Saturday, 18 April 2015

Forget the Minimum Wage, Welcome to the 'Happiness Wage'


Dan Price, who founded Seattle-based credit card
processing startup Gravity at just the age of 19.
Earlier this week, Dan Price, the founder of a credit card processing company called Gravity, saw his salary drop from a million dollars to a figure around $70k- a drop of 93%.
This reduction, strangely, wasn't due to the company suffering or another authority acting upon him- on the contrary, he was the instigator of this unselfish act, part of his company's wage overhaul that has gained much attention in the past few days.

Price's announcement that his new wage would set the minimum wage for all of his 120 employees was not new in its nature- many companies, such as JP Morgan, Chelsea FC and Deloitte have already committed to giving all their employees a 'living wage', one that is above the minimum wage and in line with the ever increasing cost of living.

But minimum wage chosen by Dan Price itself is quite staggering. The new minimum of 70 thousand dollars (£47,000) means that 90 (70%) of Gravity's 120 staff will be receiving a pay rise, a staggering amount that clearly will take a toll on the company's finances.

Of course, this move has been calculated meticulously. If we take the average US wage of $51k to be representative of Gravity staff, Price's $930k wage decrease alone is enough to 49 of his staff to have their pay boosted to $70,000. Of course, that still leaves 41 staff to fund- but Price plans to spend up to 80% of the company's forecasted profits over the next three years to ensure this wage promise is met.

It is likely that Price will be receiving more than just his $70k salary, just as so many of those 'one dollar CEOs' do. Being a co-founder of the company, he's likely to have a sizeable amount of shares in the company.

So, what inspired Price make this bold move? According to The New York Times, inspiration came from multiple sources, most notably Price's own experiences of friends struggling to make ends meet on less than $40k. "It eats me inside," he stated.

With regards to the specific figure of $70k, the idea came from Princeton economists Daniel Kahneman and Angus Deaton, whose studies on potential causal effects of money on happiness concluded that "emotional well-being also rises with log income, but there is no further progress beyond approximately $75,000.". Essentially, they found that money buys happiness- but this causal effect wears away once surpassing $75k. Think of this as not a minimum wage but a kind of 'happiness wage'.

The USA currently is in an appalling state of income inequality across the socio-economic spectrum, with the executives of society clearly detached from the rest. The average American CEO salary of around $11.7m is 331 times that of their average employee- and this gap is something Price himself seeks to address with this minimum wage. "The market rate for me as a CEO compared to a regular person, it's absurd," he said in an NYT interview. "As much as I'm a capitalist, there's nothing in the market that is making me do it."
Mohammad Lone Editor