More Businesses are Instituting Minimum Pay Thresholds. Is It About Good Policy or Publicity?

June 27, 2018
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Category: Management

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On a plane ride from a conference in Orlando to Boston, Megan Driscoll was mulling over the future of her workforce — and her company.

Driscoll, CEO of PharmaLogics Recruiting outside of Boston, was returning from the Inc. 5000 conference in 2015. One of the speakers was Dan Price, the CEO of Gravity Payments, which had made headlines when Price raised the minimum pay at the company to $70,000 a year. After hearing Price speak, Driscoll was contemplating some hard questions about pay at her own company.

“What’s a fair rate to pay someone to come in and expect them to do their best work?” Driscoll asked herself. “If someone is struggling to make their ends meet or take their family on a small vacation, they’re not bringing their best self to work every day … I don’t want to earn more because others earn less.”

At that time, employees earned a base salary of around $37,500 for entry-level but could also earn up to $20,000 in commission. The issue is that commissions could fluctuate, so an employee couldn’t rely on that income when applying to rent an apartment or leasing a car. Not even four months later, Driscoll made a big announcement: PharmaLogics Recruiting would raise employee base salaries to a minimum of $50,000 (plus up to $20,000 in commission). Senior salaries were raised accordingly. Increases in other departments (such as administrative staff)  were phased in over time. The total increase in payroll that first year was around $500,000 in additional salaries, according to Driscoll.

“We still made more money after putting $500,000 into salaries.”

Driscoll is one of several executives moving to institute higher minimum pay thresholds at their companies in an attempt to address issues of income inequality or insecurity, and in the process recruit and retain top talent. Gravity Payments was one of the earliest, and most high profile, companies in the movement. But the company also faced internal backlash against its policy and from those outside the company who called the initiative a publicity stunt. (Gravity Payments didn’t reply to requests for comment for this article.)

But Caroline Valentine, President of Austin, Texas-based HR consultancy ValentineHR, says minimum pay thresholds can be both good publicity and good policy. She says a lot of smart companies develop compensation strategies to stay competition in hiring and minimize turnover. “What they do is they look at cost of living for employees, where their employees live and decide if that wage they’re providing is sufficient to be able to live,” she says.

For Driscoll, the minimum pay threshold has already paid dividends. “In 2016, not only did our revenue go up but our profit margins went up,” she says. “We still made more money after putting $500,000 into salaries.” Turnover has also declined. Prior to the pay bump, Driscoll says their turnover was around 55 percent (“typical for a sales organization growing and hiring young people,” she says) but it’s since decreased to 30 percent. PharmaLogics’ current headcount is 85.

Recently, another startup joined the fray. Andrew McConnell, CEO of Atlanta, Georgia-based tech startup Rented.com, announced on April 1 (no joke) that he was raising his employees’ pay to a minimum of $50,000 per year. McConnell says the idea came from Cliff Johnson, the company’s newly hired vice president of sales, who wanted Rented to follow Gravity Payment’s lead on compensation. “I was planning to give some people raises, but he pushed me to say ‘I think we should do more than that,’” McConnell explains.

McConnell was skeptical at first, especially because this change would impact all future hires. But he ultimately decided they could create at least that much impact on the company’s bottom line by rethinking some job functions. “We looked at certain positions that may have been more admin type roles and looked at how we could automate some of that and grow those roles,” he says. “Our number one value as a company is continued growth and improvement. We decided that for some of these roles, sure the activity the person may be doing on the day-to-day may not justify what you’re paying there but by overpaying, we can get people who very quickly can grow into higher level positions.”

It’s early to measure the impact of Rented’s move, but McConnell says expecting more and paying more “attracts more talented people and creates a more loyal sales force and more impactful jobs.” The startup currently has 17 full-time employees and is currently filling six more positions.

“We publish our pay so everybody in the company knows what you earn as you move up the ladder. There are no surprises.”

Valentine says other companies could benefit from Rented’s strategy of automating repetitive tasks and growing employees into higher-level functions. “You could literally save money on all of these no skill jobs and put that towards hiring skilled people and providing training dollars to them to help them learn a new skill,” she says. “Whenever you can create a career path for an employee, you’ve got a way for them to want to stick around.” (Replacing employees can be costlier than simply paying more to retain them, she adds.)

The other benefit for Rented and PharmaLogics is that they’ve been public about the moves without facing the criticism Gravity Payments experienced. For McConnell, the public announcement keeps him accountable to maintaining that $50,000 minimum. “Part of being super public about it is it’s a little bit of Odysseus tying himself to the mast,” he says. “Nothing’s gonna take us off course.”

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Driscoll noted that the public nature of the pay threshold could help tackle another workplace concern: the gender wage gap. “We publish our pay so everybody in the company knows what you earn as you move up the ladder,” she says. “There are no surprises. Jim and Mary earn exactly the same amount.” She recently launched a website, WageTransparency.org, to illuminate gender pay gap issues and she’s working on related legislation with her state representative. If companies feel they can’t afford to pay a living wage, she questions whether they’re pricing their product or service appropriately.

Whether Driscoll and McConnell are part of a soon-to-be broader movement, or an isolated set of small companies performing social experiments, is still open to debate. By and large, the closest thing to minimum pay at most businesses is still the minimum wage, set either at a state or federal level.

The rise of a minimum pay threshold is unlikely to come from a swift change, but gradually through word of mouth as executives implementing the policies share with other business leaders — if it happens at all.

And while some skeptics dismiss these large pay bumps as utopian or socialist, CEOs like Driscoll and McConnell believe the results will speak for themselves. “I think there really is a strong case to be made economically and for the good of a company to find a way to do something like this,” McConnell says.

About

Susan Johnston Taylor has written about business and lifestyle topics for The Atlantic, The Boston Globe, Fast Company and Entrepreneur. Her first-ever job was at a taco stand. She's also worked as a singing princess for children's parties and in nonprofit communications.

Category: Featured, Management


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