HOW TO AVOID LAYOFFS
You may have heard of Dan Price. He is the founder and CEO of Gravity Payments, a credit card processing and financial services company based in Seattle, Washington. Price made waves in 2015 when he announced a new $70,000 minimum wage for his 120 employees. He achieved this by cutting his own $1.1 million salary to just $70,000. Fox News labeled him the “lunatic of all lunatics.” Presidential Medal of Freedom awardee Rush Limbaugh declared, “I hope this company is a case study in M.B.A. programs on how socialism does not work, because it’s going to fail.”
In over five years since implementing this decision, Gravity Payments has thrived as a business. The median salary at the company is now approximately $100,000. In 2018, the company processed $10.2 billion in payments versus just $3.8 billion in 2014. Its annual revenues at the start of 2020 were trending around $48 million.
… our revenue has tripled and our headcount and customer base have doubled. Meanwhile, our employees have made major improvements to their lives, such as buying houses, starting families, saving for retirement, and eliminating debt.Dan Price, CEO of Gravity Payments
However, Gravity, like countless businesses in America, was hit hard by the sudden economic downturn in March. In a flash, their revenue dropped by 50 percent. But, unlike many businesses, Gravity has found a way to avoid laying off its staff. In fact, as of April 7, the company has not laid off a single employee. How is this possible? Price cites various strategic advantages and leadership decisions that have enabled the company to weather the storm.
- The $70K Minimum Wage Policy: Gravity’s employees are financially secure and have been able to save. Without typical financial stresses, they have been able to focus on productivity and creative problem solving. According to Price, “studies show that companies that pay a living wage are rewarded with increased productivity and improved customer service.”
- An Altruistic, Bottom-Up Solution : In March, Price and his COO spent 40 hours discussing the economic crisis with his 200 employees. He explained to them that, in the absence of an innovative, company-wide solution, Gravity would have to layoff 20% of its workforce and raise prices. In response, the team quickly identified $200,000 in easy-to-implement monthly expense reductions. But, beyond that, many of the employees offered to take pay cuts to preserve their collective jobs. So Price surveyed the entire company. 98% of the staff volunteered to temporarily reduce their compensation by 10% to 100%. Price and the COO cut their own compensation to zero.
As a result of these measures, Gravity has temporarily reduced its monthly expenditures by $600,000 and has doubled its runway. In other words, it now has ten months of cash reserves instead of just five.
The pandemic and economic disparities
The coronavirus pandemic has exposed significant social and economic inequities around the world. Certain business norms in the United States have exacerbated the impact of the economic downturn on American workers.
- CEO-To-Worker Compensation Ratio: In the United States in 2018, CEOs of the largest 350 companies received compensation, on average, that was 278 times the median employee compensation at those companies. This is up from a ratio of 58-to-1 in 1989 and just 20-to-1 in 1965. Since 1978, average CEO compensation has increased by 1008 percent. Compensation for they typical worker, however, has only risen by 12 percent. Average annual CEO compensation among S&P 500 companies has increased by $5.2 million in the last decade, whereas worker pay has risen by less than $8,000.
- Stock Buybacks and Dividends: Rather than increase employee compensation or invest in research-and-development, American companies have spent an exorbitant amount of money on stock buybacks and shareholder dividends. According to Harvard Business Review, senior corporate executives implement stock repurchases in order to “manipulate their companies’ stock prices to their own benefit” and that of other share sellers including investment bankers and hedge-fund managers, “at the expense of employees, as well as continuing shareholders.” In the last decade, S&P 500 companies have spent over $4 trillion on buybacks and over $3 trillion on dividends – approximately 91% of net income.
Prior to the pandemic, some 40% of Americans could not afford an unexpected expense of just $400. As of April 5, some 30% of Americans renters had not paid their April rent. Many are hoping that one silver lining of this crisis will be a reevaluation of compensation practices in the Unites States and a more equitable distribution of wealth.