small increase to a large number has monumental consequences to the financial performance of an enterprise of Wal-Mart's girth. No doubt, Wal-Mart management analyzed the worker characteristics they could draw with the higher minimum wage. Increased labor cost would be more than offset by increased productivity.
Gravity Payments' compensation decision, on the other hand, appears rash and idealistic; based as much on whimsy as anything.
Gravity Payments' founder and CEO, 31-year-old Dan Price, unilaterally decided that $70,000 was a good starting point. Price homed in on $70,000 after reading a study about happiness, which concluded that an annual salary up to $75,000 significantly improves a person's emotional well-being. About 70 of Gravity Payments' 120 workers will see their pay levitated (and supposedly their well-being) over the next three years. Roughly 30 of Gravity Payments' employees will see their pay doubled. As for Price, he's bearing a considerable burden for his convictions: he's slicing his million-dollar salary down to $75,000.
The intentions appear good – Wal-Mart to increase productivity; Gravity Payments to improve mental health. But we all know what the road to hell is paved with. Both companies are now dealing with an unforeseen consequence – the problem of relativity.
Value, productivity, and fairness aren't absolutes; they are determined by comparison. Many employees unaffected by the new compensation policy are feeling less valued. The new paradigm unsettles. If a sufficient number of employees feel unsettled, the new pay policy will produce what was to be avoided – reduced morale, lower productivity, and higher turnover.
Wal-Mart is already facing upheaval. Many of of its senior workers are disgruntled. With the benefit of hindsight, the reasons are obvious.
If you've been with Wal-Mart for five-years and earn $12/hour and a new hire starts at $9/hour (soon to be $10/hour), you're miffed if the gap has narrowed. If the previous starting wage had been $8/hour, you made 50% more than the new hire. With a five-year work history, you've likely earned the premium through productivity gains imbued by work experience. You know how the joint is run. Now, the premium has been reduced to 33%; next year, it will be reduced to 20%. Even if you were given a $1/hour raise to $13/hour, the premium is still reduced. Today, the premium is 44%; next year, it will be 30%.
Gravity Payments' compensation and the issues it engenders have been elevated to an even higher plane. If you're an operations manager earning $90,000 annually and the mail clerk will soon earn within $20,000 of your annual salary, why bother? The stress of operations management is worth more than a $20,000 premium over the relatively stress-free gig of sorting and parceling out mail. You respond by parceling out resumes.
There are other ancillary issues particular to Gravity Payments that 31-year-old Dan Price failed to consider. Perception is one. One day Gravity Payments might need outside capital. What lender or equity investor is willing to place money into a company whose CEO deliberately overpays for labor? The idea is to keep cost down, not up. On an esoteric level, Price has wondered onto the unstable turf of mind reading. He wants happier employees, but compensation untethered to higher productivity is just as likely to irritate than to assuage. People have an intuitive understanding of fairness; they understand the score.
Any damage that Wal-Mart and Gravity Payments incur is self-inflicted, thus limited. Others are interest in inflicting damage nationwide. Proponents of federal- and state-imposed minimum wage should heed relativity before stepping up on their soapbox. Minimum-wage proponents breezily assume that raising the minimum-wage will increase morale and productivity and reduce employee turnover (while concurrently mitigating the dubious claim of monopsony power) at the company level. Concurrently, the economy will grow at a faster pace, because lower-paid workers purportedly spend a higher proportion of their income. (This is an old Keynesian precept.) It's all pluses, no minuses.
The proponents, though, assume too much. Leaving the spending-accelerator aspect (a dubious aspect, to be sure) aside, if everyone is mandated to be paid $12/hour, morale, productivity, and turnover will remain unchanged nationwide. Wage differentials matter inter-company as much as intra-company. The Wal-Mart employee might be more motivated if he sees he's now making $2 more than the Target employee performing a similar job. Both if they are both mandated to earn the same, where's the additional motivation? There isn't any.
Occam's Razor states that one should not make more assumptions than the minimum needed. Unfortunately, decisions are frequently made with fewer assumptions than the minimum needed.
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