Question

Dan Price, the founder of Gravity Payments, a small, privately owned company that provided high-service and low-cost credit card processing, surprised his 120-person staff when he announced that over the next three years he would raise the salary of all employees, even the lowest paid clerk, customer service representative, and salesperson, to a minimum of $70,000. The average annual salary at that time at Gravity was around $48,000, so the increase would nearly double some employees’ salaries. Price explained that he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit. Price’s announcement was met with mixed reactions. Some employees were thrilled, clapping and whooping when they heard the announcement. “I’m freaking out,” said one employee. But, others—many from the financial services community—said that this was just a costly publicity stunt. Price was no stranger to the spotlight. He earned the honor of Entrepreneur of the Year in 2014 from Enterprise Magazine. GeekWire named Price its Young Entrepreneur of the Year in 2013, and in 2010 he received the Small Business Administration’s National Young Entrepreneur of the Year award. When asked about his recent awards, Price said, “I’m looking at this not as any kind of end result to celebrate, but more just a stepping stone to get our ultimate goal, which is to level the playing field and make payments and financial services and business services fair for independent business owners.” Price also annually donated 10 percent of Gravity’s profits to charity. The equitable employee salary announcement seemed like another step toward achieving Price’s goals as a business owner. Price launched Gravity (a name, Price explained, that was selected because “you could understand [it] on the phone”) while attending college, but the firm actually grew out of a technology consulting business he created while in high school. His goal was to manage credit card transactions for small businesses, like coffeehouses, in a more affordable and transparent way. “I never intended to make a lot of money, or really any,” said Price. “I was really upset at this industry for the way they were treating my [consulting] clients, and I just wanted to blow the thing up. So I was like, ‘I’m going to charge a third of what everyone [else does].’” Financial analysts recognized Gravity Payments’ success; his company processed nearly $10 billion in credit card transactions and generated revenues of about $150 million annually. When asked why he did not “cash out,” Price responded, “I’ll ask my friends who have sold their businesses, ‘Did that business get to the goal that you originally had in mind?’ And they’re all happy they sold because of the phenomenal financial outcome. But when I ask them, ‘Did you actually accomplish the nonfinancial goal that you set out in starting a business?’ . . . they almost all say no.” Price encountered hard times in 2008 when Gravity lost 20 percent of its revenue nearly overnight because customers were running less volume through the system during the economic recession. Price recalled that half of his staff was in his office asking for raises and the other half was definitely afraid they were going to lose their jobs. So, he called his employees together and explained that the company had eight months of cash in the bank. “If we hold our expenses steady and just sell the same amount every month for five months, we’ll get back to break-even and not have to do any benefit cuts, any layoffs, anything like that,” he told his staff. Given Price’s response during the economically challenging times, it did not surprise his employees when he took the bold move of promising every employee a salary of $70,000 annually. Price’s commitment to a new company minimum wage captured national attention given the soaring disparity between executives’ pay and that of their employees. In the United States, where the pay gap was the greatest for any country, chief executives earned more than 300 times what the average worker made (as discussed in more detail in Chapter 13). Some people, like Gilded Age’s executive J. Pierpont Morgan and management scholar Peter Drucker, advocated a 20-to-1 executive to average employee ratio. Price’s 1-to-1 ratio was unprecedented in the business community. “The market rate for me as a CEO compared to a regular person is ridiculous, it’s absurd,” explained Price, who admitted that his only main extravagances were snowboarding and picking up the bar bill for his friends. He drove a 12-year-old Audi, which he received in a barter for service from the local dealer. “As much as I’m a capitalist, there is nothing in the market that is making me do it,” said Price, referring to paying wages that would make it possible for his employees “to go after their own American dream, buy a house and pay for their children’s education.” After the passage of the Dodd-Frank Act in 2010, the Securities and Exchange Commission was supposed to require all publicly held companies to disclose the ratio of CEO pay to the median pay of all other employees, but as of 2015 this legislative rule has not been put into effect. Corporate executives vigorously oppose this rule, complaining that it would be cumbersome and costly to implement. Price admitted that hearing his employees’ problems with making ends meet on wages that were well above the $7.50 per hour minimum wage or even at $40,000 a year “just eats at me inside.” He wanted to address the social issue of wage inequality and felt that as a business leader he was in a position to do something, but he wanted to do something that would not result in raising prices for his customers or cutting back on services. Hayley Vogt, a 24-year-old communications coordinator at Gravity who earned $45,000 annually, said, “I’m completely blown away right now [after hearing Price’s announcement].” She said she had worried about covering rent increases and a recent emergency room bill. “Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it.”

Stop 1: (Define the problem in the case.)

Stop 2: (Identify the OB concepts or theories to use to solve the problem.)

Stop 3: (Explain what you would do to correct the situation.)

Answer 1

Ans 1:The problem we are talking about in the case is " The ratio of CEO's salary to the median salary of all the employees put together" and "Dan Price, the CEO's promise to make the lowest salary of an employee as high as $ 70000 per year while bringing down his own salary from $ 1 million to $ 70000( equal to his employee's salary) "

The Case talks about disparity between the salary of the CEO and the employees working for him. The law of fixing the salary not higher than 20 times of that of the median salary which is still in limbo and the growing disparity in the salary of the CEO and his/her employee in a country like the United States.

Ans 2: The Organizational Behavior theory related to the solution of the problem are Motivational theories given by Herzberg ( Herzberg's two factor theory) and Vroom's Expectancy Theory.

As for Dan Price, money is just a thing of maintaining his livelihood, the success from his job and the organization reaching new heights is his main motto. Hence, from the Herzberg's two factor motivation theory, his salary is a hygiene factor which stops dissatisfaction while the success of the company and happiness of his employees is his motivator or satisfier.

As for the employees of Dan Brown's company Gravity; it's an example of the Vroom's Expectancy theory which states that Force = Value x Expectancy x Instrumentality.

All the factors when applied together and more than unity or at least unity will create a positive force. In this case, increase in salary leading to a better lifestyle will lead to a greater value for the employees while clear cut mention of the goals to be achieved , has given them the right direction as in instrumentality. The expected rise in profit and simultaneous increase in salary and fame of the company has led to a expected rise in quality of work from the employees.

Ans 3: The situation which leads to this kind of situation is a classic example of Organizational Behavior problem induced by external agencies and skeptics inside the organizational framework. Dan Price has created his own benchmark by creating a high industry standard challenging his competitors. This is going to increase the morale of the employees and help them give their best while being goal oriented and systematic in their approach. The problem can be addressed sensibly by involving all the stake holders, in this case his employees and shareholders about the source of finance needed to take this ambitious step. As mentioned in the case, strategies to bring in the money from increase in revenue and subsequent increase in profits in the medium term while a pay cut by him will lead to the success of the organization in the long run.