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Paying employees $70,000? Not such a bad idea

Higher wages give employees luxury of stressing less about providing basics of life

By Todd Humber

Paying employees a generous salary is a good business practice, not socialism.

Dan Price, the CEO of Gravity Payments in Seattle, has come under fire for his promise to pay his 120 employees US$70,000 per year. According to a CNN article, the plan has come under scrutiny for a couple of reasons — political opponents say it “smacks of socialism.” Also, two employees have quit and he’s apparently lost some clients.

Why the backlash over paying employees a generous wage? It’s a bit of a head scratcher.

A 2010 study out of the Woodrow Wilson School at Princeton University in New Jersey has been trotted out, by Price and others, during the current debate around this compensation practice.

That study found $75,000 was the magic salary number — once workers hit that milestone, they were as happy as money could make them. More money wouldn’t make them happier, but less money would make them unhappier. And the further they fell below $75,000, the less happy they were.

That’s intuitive. One might not have guessed the exact figure, but it’s obvious money can make you happier — up to a point. I recall my first gig out of school as a junior reporter/photographer with the Woodstock Sentinel-Review in 1996. My annual salary was $18,500. Which meant, with student loans, car payment, insurance and rent, I was living paycheque to paycheque with barely any money for groceries, let alone entertainment.

It’s hard for workers in that position to be happy — when you can’t even cover the basics of life, it’s hard to rise above. Think Maslow’s hierarchy of needs. The higher up you go, the more energy you can devote to being the best employee you can be. I firmly believe it.

If your employees are living paycheque to paycheque because they’re not earning enough, if their mind is on how to pay the rent, how to afford food for their family and the fact that weird clunking noise in the car is getting louder and they can’t afford to fix it or buy a new one, it’s going to show up in the workplace.

Lower engagement, lower productivity, distractions. These are not the makings of a strong company. Price knows this, which is why he agreed to take a 90 per cent pay cut and give the money to his staff. It doesn’t make him a martyr. It doesn’t make him Robin Hood.

It makes him a smart CEO.

The move doesn’t come with a guarantee of success. One of his staff pointed out an obvious flaw in the scheme, one that even the most junior HR pro could point out. Just listen to what one of the employees who left said:

“Now the people who were just clocking in and out were making the same as me,” said Grant Moran, a web developer, in an interview with the New York Times. “It shackles high performers to less motivated team members.”

That may be true, but it’s not a compensation-related problem. That’s a performance management issue. Even with a $70,000 salary floor, there needs to be differentiation for high performers — that could come in the form of a higher bonus, more vacation time or other perks.

Less motivated team members shouldn’t be on the payroll. I can’t speak for Price, but I feel pretty confident his motivation to increase salaries was not rewarding slackers — they still need to be dealt with using solid HR practices. Performance improvement plans, discipline and coaching do not disappear with this compensation philosophy.

Instead, he’s trying to elevate his workforce by creating high-performing teams than can be fully present in the workplace, who are committed to their jobs and who earn a decent living in the process.

That’s not socialism. That’s not a CEO run crazy.

It’s just a smart people practice, and I’d bet more on it catching on than being a one off experiment.

Todd Humber is the associate publisher and managing editor of Canadian HR Reporter, the national journal of human resource management. He can be reached at todd.humber@thomsonreuters.com or visit www.hrreporter.com for more information.

© Copyright Canadian HR Reporter, Thomson Reuters Canada Limited. All rights reserved.

Todd Humber

Todd Humber is the publisher and editor-in-chief of Canadian HR Reporter, the national journal of human resource management. Follow him on Twitter @ToddHumber
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