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I'm all in favor for workers getting paid more, but I can understand the brother's perspective. Shareholders, especially ones who own 40% of the company, have a

• Zombieball 10y ago
  I don't understand why the idea of employee interests and shareholder interest can't be aligned? If the shareholders are invested for the long haul, surely they are one in the same. Obviously this is a simplification / wishful thinking. But maybe it's what we should strive towards :)
  • existencebox 10y ago
    Let's be straightforward about this in asserting ourselves as employees; They already ARE aligned. If you're (my employer) not paying me well compared to competitors, I will absolutely walk, and you will be saddled with finding and training/ramping up a replacement. That is a direct cost to shareholders. It is in their best interest to ensure a reasonable continuity within their workforce both from a work output standpoint and a morale/culture standpoint, as teams I've been on which have had time to establish trust and understanding for each other have been remarkably more effective than those that did not. As such, pay is one of the "easiest to pull" strings to this end. There is some mental dissonance however, as I imagine this train of thought would be "obvious" to those in power, yet we see regular evidence of wage stagnation/suppression. If we don't assume incompetence, some optimum of balancing pay and churn has been found and accepted, and if I trust that they are making a self interested decision, there may NOT be a benefit to paying more. However, I'd really like to see the numbers, because my following intuition from a long time of watching the best engineers hop from job to job is that I probably wouldn't agree with their choice of calculations.
    • Zombieball 10y ago
      I agree. I imagine arguments about misalignment can be made whe you vouch to pay a 2x market rate multiple to office admins, janitors, etc. However, like you say, it has to do wonders for corporate culture! (ignoring the jealous folks who think they deserve to be paid more than a janitor. I believe I remember a few such people when I originally read this announcement)
    • imron 10y ago
      > If you're (my employer) not paying me well compared to competitors, I will absolutely walk, and you will be saddled with finding and training/ramping up a replacement You are lucky to be working in an industry with a position and skillset that allows you that luxury. And yes it is a luxury, and one that many employees don't have.
      • existencebox 10y ago
        I absolutely appreciate that; it's a constant effort to reskill myself to stay relevant and I may not always be able to keep up; do not mistake my comments as ignoring that. It was primarily intended to realize that while we have this advantage, if we let our employers leverage us and do not leverage them in return, we would be letting as you say, a rare opportunity, go to waste, and in many cases result in undervaluing ourselves. I do not believe we owe companies undue charity in that respect, when it is very often not shown in return.
• coherentpony 10y ago
  You could view it a different way. You could view that he did act in the best interests of his shareholders; if you pay your employees poorly they aren't as effective which hurts profits. Two sides of the same coin.
  • Me1000 10y ago
    That also assumes that the market equilibrium for every job is at least $70,000, which it probably is not.
    • Jtsummers 10y ago
      Paying over the market value for the employees is a pretty powerful motivator for them. If they're in a job that normally gets $30k/year, and now they're recieving an extra $40k, they don't want to risk going back out in the job market.
      • cookiecaper 10y ago
        If you really want to keep your employees stuck, the key is to over-pay them. The vast majority of people immediately scale up their obligations to maximize the entire breadth of their paycheck (or at the very least, they become accustomed to having a large amount of disposable income). If they'd have to take a 30%+ pay cut to get employed by another company, most employees literally can't leave without risking financial ruination, and it's certainly not a pleasant prospect in any case. Over my career, the saddest, most stuck employees have been those whose salaries outstrip anything they could get if they go back on the market. It's wise to think carefully before accepting a salary that is much higher than normal, because it's likely that you'll have a very difficult time leaving.
        • hx87 10y ago
          It's less of a problem if you spend and borrow as if you were making market average salary.
        • 10y ago
• bwilliams18 10y ago
  CEOs have way more latitude than most think. There is an incredibly easy argument to make in this case: paying employees more means you get better employees, and more productive employees, thus you drive more shareholder value.
  • cbHXBY1D 10y ago
    It's insane that we live and work within a system where you can be sued as a CEO for that argument.
    • maerF0x0 10y ago
      We live in a system that allows (afaik, IANAL) a law suit for anything. Afterall, if you have a complaint you need to be heard and due process needs to explore the legitimacy of your complaint. What's insane is some of the lawsuits that succeed.
    • bko 10y ago
      If you paid employees all of the companies earnings you wouldn't make any money. If you paid employees nothing, you wouldn't be making any money as they would stop working. If you pay somewhere in the middle, you would likely make money. So there exists a point where paying workers more will result in less money. If he made a change on compensation not based on the interest of the company, then the other shareholders should be allowed a say.
      • lukeschlather 10y ago
        Nothing you said is entirely true. It's certainly true if you look at it from a quarterly-earnings perspective. But there's no reason that a company paying out 100% of earnings to its employees can't outperform a company paying out less year-over-year. You do need committed investors, but even if you have investors cashing out it may be better for the company that they leave when you look at things on a 5-year or longer timescale.
        • 10y ago
• robalfonso 10y ago
  Time scale is worth considering here. Certainly over the short term this is a bad move for the company. What remains to be seen is how it will affect the company long term. The company in this case also generated a lot of good will, something that is hard to get, hard to value, but very important none the less. Too many corporations are so focused on quarterly performance they fail to account for the long term.
  • chrisbennet 10y ago
    It turns out that even over the short term, it's been good. "Six months after Price's announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have also doubled. " http://www.inc.com/magazine/201511/paul-keegan/does-more-pay-mean-more-growth.html http://www.inc.com/magazine/201511/paul-keegan/does-more-pay...
• hiou 10y ago
  In this case we really aren't talking about a cut and dry example of putting workers over shareholders. The company has seen significant increases in value over time. It's a pretty difficult sell to say a CEO is hurting the company while also creating as much value as he was for the shareholders. These are boardroom disputes not courtroom disputes.
• SixSigma 10y ago
  > Given that the CEO legally has a Fiduciary duty to the shareholders to protect their best interests No such duty exists. What does is the annual general meeting where shareholders vote on proposals put forward by the board, such as the mission statement and a company vision. If these state "we aim to remunerate employees on a flat rate equal to the highest current salary" then you can't cry later.
  • pjmorris 10y ago
    I've read, similarly, that the CEO is not bound legally to protect shareholder's best interests ahead of everything else, article linked here [1]. Quoting: "If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that. Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular." [1] http://www.nakedcapitalism.com/2013/10/why-the-maximizing-shareholder-value-theory-of-corporate-governance-is-bogus.html http://www.nakedcapitalism.com/2013/10/why-the-maximizing-sh...
• noonespecial 10y ago
  A less cynical interpretation would be that Dan expected the $70k to attract top people and inspire a great deal of loyalty and that the publicity from announcing this radical approach would more than make up for the extra cost in new business. In other words, cheap advertising. Oh and Dan has 60% ownership so he makes that call and every other. Sounds open and shut to me.
  • wutbrodo 10y ago
    > Oh and Dan has 60% ownership so he makes that call and every other. Sounds open and shut to me. Umm....I'm a little shocked you're not aware of this but 60% ownership doesn't give you the right to use the corporate credit card for personal expenses (which is what the suit is about[1]). How on earth is that open-and-shut just because he has 60% ownership? [1]From the article: "On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses."
• dpark 10y ago
  > In this case, the CEO was acting in a way that is favorable to his employees' interests, but detrimental to the interests of the shareholders. That's an iffy assertion. You could argue that no corporation should pay above minimum wage for any position because to do otherwise is to eat into profits unnecessarily. But the reality is that for many positions you cannot attract or retain employees without paying them far above minimum wage. It's not hard to argue that it's in the best long-term interests of the company to pay wages that make it easier to attract the best employees and that make its employees very loyal. Whether those wages are $40k/year, $70k/year, or $200k/year is not objectively very clear.
• mgkimsal 10y ago
  It's all academic until you have a few years of real world results to see how this pay raise will affect people. Roughly 130 people - let's assume 100 of those people got a $30k raise - this is ~$3m more per year. The CEO went from $1m/year down to $70k, so... approximately $2m/more per year invested in paying people a decent wage. What affect will this have on retention, employee commitment, training costs, better focus at work by not having to look for a second job, etc.? I would think at least some of the $2m diff would be made up just by reduced hiring/training costs, though it's probably hard to measure that accurately. These numbers are not much more than a WAG, so perhaps I'm WAY off here... And... from an article last year ================= Gravity had about 120 employees, and they earned a little less than $50,000 on average. He found it would cost about $1.8 million to increase wages to $70,000 in steps over three years. Cutting his own pay would cover much of that, and if the wage hikes made his staff more productive, he figured, the whole move just might work. ================= So that seemed to be the plan (well, the plan that's made its way in to the media stories)
• Marazan 10y ago
  In the UK a director's responsibilities are set out in the Companies Act: A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a)the likely consequences of any decision in the long term, (b)the interests of the company's employees, (c)the need to foster the company's business relationships with suppliers, customers and others, (d)the impact of the company's operations on the community and the environment, (e)the desirability of the company maintaining a reputation for high standards of business conduct, and (f)the need to act fairly as between members of the company. And that's pretty much it. This gives directors massive wide ranging latitude to act. Delaware's duties are similar, they give the directors huge latitude - companies are not legally mandated to e amoral profit machines.
  • whack 10y ago
    There are legal professors who disagree with you. "Most large businesses buy their corporate charters from the state of Delaware. And the law of Delaware is clear about corporate purpose. The chief justice of the Delaware Supreme Court, Leo Strine, put it simply in a recent law review article: “Directors must make stockholder welfare their sole end.” In cases where directors have acknowledged sacrificing shareholder interests for other groups, Delaware courts have found those directors violated their fiduciary duties." http://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/its-law-but-it-shouldnt-be http://www.nytimes.com/roomfordebate/2015/04/16/what-are-cor... I've also read articles by "authors" arguing otherwise, so maybe the answer isn't all that clear. But my tendency is to believe what a legal professor says, and the above paragraph sounds pretty convincing.
    • azernik 10y ago
      This is not a disagreement between a law professor and a layman commenter; it is a disagreement between UK and Delaware law on corporations. You're making it sound like the former.
      • 10y ago
• st3v3r 10y ago
  I couldn't disagree more. With that kind of attitude, paying employees more than minimum wage would be "detrimental to the interests of the shareholders." Hell, the exorbitant executive salaries are "detrimental to the interests of the shareholders". Where are the lawsuits against those companies?
• ubernostrum 10y ago
  Shareholders, especially ones who own 40% of the company, have a reasonable expectation that the company CEO will be acting in their financial interests. And there's quite a strong argument that the CEO was acting in their financial interests, just on a longer time scale than many people today can be bothered with. The issue here is largely attributable to statements from Milton Friedman and people who like to quote him, which leads to the mistaken belief that companies are legally obligated to provide blind, hell-bent, maximum short-term-return-no-matter-the-long-term cost "value" to shareholders. Which in turn has all but driven out the idea of providing consistent long-term profit to shareholders, and to "I bought a bunch of your stock Monday, gut your company to give me a payday Tuesday or I'll sue and overthrow your board on Wednesday" somehow being enshrined as a noble endeavor.
  • digitaltrees 10y ago
    That's a good point. In a related point, people also forget that a corporation or LLC is a grant of limited liability the government allows in exchange for a public purpose otherwise the shareholders would be liable for all of the debts of their business activity. As such there is a reasonable argument that this right to limited liability should come with a duty of care to society at large (employees, customers, the environment). The history of corporate charters provides an interesting context because the limited liability was initially reserved for very risky but important activities like exploration. The original corporate charters were grants of both monopoly and limited liability offered by a monarch or sovereign for a specific approved business activity. Overtime society has expanded these grants to any and all business activity so we forget the original rationale for allowing these privileges. Event the LLC is a relatively new entity. Historically business was conducted by partnerships. The partners were on the hook for the debts and actions of their partners and often put a lot of effort into limiting the risk of their business activities. There is a strong argument that allowing investment banks to shift from a partnership to corporate structure allowed them to pursue much riskier activity. Goldman Sachs went public in in 1999 but was a partnership for 130 years before that. The same motive applies to shareholders, if we allow them to benefit from limited liability it should be with the understanding that the company and its management have a duty to act appropriately which means the interest of Soviety at large and related concerns balances against profit concerns.
• mmanfrin 10y ago
  but detrimental to the interests of the shareholders How so?
• huac 10y ago
  In the US, it is well established legal perspective that the CEO and the management can do pretty much anything they want if they can plausibly claim that it increases shareholder value. In this case, pushing higher employee salaries could plausibly lead to retaining more employees, attracting better talent, and so on - if the CEO had framed his arguments in this manner it would be open and shut. https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
• digitaltrees 10y ago
  If you dig into the story, Gravity claims that the payrate increase actually resulted in revenue growth, productivity growth and reduced churn. They did lose some senior staff but overall it was actually an improvement for the company.
• jacquesm 10y ago
  > In this case, the CEO was acting in a way that is favorable to his employees' interests, but detrimental to the interests of the shareholders. That's debatable. You'd have to set up a number of companies side-by-side in order to establish whether or not paying everybody such a high wage would lead to one or the other group of companies doing statistically better for their shareholder in the longer term. I can see all kinds of reasons why paying employees more might actually work out to be a benefit in the longer term. > Given that the CEO legally has a Fiduciary duty to the shareholders to protect their best interests, I can understand the brother filing suit. Can we please stop perpetrating that myth?
  • CPLX 10y ago
    It's not a myth, per se, that managers have a fiduciary duty to shareholders. They clearly do have such a duty. The myth comes in where people believe that means the burden of proof is such that they have to blindly serve short term financial interests of shareholders. There is no such rule at all, in fact it's quite the opposite: https://en.wikipedia.org/wiki/Business_judgment_rule https://en.wikipedia.org/wiki/Business_judgment_rule The business judgment rule is a case law-derived doctrine in corporations law that courts defer to the business judgment of corporate executives. It is rooted in the principle that the "directors of a corporation... are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge".[1] The rule exists in some form in most common law countries, including the United States,[1] Canada,[2] England and Wales,[3] and Australia.[4] To challenge the actions of a corporation's board of directors, a plaintiff assumes "the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty — good faith, loyalty, or due care".[5] Failing to do so, a plaintiff "is not entitled to any remedy unless the transaction constitutes waste... [that is,] the exchange was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration".
    • jacquesm 10y ago
      Fair enough. The problem is that in the context of this particular article the CEO could easily make the case that he's doing just that so invoking this as a counter argument against what the CEO did makes no sense.
• deleted 10y ago
  [deleted]
• mrgoldenbrown 10y ago
  The lawsuit is not about the $70,000 minimum salary. >On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses. The judge also ordered Lucas to pay Dan’s legal fees.
• mikeryan 10y ago
  I'm not interpreting this as any sort of issue with the pay increases. This seemed like one way to "over compensate" one of the two partners in a business partnership and a cautionary tale. In a partnership, generally, all profits and distributions from the business pass through to the partners at the percentage of their ownership stake. Most partners (myself included) take minimal salaries in order to prevent extra taxation on payroll taxes and the bulk of the compensation comes in the form of partnership distributions. In this case IIRC the CEO became a 60% shareholder then started paying himself a salary of $1,000,000 a year. This is considered a business expense in this case and not part of the partnership distributions. IE if the business was making 3M a year in profit and the brothers took no salary they'd split it 1.5M each (in this case 60/40 but lets say 50/50 for ease). In this case now the one brother takes 1M in salary and the profits are now $2M, split both ways and Dan gets 2M a year in salary and distributions and the brother gets $1M. Thats how I read the case anyway.
• metaphorm 10y ago
  why is it reasonable to assume that a CEO that chooses to increase worker compensation is acting detrimentally to the interests of shareholders? that statements needs justification. A LOT of justification. here is a basic argument in favor of it, from the fiduciary perspective: employee retention, loyalty, and morale are essential for the business to operate effectively.
• summarite 10y ago
  I think you are mistaken to think there is no business case for good, stable salaries. Think motivation, employee retention, attractiveness to prospective employees, team spirit, ... you can easily argue that a good and happy team is worth more in the long term to shareholders than the cliché American hedge fund strategy of buying a company, reducing staff and staff salaries and cashing out. What's good for the employees need not be bad for business, certainly not in this case as it also happened to generate goodwill and attention/good press for the company, but there are also plenty of good reasons in other cases.
• wutbrodo 10y ago
  > I can understand the brother's perspective. Shareholders, especially ones who own 40% of the company, have a reasonable expectation that the company CEO will be acting in their financial interests. In this case, the CEO was acting in a way that is favorable to his employees' interests, but detrimental to the interests of the shareholders. Given that the CEO legally has a Fiduciary duty to the shareholders to protect their best interests, I can understand the brother filing suit. I'm not sure how you drew any conclusions about the lawsuit from the points you're trying to make in this paragraph; in fact I can't see how any of what you're saying has anything to do with the lawsuit? From TFA: > On Friday, Judge Theresa B. Doyle of Superior Court in King County, in Washington State, ruled that Dan’s brother, Lucas, had failed to prove his claims that Dan had overpaid himself and inappropriately used a corporate credit card for personal expenses. He wasn't getting sued for paying his employees $70k. It's a short article: you could have read the entire thing in less time than it took you to write an uninformed comment about it.
  • whack 10y ago
    Yes, I did read the entire article and you could have made your point without having to insult me personally. The following paragraph of the article hints strongly that the brother was upset by the 70k/year decision, and that it played some role in their conflict. "When Dan announced his plan to pay everyone at Gravity Payments a minimum salary of $70,000, Lucas objected, saying he was not informed of the decision until shortly before it was made public. A company spokesman said the lawsuit was filed two weeks after Dan announced the salary plan, which brought the company an unexpected crush of attention."
    • Analemma_ 10y ago
      > Yes, I did read the entire article and you could have made your point without having to insult me personally. You asserted with great confidence that the lawsuit was about the $70K salary, when it wasn't at all, as even a cursory glance at the article would've told you. wutbrodo did not insult you personally; he called your comment uninformed, which is pretty indisputably true. You don't really have any grounds to be angry here.
    • 10y ago
• tn13 10y ago
  > In this case, the CEO was acting in a way that is favorable to his employees' interests, but detrimental to the interests of the shareholders. I am surprised how many young CEOS themselves forget this. My friend is a VC who invests in startups in India. Recently he invested few million dollars in an Indian startup and then invited the founders to SF. Later he learned that both the founders traveled business class and stayed at a beachfront resort. While this VC himself has been traveling econ class to India and staying with friends and family.
  • linuxkerneldev 10y ago
    > he learned that both the founders traveled business class and stayed at a beachfront resort. My understanding is that the Indian startup space and VC ecosystem is pretty vindictive towards any founder who would have behaved that way and the rest of the world would have all heard about it if it were true. Care to name the startup and the founders so that we can verify that this story is true?