Remember Dan Price of Gravity Payments, who gave his employees a $70,000 minimum wage? Here's what happened next.

Remember the Guy Who Gave His Employees a $70,000 Minimum Wage? Here’s What Happened Next.

Remember the Guy Who Gave His Employees a $70,000 Minimum Wage? Here’s What Happened Next.

Moneybox
A blog about business and economics.
Oct. 23 2015 4:07 PM

Remember the Guy Who Gave His Employees a $70,000 Minimum Wage? Here’s What Happened Next.

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Double salary for you, and you, and you ...

Photo by Bay Ismoyo/AFP/Getty Images

This post originally appeared in Inc.

Before Dan Price caused a media firestorm by establishing a $70,000 minimum wage at his Seattle company, Gravity Payments ... before Hollywood agents, reality-show producers, and book publishers began throwing elbows for a piece of the hip, 31-year-old entrepreneur with the shoulder-length hair and Brad Pitt looks ... before Rush Limbaugh called him a socialist and Harvard Business School professors asked to study his radical experiment in paying workers ... an entry-level Gravity employee named Jason Haley got really pissed off at him.

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It was late 2011. Haley was a 32-year-old phone tech earning about $35,000 a year, and he was in a sour mood. Price had noticed it, and when he spotted Haley outside on a smoking break, he approached. "Seems like something's bothering you," he said. "What's on your mind?"

"You're ripping me off," Haley told him.

Price was taken aback. Haley is shy, not prone to outbursts. "Your pay is based on market rates," Price said. "If you have different data, please let me know. I have no intention of ripping you off." The data doesn't matter, Haley responded: "I know your intentions are bad. You brag about how financially disciplined you are, but that just translates into me not making enough money to lead a decent life."

Price walked away, shocked and hurt. For three days, he groused about the encounter to family and friends. "I felt horrible," he says. "Like a victim." An entrepreneur since he was a teen, Price prided himself on treating employees well at Gravity, which he co-founded in 2004 with his brother Lucas Price. Three years before, as a 16-year-old high school kid, Dan Price saw bar owners being gouged by big financial firms every time they swiped a patron's credit card. By first outsourcing technology, and then building its own systems, Gravity offered lower prices and better service, and grew rapidly for four years—until the Great Recession nearly wiped it out. Traumatized, Price kept a lid on wages even after the economy recovered—to save the company, of course! Why can't employees see that? Yet the more people tried to cheer him up about his wage policy, the worse Price felt.

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Finally, he realized why: Haley was right—not only about being underpaid, but also about Price's intentions. "I was so scarred by the recession that I was proactively, and proudly, hurting my staff," he says. Thus began Price's transformation from classic entrepreneur to crusader against income inequality, set on fundamentally changing the way America does business. For three years after his face-off with Haley, Price handed out 20 percent annual raises. Profit growth continued to substantially outpace wage growth. This spring, he spent two weeks running the numbers and battling insomnia before making a dramatic announcement to his 120-member staff on April 13, inviting NBC News and the New York Times to cover it: Over the next three years, he will phase in a minimum wage of $70,000 at Gravity and immediately cut his own salary from $1.1 million to $70,000 to help fund it.

The reaction was tsunamic, with 500 million interactions on social media and NBC's video becoming the most shared in network history. Gravity was flooded with stories from ecstatic workers elsewhere who suddenly got raises from converted bosses who tossed them out like Scrooge after his epiphany—even, in one case, at an apparel factory in Vietnam. Price was cheered at the Aspen Ideas Festival and got an offer from The Apprentice reality-show impresario Mark Burnett to be the new Donald Trump on a show called Billion Dollar Startup. Gravity was inundated with résumés—4,500 in the first week alone—including one from a high-powered 52-year-old Yahoo executive named Tammi Kroll, who was so inspired by Price that she quit her job and in September went to work for Gravity at what she insisted would be an 80–85 percent pay cut. "I spent many years chasing the money," she says. "Now I'm looking for something fun and meaningful."

Price had not only struck a nerve; he had also turbocharged a debate now raging across the American landscape, from presidential forums to barrooms to fast-food restaurants. How much—indeed, how little—should workers be paid? While financiers and C-suite honchos have showered themselves in compensation, most Americans haven't had a raise, in real dollars, since 2000. Especially in the wake of the recession, entrepreneurs and corporate bosses have tightly controlled costs, including wages. That boosts profits—and bonuses. But at what cost? In a U.S. economy that is more than two-thirds consumer spending, GDP growth is chained to income growth. Workers can't spend what they don't have, nor do they have the home equity to borrow and spend. Weak wage growth helps explain why this long economic expansion has been so tepid.

Until Price dropped his wage bomb, much of that debate was punditry. He gave it a name and a face: A modern Robin Hood helping the working class by stealing from himself—and perhaps from shareholders of other companies whose bosses are now also putting employees ahead of profits: #imwithdan! Was it coincidence that Walmart, that paragon of parsimony, coughed up raises for its lowest-paid workers?

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Then the inevitable backlash came. Price has been pilloried on Fox News and trashed by the multimillionaire Limbaugh ("I hope this company is a case study in MBA programs on how socialism does not work, because it's gonna fail"). A Times story in July was so laden with quotes from disgruntled customers and staff that Price's worried friends called to say he always has a place to stay if things don't work out. Others accused Price of orchestrating a clever publicity stunt. ("If it was," he replies, "I'm a genius.") Shortly after Price announced his minimum, his brother Lucas sued him, claiming Dan had previously paid himself "excessive compensation" and asked the court to order Dan to buy Lucas's 30 percent share of Gravity "at fair value" or dissolve the firm. Lucas declined to comment; Dan denies his brother's claims.

Price isn't backing down about pay going up. Now he's going all in. He revealed to Inc. that he has sold all his stocks, emptied his retirement accounts, and mortgaged his two properties—including a $1.2 million home with a view of Puget Sound—and poured the $3 million he raised into Gravity. As majority owner, he is not exactly penniless. But if Gravity fails, so does Price. "Most people live paycheck to paycheck," he says. "So how come I need 10 years of living expenses set aside and you don't? That doesn't make any sense. Having to depend on modest pay is not a bad thing. It will help me stay focused."

And business owners will stay focused on him. The Dan Price Pay Experiment will either be hailed as a stroke of genius showing that entrepreneurs have underpaid their workforces to their companies' detriment, or as proof positive that Gravity is being run by a well-intentioned fool.

"I love Monday mornings," says Price, relentlessly upbeat as usual, walking through Gravity's sparse office in the Ballard section of Seattle, a rapidly gentrifying former fishing village. He wears the full hipster regalia of ripped jeans, untucked shirt, and sneakers. The office looks as you might expect—desks and computers in bland cubicles—but the space is reorganized every six months so people can sit near different colleagues. "So we don't get too comfortable," Price says.

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Being comfortable wasn't a goal in Price's family when he was growing up in rural southwest Idaho, near Nampa. He and his five siblings took turns waking at 5 a.m. to make breakfast before Bible readings and prayers led by their Evangelical Christian parents. On his own, Price spent hours reading Scripture and reached the finals of a national Bible-memorization competition in the fifth and sixth grades. Like his siblings, he was homes-chooled until age 12. That's when he rebelled a bit, dying his hair with red and blue streaks and painting his nails like the punk rockers he listened to.

Price learned to play bass guitar and formed a Christian rock trio called Straightforword, which was successful enough to tour and get national airplay. At 16, when the band broke up, he decided to help the struggling owners of bars and coffee shops where they had played by negotiating cheaper rates from the credit card processing companies, which offered little more than exorbitant prices and spotty service.

Though his family struggled financially, Price never thought of his enterprise as a way to make money. Inspired by his father, Ron Price, a self-employed consultant who often spoke of living according to your values, Dan says he just wanted to help friends like Heather, who ran the Moxie Java coffee shop in Caldwell, Idaho. But make money he did, rounding up more than 200 clients and in a good month netting $12,000. By the time he entered Christian Seattle Pacific University in 2004, Price had developed a more sophisticated business model: processing credit card transactions himself using outsourced technology.

Though fluent with computers, his real skill was negotiating—cobbling together deals with the myriad firms involved in making a single credit card swipe go through smoothly. While continuing to serve his Idaho customers, he found enough new ones in Seattle to start Gravity Payments with Lucas, five-and-a-half years older and already a college graduate. He also married Kristy Lewellyn, a high school sweetheart whose strict Christian parents demanded, when Price was 16, that he commit to marriage or stop seeing her. He agreed, but the union didn't last, ending amicably in 2010.

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Dan and Lucas were 50-50 partners in Gravity and shared responsibilities but had a falling out about 18 months after launch. Lucas was frustrated at being given menial tasks by his kid brother, and in 2008, they agreed that Dan would become majority owner. Lucas is now an executive at the Seattle texting startup Zipwhip.

Funded in part by Dan's savings, credit card debt, and student loans (diverted to fund his venture), the company grew rapidly as Gravity built its own technology and brought the card-processing systems in-house. He somehow graduated from college in 2008, won several business awards, and met President Obama. Then the recession hit and Gravity fell rapidly to earth. Revenue dropped 20 percent, and vendors and clients went bankrupt. Price was spooked. "We almost lost everything," he says. Always stingy with pay, he had offered employees the usual startup promise: We'll give you an exciting place to work, and you'll learn so much you'll eventually be financially successful—either here or elsewhere. But after his encounter with Jason Haley, he decided to try a new tack.

The 20 percent raises Price implemented in 2012 were supposed to be a one-time deal. Then something strange happened: Profits rose just as much as the previous year, fueled by a surprising productivity jump—of 30 to 40 percent. He figured it was a fluke, but he piled on 20 percent raises again the following year. Again, profits rose by a like amount. Baffled, he did the same in 2014 and profits continued to rise, though not quite as much as before, because Gravity had to do more hiring.

"But I was still bothered and I didn't know why," he says. In March, Price went walking with a good friend who earned less than $50,000 at another firm. She was smart, capable, and worked 50 to 60 hours a week. But her Seattle rent was rising another $200 a month, and she was struggling with student debt and worried about how to pay for basics. "I was so angry," Price says. "Here I am walking around making $1 million a year, and I'm working shoulder to shoulder with people in her situation who are every bit as good and valuable as I am."

As a numbers guy, he knows all the statistics. Even as the nation's productivity has improved 22 percent since 2000, median wages have risen only 1.8 percent, adjusted for inflation. Wages have actually fallen by 3 percent since the recession. Meanwhile, productivity gains are going to CEOs who earn, on average, about 300 times more than typical workers, compared with 71.2 times in 1990, according to the Economic Policy Institute. (Price's $1.1 million salary was about 23 times the $48,000 average at Gravity.) Such trends have driven the push for a $15 minimum wage in some cities, including Seattle.

"I began wondering what my friend would have to make so she wouldn't have to worry about a $200 rent hike," says Price. He recalled a 2010 study by Princeton behavioral economist Daniel Kahneman finding that, while people did not feel happier on a daily basis as their income rose above $75,000, they were decidedly unhappier the less they earned below $75,000. At Gravity, new hires made $35,000 a year.

By any measure, Gravity was doing relatively well. Revenue hit $150 million in 2014 and was growing 15 percent per year on $7 billion in customer transactions. Profits hit $2.2 million—actually a so-so 1.46 percent net margin, below the industry average. About 40 percent of the profits went to Dan and Lucas as dividends (Dan put his in an emergency savings account for the company). The rest went back into the business. "We had a great culture and hundreds of people were applying for positions, so we could have gotten away with underpaying for a while longer," he says.

But Price worried that employees with money troubles would fail to provide the top-notch service that had made Gravity successful. He also believed that low starting salaries were simply wrong—contrary to his values, which his father had always taught him to respect. "I just decided I'm gonna do $70,000," he says. "I don't care if I have to stop paying myself or I have to work 20 hours a day. I'm going to do it."

The plan will eventually double the salaries of 30 workers and give raises to 40 more making less than $70,000. Phased in over three years, this will cost $1.8 million. The minimum jumped to $50,000 immediately and will climb by $10,000 in each of the next two years; those who earn $50,000 to $70,000 will get $5,000 raises. Price has vowed not to raise prices, lay off staff, or cut executive pay. More than half the cost will be offset by Price's pay cut. Unless revenue grows, the rest will be covered by that $2.2 million profit, leaving little margin for error.

Since that April made-for-TV moment, Price says he's had no second thoughts—mostly because he's been learning how his employees had been struggling. Garret Nelson, 31, a salesman in Boise, Idaho, got a $5,000 raise, to $55,000, allowing him to pay for teaching supplies and music lessons for his five homeschooled kids. "People back in Idaho said he was nuts," says Nelson, who went to middle school with Price. "But it really energized the employees."

Is there a magic number that keeps workers focused while still generating a profit? Price calculated a figure but never imagined the publicity he's gotten would boost new customer inquiries from 30 per month to 2,000 within two weeks. Customer acquisition costs are typically high, so in that sense, the strategy has paid off. And in this business, customer retention is key. Gravity's 91 percent retention rate over the past three years—far above the industry average of about 68 percent—has been crucial to its success. Maria Harley, Gravity's vice president of operations, looks at a different set of numbers. While the company had to hire 10 more people than anticipated to handle the new business, most nonlabor costs—rent, technology, etc.—have remained the same, thus improving operating ratios. "We don't need our sales to double," she says. "We only need them to increase marginally—by about 25 to 30 percent. When I started being more logical than emotional about this, I said, 'This is totally possible.'"

Six months after Price's announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have also doubled. Gravity did lose a few customers: Some objected to what seemed like a political statement that put pressure on them to raise their own wages; others feared price hikes or service cutbacks. But media reports suggesting that panicked customers were fleeing have proved false. In fact, Gravity's customer retention rate rose from 91 to 95 percent in the second quarter. Only two employees quit—a nonevent. Jason Haley isn't one of them. He is still an employee, and a better paid one.

In fact, the biggest threat to Price's company isn't his strategy; it's his brother. Lucas's lawsuit, scheduled to be heard in May, could ruin Gravity. Price estimates legal fees will reach $1 million by then. The suit was filed on April 24, 11 days after the pay-raise announcement—perhaps to pressure Dan to sell when Gravity was in the limelight, thus maximizing the value of Lucas's share. Dan says Lucas has refused his offer to buy him out for $4 to $5 million. (Lucas's attorney says the suit is unrelated to the raises.)

When asked about his brother, Dan maintains his usual upbeat, grateful attitude: "We're in such a great place with the company and Lucas helped me get here. Anything he gets, I won't begrudge. I'll be glad he got it and think he deserves it." Asked how he can remain so charitable when his own brother is suing him—Lucas was best man at his wedding—Price laughs and says he's been seeing a family therapist for about a year.

Brother or not, he vows to fight fiercely to protect his company. "I will do anything to help Lucas reach his financial goals," Dan says, "as long as it doesn't lead to price increases to our merchants, decreases in services to them, pay cuts, or other types of cutbacks to our investments in our team."

Raising your cost of doing business is generally not considered the best way to increase profits and improve market position. Yet the finish line for Price may be when he can lift his own salary up to market rate—making it easier for the company to replace him, if necessary, and show CEOs that sacrifice by the boss is only temporary when overhauling a company's wage structure. He'd also like to get his $3 million loan back—invested to "take us from a low to a high margin for error," he says—but won't sweat it if that doesn't happen. "I started with nothing," he says. "I can always make enough to support myself."

Price says establishing a $70,000 minimum wage is a moral imperative, not a business strategy. And yet he must prove the business wisdom behind it, not only to keep Gravity from sinking—and going down with the ship himself—but also to achieve his long-term goal of transforming the business world. "I want the scorecard we have as business leaders to be not about money, but about purpose, impact, and service," he says. "I want those to be the things that we judge ourselves on."

Correction, Oct. 25, 2015: This post orginally misidentified the author of this story. It is Paul Keegan, not Jeff Bercovici.