Conventional Wisdom: Pay Yourself First
On the Contrary: Pay Yourself Last
When Gravity Payments CEO Dan Price announced last week that he would slash his $1 million salary and raise his employees' pay to at least $70,000, it made waves in the business world. But I'm left with a simple question: Why was he paying himself $1 million in the first place?
Don't Poach Your Growth
Price said he plans to drop his salary to $70,000 as part of the overall shift in pay structure. That's big, but here's what's really astounding--his previous salary of $1 million is nearly half of Gravity Payments' estimated $2.2 million projected net profit this year.
I've never come near paying myself that percentage of my company's profits. The scary truth, the one I didn't tell anyone during the early days (especially my employees) is that there were years where I only took home enough to buy us groceries. (Fortunately my wife was working and could buy us everything else.) The first year I was in business for myself I took no salary because I had to pay my employees.
Why? Because from day one, I realized that my employees were worth as much, if not more, than me. You should be hiring people with the skills you lack, and that's extremely valuable.
Be a Chief, Not a Hero
I sympathize with Price, I really do. Fairly negotiating pay and compensation is a dance, and it's a complicated one. As a CEO, of course you want everyone to be happy and have all the money they need (or at least you should). You want to be the hero, the one who sweeps in and gives everyone a raise. But being the hero can't be your goal.
That's because your company already has a goal. Mine is to make the best damn fans and lights possible. Gravity got in the game to make processing payments more affordable. Employee loyalty and retention matter--a lot--but they aren't a magic bullet; a company grows because everyone contributes to reaching the goal.
So, what's a CEO to do?
While they aren't all glamourous or headline worthy, there are plenty of options for compensating employees that take the overall health of the business and employee contributions into account. One of my favorite is bonuses, which I've written about before.
Another is our Stock Appreciation Rights program, which I started in 2007. As a privately held company, it's our version of a stock option. There's no buy-in required (or permitted), and it rewards participants based on the effort and commitment they contribute. If the company grows, their shares increase in value. This program keeps our employees focused on what's right--not just for tomorrow, but next year and the next decade.
The Problem Behind Big CEO Salaries
My real issue with the Gravity story, and with all excessive CEO compensation, is thinking about pay in terms of what you need now instead of what your business, and your employees, will need in 5, 10 or 20 years. If you think the most important thing about the Gravity Payments story is the feel-good bit about $70,000 salaries, you're dead wrong.
Don't imagine this is a debate about under-paid fast food workers, basic ethics and minimum wage. It's not. This is also not a case of a corporate executive skimming a tiny percentage of a large profit and making a salary that would make an NBA first-round draft pick blush.
Instead, this is a simpler story, an overcorrection for the bad business decision to pay yourself first (and most). It's a cautionary tale for business owners, managers and investors: If you take a large percentage of your company's profit for yourself, you'll need a big, sweeping gesture to keep people energized about your work.