People love the story of Dan Price, the CEO of Gravity Payments in Seattle, who cut his $1 million annual salary to $70,000 and raised the salaries of his lowest-paid employees up to a $70,000 floor. Price says he was inspired to make the move after reading that more money leads to more happiness, but only up to the point of $70,000 a year or so.
What we can learn from the CEO who took a 93% pay cut to give his team a raise
The original New York Times report quotes Price saying, “Is anyone else freaking out right now. I’m kind of freaking out,” right after making the announcement. It’s a wonderful story, and Price deserves the plaudits he’s receiving.
Unfortunately, the big questions raised by the story have a couple of not-so-feel-good answers. But Price is getting something important right: a more equal world is going to be a happier world.
What if every CEO did this?
The most natural question is to wonder what would happen if more CEOs acted this way. After all, though $1 million is a lot of money, it’s far from the top of the executive compensation sweepstakes in America. But as Danielle Kurtzleben pointed out last year, it turns out that the executive compensation packages of really big companies’ CEOs don’t actually go that far when stretched across huge enterprises.
Walmart chief Douglas McMillan, for example, pulled in $25 million in 2014. That’s a ton of money. But Walmart has about a million hourly employees, meaning that a drastic pay cut for McMillan would only finance a very modest bonus for the entire team. If McMillan cut his salary to $70,000, for instance, he would only be able to give each of his employees a raise of not quite $25.
Walmart is, obviously, an extreme case. But the huge divergence in what Price can achieve with a pay cut and what the much-better-paid McMillan can achieve with a pay cut goes to show that the math of this kind of enterprise is heavily dependent on the size of the company. For smallish companies, what the boss pays himself really is the key to what he has left to pay his workers. Big companies have much more complicated pay structures. Compressing the salary distribution up and down the line at Walmart could certainly raise pay for rank-and-file associates considerably, but it would mean forcing not just one boss but hundreds of highly paid subordinates to take pay cuts.
The research that inspired Price is probably wrong
Even worse, Price's reading of the happiness literature is likely mistaken. He appears to have been relying on a paper by Daniel Kahneman and Angus Deaton. But subsequent analysis by Betsey Stevenson and Justin Wolfers disputes this, and finds that the reason you see rich people trying to amass even more money is that there is no satiation point. So $70,000 is better than $25,000, but $7 million is even better.
Here’s a chart summarizing their findings:
Across countries, life satisfaction increases with the log of household income. In other words, it’s true that if you’re already pretty affluent, a little money won’t make you much more content. But that doesn’t mean money is useless — it just means you need a lot more.
Redistribution increases well-being
That point about how much money you need to become happier cuts both ways, though. What it says is that the well-being Price would lose by dropping from $1,000,000 a year to $980,000 a year is smaller than the well-being gained by a rank-and-file employee going from $50,000 a year to $70,000 a year. Which is to say that redistributing income from the haves to the have-nots makes the world a happier place.
In a corporate setting, that means a small raise to low-paid workers will accomplish more than a medium raise to workers who are already well-paid. In a political setting, it means that taxing the rich to finance tax credits or health insurance for the poor and the working class will make for a happier country.
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