Raising minimum salaries and lowering executive pay always sounds great on paper. But sometimes when you lower the ceiling and raise the floor, you squeeze people in the middle.

That, at least, is one early moral of the still-forming story at Gravity Payments. To quickly fill you in: In April, CEO Dan Price announced a $70,000 minimum salary at the 120-employee, Seattle-based credit card processing company, cutting his own seven-digit compensation to do it. 

The business media seized upon it like a pack of wolves eager for fresh meat because it relates to two hot-button topics, especially nearing an election year: minimum wage and executive compensation. 

For Gravity, a firm that has appeared six times on Inc.'s annual list of fastest-growing private companies, the upside was a tsunami of publicity, most of it positive. And the publicity brought in sales. "Three months before the announcement, the firm had been adding 200 clients a month. In June, 350 signed up," notes the New York Times

Of course, not everyone was blindly elated by Price's elevation of Gravity's salary floor. At the time, Inc. columnist Carey Smith, founder and CEO of Big Ass Solutions, a $122-million manufacturer of large fans and lights based in Lexington, Kentucky, asked an exceptionally salient question: Why was Price paying himself $1 million in the first place?

While Price's decision to drop his own salary to $70,000 as part of the shift was admirable, Smith questioned the wisdom of Price's previous salary--nearly half of Gravity Payments' estimated $2.2 million projected net profit.  "I've never come near paying myself that percentage of my company's profits," Smith wrote. 

A thorny transition.

Now that three months have passed, other reasons for skepticism have emerged. Here are a few the New York Times touched on: 

  • Gravity was not ready for the abundance of incoming inquiries. "And with so many eyes focused on the firm, some hoping to witness failure, the pressure has been intense," notes the Times. To manage the attention, Price has hired a dozen more employees--all at a generous minimum salary.
  • Two valuable employees quit, telling the Times it was unfair to double the pay of some new hires while the longest-tenured employees received negligible raises or none at all.
  • Employees balked at the high-profile nature of the move. Web developer Grant Moran, who left, expressed the frustrations of several staffers in telling the Times, "I was kind of uncomfortable and didn't like having my wage advertised so publicly and so blatantly. It changed perspectives and expectations of you, whether it's the amount you tip on a cup of coffee that day or family and friends now calling you for a loan."
  • Some entrepreneurs in Seattle's intimate small business community believe Price's move made them look stingy.
  • Price's older brother, Gravity co-founder Lucas Price, who owns 30 percent of the company, filed a lawsuit. He told the Times in an email: "Dan has taken millions of dollars out of the company for himself while denying me the benefits of the ownership of my shares, and otherwise favoring his own interests as the majority shareholder over my interests." Now the company has to spend on legal fees at a time when its margins were already shrinking, thanks to the pay raise.  

What's a founder to do?

You can see in Gravity's story the hallmarks of other high-profile change initiatives that throw a wrench in the established way of doing things. 

At Zappos, for example, the well-publicized move to a holacracy-style of management meant 14 percent of its workforce--210 of 1,500 employees--took buyouts, instead of staying aboard as the online retailer transitions. While only time will tell if Zappos' move is the right one, detractors have cited the defections as a reason the move was either ill-advised or poorly executed. 

And just as Gravity employees are struggling to balance the workload that accompanies a boost in inbound inquiries with all of their regular tasks, Zappos' employees, too, have had to learn a new system of governance without neglecting their everyday jobs. They have to keep selling shoes, even while mastering the nuances of the holacracy rulebook. "The challenge with the rollout is, it's not like we can completely shut down the business to roll it out," Zappos' John Bunch, who is leading the company's holacracy initiative, recently told Inc. "All business needs have to keep being met."

All of which begs a basic question: What are you supposed to do, as a founder, if your quest to make your organization more fair and just necessarily means subverting the incumbent compensation policies you helped to establish in the first place? 

As Smith points out, you need not make a show of it by imposing an elevated pay floor. There are subtler methods. Two of his favorites are cash bonuses and the company's stock-option program, which is not a buy-in program but, instead, that awards employees with stock for their effort and commitment. Will these methods generate headlines? No. But they also won't generate internal or external backlash.

None of this is meant to prematurely make a judgment about Gravity's initiative. Keep in mind: Only three months have elapsed. What's more, Price's timing in addressing the topic is superb. CEO pay--especially the gap between CEO pay and average worker pay--is about to become a much bigger deal, thanks to new SEC rules slated to go into effect in a few weeks.

In addition, there's a small but significant movement among tech entrepreneurs, venture capitalists, and prominent academics to address the growing income inequalities created by the digital economy. It's a movement President Obama is well aware of.  

Not long ago Inc. asked one of those academics--MIT Sloan's Erik Brynjolfsson--what entrepreneurs could do to help solve the problem. He said that a crucial first step for founders was to reframe their big-picture thinking about labor as a cost center. Price has taken that key first step. The move may have encountered some early stumbling blocks, but that's often the price of leading the way where others have feared to tread.

Published on: Aug 3, 2015