A $70,000 Reality Check

20130504_FBD002_0“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” ― Ayn Rand

Politics is about winning elections while economics is about reality.  Fantastical idealism vs. the real world.

A difference between politicians and economists is in the questions they ask an interested audience.  The politician will ask, “what is it that you want?” and seek to gain favorability by promising those desires.  An economist will ask, “what do you want more?”  Underlying this question is the basic comprehension of the concept of a trade-off that is all but irrelevant, and potentially perilous, in populist, partisan politics.

All elements of business, welfare, investment and taxation are interconnected by the over-arching economy of a nation.  As the world has grown closer, through technological achievement and innovation, the economies of other nations also play a role and affect our own.  Economics is not necessarily good or bad in the moralistic sense but seeks to study and predict the cause and effect of particular actions based upon given rules and understood truths of human nature.  However, the values underlying business practices will determine the destiny of a business.  And such economics are not prone to sympathy, they do not care about the subjective sense of what is right.  Economics deals with what is.  It is the business of reality.

Enter Dan Price, the CEO of Gravity Payments in Seattle, who decided a few months back that his “values-based” company would raise its minimum pay for employees to an annual $70,000.  This action was taken in the midst of other calls for an increase in the minimum wage so, predictably, Price was hailed as a hero of the working class.  This was a decision based on need, not fiscal responsibility or practical, financial, business motivations.

As Price told Time magazine back in April, “To me, once you know the right thing to do, and it’s the right thing for everybody involved and it’s going to be beneficial to everyone, it becomes a moral imperative to actually do it.”  This is undoubtedly a noble thought, on its face, but economic reality is not so forgiving.

To risk being the bearer of bad news: there is no such thing as “the right thing for everybody.”  There are only trade-offs and opportunity costs.  To spend anything, be it time or money, in one place, means that that same item cannot be used for anything else.  And with that, the economic reality of Price’s decision has now started to take effect.

Entry-level employees have seen their compensation double in some cases while those employees who worked their way up to beyond the baseline $70,000 have seen no benefit of this “moral imperative.”  Consequently, consternation and corporate conflict have now ensued.

Here is a story from the New York Times of one employee:

“Maisey McMaster was also one of the believers [of the compensation plan]. Now 26, she joined the company five years ago and worked her way up to financial manager, putting in long hours that left little time for her husband and extended family. “There’s a special culture,” where people “work hard and play hard,” she said. “I love everyone there.”

“She helped calculate whether the firm could afford to gradually raise everyone’s salary to $70,000 over a three-year period, and was initially swept up in the excitement. But the more she thought about it, the more the details gnawed at her.

“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,” she said. To her, a fairer proposal would have been to give smaller increases with the opportunity to earn a future raise with more experience.

“A couple of days after the announcement, she decided to talk to Mr. Price.

“He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.”

Predictably, Ms. McMaster is no longer an employee of Gravity Payments.

Need, charity, the greater good all sound great to the general populace because everyone assumes that they will personally benefit from such action.  The problem with this type of business plan is that plenary payments to employees in the form or equal compensation seek to equate the inequitable characteristics of humankind.  Namely, the inherent abilities of every individual.

People are not simply clones with identical skill sets driven by ambition and dedication.  Some work very hard but not very well, others seem to skate by while exuding very little effort.  A few work hard, and well, all their lives.  The fundamental purpose of compensation is to monetarily represent all of those intangible facets of human beings.  And the only way to successfully run a business is to compensate based upon a return on the investment made in an employee.

A business owner cannot pay an employee more than that employee generates for the business in financial returns without losing money and, subsequently, going out of business.  To compensate in order to correct perceived social inequalities will only result in further inequality and financial ruin.

That, for better or worse, is economic reality.

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