When Dan Price announced that he was raising the minimum salary in his company to $70,000, it made a lot of headlines. The story of the founder and CEO of the Seattle-based credit card processor Gravity Payments drastically cutting his own salary in order to raise the standard of living of even his lowest paid employees was written about just about everywhere, from liberal bloggers to conservative radio hosts.
Inside the company itself, the reaction was generally positive. “Everyone start[ed] screaming and cheering and just going crazy," Price told Business Insider shortly after the announcement. That enthusiasm eventually settled down as Gravity Payments went about figuring out how to make the new plan work. The original plan immediately raised everyone’s minimum to $50,000 and then would increase by $10,000 until it reached $70,000 by December 2017.
But that plan might have to change.
Price and Gravity Payments have made headlines again, after a New York Times article revealed that the company is struggling to deal with the implications of Price’s plan. The media coverage started a flood of emails, phone calls and social media posts about the company, which even when positive was an unneeded distraction. In addition, some customers, who saw the move as a political statement or feared a price increase, took their business elsewhere.
But the most damaging blow to the company is internal, as some of the most valuable employees at Gravity Payments have started to leave the company. The Times reported that two employees have left directly because of the policy. One told the paper she was initially excited about the new policy, but as she thought about the details she began to get dismayed. “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 she presented the issue to Price along with an alternative way to raise salaries, but was met with an accusation of selfishness. So she decided to quit. Another employee, on the lower-end of the former pay range, also decided to quit after thinking through the policy. “Now the people who were just clocking in and out were making the same as me,” he told the Times. “It shackles high performers to less motivated team members.”
No matter how altruistic Price’s intentions, nor how unexpected the media attention was, the departure of long-tenured and more valuable employees was actually predictable. In Price’s plan to raise salaries, lower paid employees saw their incomes almost double while higher paid employees saw just a modest bump. The higher paid employees’ frustration would have been predicted by J. Stacey Adams, the organizational psychologist who, in the 1960s, laid the foundation for the equity theory of motivation.
According to equity theory, individuals are constantly calculating a ratio of their inputs (time, effort, skills, experience, etc.) to the outputs the organization gives them (salary, benefits, recognition, security, etc.). When their ratio appears equitable to that of their coworkers, the organization runs smoothly. When the comparisons are out of whack, that’s when demotivation and strife set in. When two equally skilled employees are paid unequally, problems will ensue. This is why equity theory is also the primary reason gender and racial wage gaps are everyone’s problem, not just those affected.
But equity theory also says that when two unequally skilled employees are paid equally, there is also a problem. The ratio comparisons don’t add up, and distress ensues.
The theory and its predictions apply to pay raises just as much as pay. Giving large raises to lower paid, lower contributing employees may be well intentioned, but unless it's paired with equitable raises for higher contributing employees, it is bound to cause dissatisfaction and turnover. Price, reflecting on the policy in his interview with the Times, even admits that some of the distress was a possibility. “There’s no perfect way to do this and no way to handle complex workplace issues that doesn’t have any downsides or trade-offs.”
While that may be true, equity theory reveals that the flaw in Price’s well-intentioned plan was who he asked to feel the downsides and make the tradeoffs with him.
David Burkus is the author of Under New Management. He is host of the Radio Free Leader podcast and Associate Professor of Management at Oral Roberts University. To get more resources to help you lead smarter, join his free newsletter.
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