Question

In April 2015, CEO Dan Price of Gravity Payments made a shocking announcement. Price, who is also founder and co-owner of Gravity, decided to cut his own salary by 93 percent, and then to use that money—along with a big chunk of corporate profits— to ensure that every single one of his employees makes a minimum of $70,000.1

The news was certainly welcomed by Gravity’s employees. (For the lowest-paid employees, the raise to $70k meant a doubling of their salaries.) And Price was widely applauded by commentators and on social media.

Price’s move was especially noteworthy in an era in which many CEOs have been criticized for accepting astronomically high levels of pay. In a 2015 article on executive compensation, Bloomberg.com reported,2 for example, that Elon Musk, the entrepreneurial CEO of Tesla Motors Inc., earned just over $100 million in 2014. But that’s far from the high end of executive compensation: The same article noted that Nicholas Woodman, CEO of GoPro Inc., had earned a whopping $285 million that year. Criticism of CEO pay has not focused solely on the absolute amount earned, but also on the ratio of CEO pay to what those CEOs’ employees are paid. According to the Bloomberg article, “The CEOs of 350 Standard & Poor’s 500 companies made 331 times more than their employees in 2013.”

Some people defend high levels of pay for CEOs, pointing out that the highest levels of compensation are achieved through stock options, which means that CEOs do well only when the value of the company’s stock goes up, a sign that the CEO is actually doing a good job. Others, however, are skeptical. As the Bloomberg article points out, “Stock options, once believed to align executives with shareholders because they appreciate when the stock price rises, are now derided for encouraging short-term financial engineering at the expense of long- term planning.” In other words, stock options encourage CEOs to find short-term ways to boost stock prices (such as reducing costs by cutting employees), even if those moves aren’t in the long-term interests of the company and its shareholders.

Let’s turn back to Price’s decision. Different people had different reactions to the decision. Some applauded it as a move toward justice or fairness in compensation. Others thought it was a savvy business move, aimed at producing better outcomes for Gravity Payments by motivating employees and gaining free publicity for the company. Still others thought it spoke well of Price’s character; to them, Price looked like what a good CEO ought to look like, in comparison to the greedy CEOs of so many other companies.

questions:

1. Do you think Dan Price is a hero? Why or why not?

2. Are there any further facts that you would want to know before making a judg- ment about this case?

3. GravityPaymentsisprivatelyownedbyDanPriceandhisbrother.IfGravitywere a publicly traded company with thousands of shareholders, would that change your view about the ethics of his decision? If so, in what way?

4. If you were an employee at Gravity Payments, already making $70,000, how would you feel about employees who made half what you make suddenly mak- ing the same amount as you?

Answer 1

1. As per the above part of the information given, it seems that Price is a hero and he is surely looking after the employees working under him. Price seems to motivate its employees to work hard and loyaly to the company. But at the same it will also affect the hard work to reward equation for many employees.

2. Yes, there are a few facts that need to be analyzed before making any concrete judgment about this case. Firstly there is no light thrown on the average salary of the employees in the firm. If the average salary of the employees in the firm is less than $70,000 then it is going to be a motivational factor orelse it is unfair for the employees. Secondly there is information given on the salary structure of Price, whether he is letting go his stock options or other perquisites. If he letting go his perquisites or allowance section then it will help the company to save money and earn more profits.

3.If Gravity Payments were to be a publicly traded company, then it would surely affect the view about the ethics of the firm because the firm is going to use a big chunk of corporate profits to increase the salary of the employees. If the firm is publicly traded then the profits belong to the people holding thier shares. Firm's decision to use the profits to increase thier salaries would not have been welcomed.

4.If I were an employee already making $70,000 the I would not welcome this decision because if I am getting paid the same as the person who is not working as hard as I am, then it will surely demotivate me. Salary structure in any firm is determined on factrs like the criticality of the work done, amount of hard work and many others. If these all factors are avoided then a part of the employees will be de-motivated.