
Here's What Really Happened at That Company That Set a $70,000 Minimum Wage - Thorondor
http://www.inc.com/magazine/201511/paul-keegan/does-more-pay-mean-more-growth.html
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kspaans
> he has sold all his stocks, emptied his retirement accounts, and mortgaged
> his two properties -- including a $1.2 million home with a view of Puget
> Sound

Maybe I'm missing something, but how is a $1.2m mortgage affordable on
$70k/year? Did he not remortgage the whole value of the house?

~~~
rdancer
He sold the mortgage to his company, for stock.

The company takes out a mortgage, secured by the house he owns, he gets stock
in return. If the company fails to pay, house gets foreclosed on, but he still
keeps the stock.

~~~
linkregister
Are you speculating or is that substantiated?

"He sold his stocks" implies stocks in other companies.

He can't increase his equity (50%) in his company until he buys out his
brother. Am I missing something?

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wtbob
I suspect that the real reason for the raises is the dispute with his brother:
by paying profit out to employees, he doesn't have to pay it as dividends to
his brother.

~~~
smt88
That is a reasonable suspicion, unless you actually read the article.

1\. The lawsuit was filed _after_ the pay increase.

2\. "Profit growth continued to substantially outpace wage growth." So
basically the company is more profitable than ever.

3\. This guy is an outspoken advocate of paying people an equitable wage. It'd
be a lot of trouble go to through all of that charade just to pay his brother
less.

4\. Profits don't always have much to do with the value of a company, which is
what the lawsuit is about. Furthermore, the lawsuit might be about the
documents they signed (or didn't sign!) related to selling stakes to one
another.

~~~
asn0
1\. The lawsuit was likely an escalation of the long-running dispute that
started early on, also mentioned in the article.

3,4. People will go to extraordinary efforts when fighting over ownership or
money. There's enough value and profit in this company to be worth a lot of
trouble.

It's too early to know what Mr. Price's real intentions are. I'm waiting for
the Wired follow-up in 3-5 years.

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GeoDeV
Wages are subject to the law of supply and demand, just like every other
aspect of economic life. Since the CEO seems to be paying well above the going
market rate, I doubt that this is sustainable for the long run. Yes, he's
partially compensated for the imbalance by cutting his own pay, but it won't
be enough. Also, the rapid growth of the company will also buy him some time,
but that can't go on forever. The article's author seems to know little about
capitalist economics beyond the conventional wisdom, most of which is wrong or
non-essential. And if Rush Limbaugh did in fact call the CEO a socialist, then
Rush Limbaugh doesn't understand what socialism is. Having said all this, I
would still like to see this company succeed, just like Henry Ford did many
years ago with a similar tactic.

~~~
rdancer
The cost of your inputs has little to do with the price you can charge for
your outputs. Those are two supply-demand curves, which have very little to do
with each other. Note that there is an infinite number of business models
where the inputs curves are way above the outputs curve, and those are the
business models that never can possibly be profitable. Increase of minimum
wage (albeit this extreme) only raises the cost of inputs, and makes the set
of unprofitable business models larger; there is no qualitative difference to,
say, raising the cost of oil 300%.

Wages in aggregate eat directly into your profits, so if you're happy with
lower profits and lower wages for executives, you absolutely can raise wages.
If you pay 70k/year in low-margin-per-employee industries, your will
inevitably operate at a loss, but this company is not low-margin.

I would also love to see this succeed, but maybe giving employees non-voting
stock would better stave off the possibility of running the business into the
ground.

~~~
evanpw
In an economically idealized world, if someone pays above-market wages then
you would expect a competitor to appear that will charge less to their
customers while making the same profits, destroying the first business.

Of course, in that idealized world, there are no "excess profits" (profits not
commensurable with risk), so it should be impossible for the company to raise
wages like that anyway.

So the real question is: why is this company so profitable, and can that
continue indefinitely? Or does this guy just have such a high tolerance for
risk that "acceptable profits" for him are unacceptable for any possible
competitors?

~~~
Jtsummers
Employees are part of that market as well. If there are two companies, one
paying market wages, and one paying more, the employees will move to the
second company. The second company now has a larger pool (and potentially
better pool) of candidates to choose from than the first.

The first company may do better on margins per sale, but the second will have
better quality/productivity per employee.

~~~
evanpw
This is a valid point, I think the effect will usually be small.

1\. If a company is paying above-market wages, then by definition there are
more people who want to work there than there are available spots, so the
second company will get some of the overflow.

2\. The market for a particular kind of labor (e.g. phone techs) is usually
much larger than whatever market for outputs these two companies are involved
in (e.g., credit-card processing), so one company paying above-market wages is
unlikely to change the market wage level very much.

This could definitely break down for some very specialized jobs.

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rdancer
This _is_ socialism. Paying wages that are 50k over the market creates
enormous incentives for corruption. The CEO seems to be a devout Christian,
and I want to hope that all the employees are strongly moral people, but to
paraphrase the parable of the camel and the needle, it is extremely difficult
to be both rich and righteous at the same time.

There is a pressure on the people to outsource much of their work at market
price, skimming the profit. People are clever, they will find a way.

It also puts an immense value on getting the job (possibly by deception or by
getting rid of the incumbent in some way), and then staying at that job at all
cost. The risk-aversion will be through the roof. There will be absolutely no
back-talking. The managers will never be challenged, no matter what they do,
by their underlings. Morale and the working conditions will deteriorate as a
consequence, with negative effect on the bottom line.

All the above used to be the norm in various forms in the Soviet bloc when I
was a kid. Those of you who spent some time in a socialist country will
recognize the problem.

I hope that this experiment stands the test of time, and we can all learn from
it how to make employing people more humane. But I won't be holding my breath.

~~~
GeoDeV
This is definitely not socialism! There is no coercive government intervention
here. It is the CEO of a private company paying his employees above market
rate. One of the many benefits of a free market is that you will often see
experiments like this. Some will fail, some will succeed, but no one will go
to Siberia. Socialism is political system, an incredibly irrational and
immoral one, but this is merely a business decision taken by a single CEO
exercising his own independent judgement.

~~~
rdancer
One of the aspects of socialist economies is that unlike in free-market
economies, wages are not set by the market. Whether they are set by the CEO or
the Central Committee is a distinction without a difference.

You can swap the word "capitalism" in for "socialism" in your comment, and
those statements would still work. Socialism didn't fail because it were
monstrous. It failed, because we ran out of money and the will to live in
squalor.

~~~
landryraccoon
I don't get it. If I hire a housekeeper and she asks for $10/hr but because I
like her a lot I offer her $20/hr, are you arguing that's socialism? It's my
money and I can do whatever I wish with it - that's capitalism at it's finest.

The CEO owns the company. If he has total control, he could instead of paying
his workers more simply buy himself a jet or donate it to a church.
(Obviously, if his shareholders object, he'll have to convince them to go
along as well). If you want to think in terms of market wage, what he is doing
is paying them market wage, then unilaterally deciding to give them a "big
tip" at his own expense - which happens to bring their total compensation to
$70K a year. That's still capitalist, since it was his money to give away in
the first place. He could give it all to Donald Trump instead, if he wanted to
- the fact that he happened to give it to his employees is almost arbitrary.
The only issue is whether he can afford to keep it up, but that's entirely on
him.

~~~
rglullis
If I understand the parent correctly, the argument is that any artificial
method to establish a price to wages will lead to corruption.

Your example is talking about one housekeeper: if she notices that she can
arbitrage on your generosity, she can pretty much contract someone else to do
her job for $10/hour, and not even show up and still earn $10/hour. If you
object to it, it is a signal that you value one's work more than the other,
and then we are not talking about market-clearing prices anymore, are we?

~~~
Jtsummers
She can be fired, she's not entitled to that $20/hour. Cut out the middleman,
though the current "free market" in the US is going to more middlemen and rent
seekers so she'd be right at home here.

~~~
rglullis
Yeah, but we are making assumptions about market-clearing wages and rational
agents, here. Anyone that gets to the position of making above-market wages
will use this arbitrage opportunity and would be fired, if we followed your
strategy.

In the end, the only way to end this and to actually get your house cleaned is
to pay market-level wages.

~~~
Jtsummers
Ok, if you're assuming strictly rational agents. If they realize they'll be
fired for contracting out their work, then wouldn't the _rational_ thing be to
continue working rather than contract out and retire early on the higher
income?

Or to train people to do as well as you and set up your own business taking
advantage of your stronger than average reputation in the field.

But doing an activity which has a high probability of costing you the income
you desire is not rational.

~~~
rdancer
They only get fired if you find out. So the rational thing for them to do is
spend part of the arbitraged amount on deceiving you. As long as they are
spending less on deceiving you than the arbitraged amount, it is rational for
them to do so. Ergo, rampant corruption.

~~~
landryraccoon
I don't get it. How does the math work out?

Let's suppose the market wage is $10/hr. If I offer a lucky housekeeper
$20/hr, why wouldn't she just happily take the money and continue to work?
Union workers don't arbitrage themselves (but they should, under your scheme,
because they collectively bargain for higher than market wage).

If the cost of deceiving me is greater than zero, then she's being irrational.
She can earn no more than $10/hr anywhere else, and hiring someone else to
replace her would cost $10/hr (since that's the market rate). So lets say she
hires someone else at a cost of $10/hr, and then goes to work for someone else
- she's still earning $20/hr (the arbitrage amount plus the value of her
labor) minus the cost of deceiving me. So assuming she wants to work for wages
(which she must, since she offered to work for $10/hr in the first place) I
don't see how it's at all rational to arbitrage the opportunity.

~~~
rglullis
Another way to go around it: you pay $20/h to a job that usually takes X hours
to do it, so in the end you will pay 20 times X.

I bring someone else to work with me, and we both do the job in X/2 time. I
pay $10/hour for the subcontracted person.

So assume a 8 man-hour job. You will pay $160. I keep $120, the subcontracted
$40. My effective rate was $30/hour. You don't think this is a problem, as you
see your house cleaned just like usual.

Next time, I bring 3 other people. We finish things in 2 hours. I pay $60 to
them, I keep $100. My effective rate was $50/hour.

Next time, I bring 7 other people. We finish things in one hour. I pay $70 to
them, I keep $90. My effective rate was $90/hour. I use the other 7 "working"
hours of the day to play videogames.

~~~
landryraccoon
> You don't think this is a problem, as you see your house cleaned just like
> usual.

How are you able to assume this, since I actually would very much see it as a
problem if 3-4 people I don't trust to clean my house as much as my
housekeeper are inside doing the job? Your underlying assumption is that I'm
an idiot and can't see what's happening. She couldn't subcontract the work for
the same reason _I_ can't subcontract my work at my current job - my employer
would see through it.

> I use the other 7 "working" hours of the day to play videogames.

Not many people would come out for $10/hr for only one hour. What about travel
time? And the organization necessary to make sure the quality is still high? I
think you're lampshading a ton here.

~~~
rglullis
You say it's lampshading, I say it's just imagining some ways where people can
exploit this type of opportunity when receiving above-market pay.

