How one company destroyed its employee incentive plan with one act of generosity

deflate baloonIt seemed like a good idea at the time and an incredibly generous act on the part of the company. When Gravity Payments founder and CEO Dan Price announced that he would raise everyone’s minimum wage to $50,000 a year with $10,000 a year increases until everyone’s minimum was at $70K in 2017, it drew cheers and kudos.

But it hasn’t worked out so well.

In an article in Forbes dated August 2, 2015, contributor David Burkis observed that the company is struggling to deal with the implications of the plan (emphasis mine). Some of the most valuable people have left the company and others indicate they are on their way out, too.

One departed employee said that “she was initially excited about the new policy, but as she thought about the details she began to get dismayed. “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.”

Notice that in the past sentence of paragraph three above is the phrase “most valuable people.” Many novice or naïve business people don’t seem to understand that some employees are more valuable than others. A person’s hard and soft skills, loyalty, experience, and job-related acumen add more value to a company than those possessing less.

The downside to across the board raises at the entry level should have been obvious to Price, but apparently they weren’t. He is now renting out his house and took a substantial pay cut himself to keep the doors open.

Why?

Because he failed to appreciate the nuanced layers of motivation. When you raise base salaries substantially and those of proven performers only minimally you erode the incentive you’ve put in place. While those whose abilities are less developed and less proven are rewarded, those employees whose abilities are more developed and proven more effective are perceived to be worth less. It redistributes the balance of payments, as it were, to favor the less valuable as much as or more than the more valuable.

In short, it pisses off the very people you do not want to piss off.

Always, and I mean always, reward producers and reward them well. You want to grow the less productive employee into a more productive one. You DO NOT want to inhibit the growth or productivity of the more effective and productive employees.

Price did precisely that and in so doing, did himself and his company much harm. It may have seemed generous to Price, the most valuable people in his company do not see it that way.

Now, before you object that we should all feel happy at the advancement of others, let me suggest we need to live in the real world where there are real emotions and complex psychological forces with which we must contend. It simply does not work. We are emotional being and how we feel significantly affects how we perform. Price should have substantially increased the pay of everyone proportionately, which I am sure he could not economically afford to do. What he did in essence was to make the most productive appear to sacrifice the most. Others got substantial raises while they did not.

So what should he have done?

If he wanted to increase the base salaries, he should have instituted a series of pay increases based on key and critical productivity markers. When an employee reached a defined level of competence, performance, and productivity, s/he would receive an appropriate increase in pay or benefits. And it should apply to everyone.

Facebooktwittergoogle_plusredditpinterestlinkedinmail