One for the Money… Does money buy happiness? Several of the 120 employees at Gra

Question

One for the Money… Does money buy happiness? Several of the 120 employees at Gravity Payments, a credit card processing company based in Seattle, are about to find out.75 The company’s founder, 29-year-old Dan Price, made the news in the spring of 2015 when he decided to bump up the salary of 70 employees to a new “minimum wage” of $70,000. Now, everyone in the company will be making at least $70,000. Some employees at the company, where the average salary was $48,000, doubled their pay, and others got a nice salary increase—probably enough, you’d think, for employees to be pretty happy about! Money = Happiness, or Does It? Why did Price do it? He said that he had been thinking about employee pay for a while, especially after reading several news reports about the glaring pay disparities between corporate CEOs and employees, which he says struck him as “ridiculous” and “absurd.” Also, Price had read an article on happiness by two Princeton researchers (one a Nobel Prize-winning psychologist) who had surveyed 450,000 U.S. residents on whether money could buy happiness—both as it affected overall happiness but also how it affected day-to-day life. The researchers concluded that people claimed to be happier with each doubling of income but only to a point. But even more interesting was the dollar amount that respondents said would make their daily life more pleasant: about $75,000 a year. Price decided to offer his employees a minimum salary of $70,000. He felt that giving his employees this amount could enable many of them to buy homes and pay for their kids’ educations. To pay for the salary increase, Price is taking a pay cut from his annual $1 million salary down to $70,000. Also, the company will have to use 75 to 80 percent of its profits to help cover the cost. Some management consultants are questioning the move, wondering if it will affect employee productivity and pay off in the long run. Concerns about what happens to employee motivation include: Will employees be less motivated to work to be promoted to higher levels of responsibility, and would those employees who put in additional effort above and beyond their current tasks lose the incentive to do so (“why should I work harder if we all get the same pay”). And what happens to the CEO’s motivation—would Price himself lose the incentive to want to grow the company? Then, there’s also the question of what happens if the company’s profitability starts to fall. Only time will tell if such issues are even relevant.

Discussion Questions

11-17 What problem(s) might managers face under this new pay approach and how could they use knowledge about employee motivation to help them deal with those problem(s)?

Explanation / Answer

Q1) Below are the problems that managers might face under the new pay approach -

1. As the minimum pay policy results in increase in pay for most of the employees, they become complacent in doing their work.

2. Motivation of the high performing and deserving employees decreases as the pay disparity decreases

3. Overall performance of the firm gets negaatively impacted.

4. Employee retention increases while productivity suffers.

Q2) Below is how the managers can use knowledge about employee motivation to help deal with the problems -

1. By increasing the CTC of employees with high variable component which is dependent on performance. This motivates the employees to work hard to get higher bonuses.

2. By rewarding and recognizing the consistent performers with additional perks. This increases consistency in performance of the employees.

3. By highlighting how the pay disparity is relatively lesser between the top management and the lower level employees compared to competitor firms.

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