The Thinking Behind Gravity Payments CEO's Move to Pay His Workers $70,000 a Year

PHOTO: Dan Price, the C.E.O. of Gravity Payments, appears in a promotional video for the company posted to YouTube on Sept. 17, 2014.PlayGravity Payments/YouTube
WATCH Gravity Payments CEO to Cut His Salary to Raise Employee Wages

Dan Price, the CEO of Gravity Payments in Seattle, has touched off a national debate over his plan to pay all of his workers a yearly salary of at least $70,000. But where did that figure come from and what's behind it?

The number, the CEO said, comes from a 2010 Princeton University study by economist Angus Deaton and Nobel-prize winning psychologist Daniel Kahneman and published in the Proceedings of the National Academy of Sciences. In the study, the researchers analyzed the answers to questions about income and well-being from more than 450,000 Americans polled by Gallup and Healthways.

Money does indeed buy happiness but only up to a point, the researchers found. The less someone made below $75,000, the unhappier they reported feeling. But making above that income threshold did not lead to increasing happiness.

It’s actually a bit more complicated than that, said study author Kahneman, who is now retired. As he explained it, there are two types of happiness: day-to-day mood and long-term well-being.

“Making a higher income doesn’t appear to affect your daily happiness after a point but making more and more money does continue to improve your outlook on life indefinitely,” he explained.

In other words, an annual paycheck higher than $70,000 won’t leave you feeling any less grumpy on a daily basis, but the larger your salary, the more successful and secure you feel.

Their research did not detect the limit where burgeoning wages stopped providing a sense of satisfaction, Kahneman said. Additionally, the same percent increase in pay -- whether you make a lot or a little -- added to a greater sense of satisfaction with life.

Their study didn’t reveal why $70,000 to $75,000 a year appeared to be the cut off for escalating happiness, Kahneman said, adding he had no clue why that was the magic number. The number probably only applies to large, expensive cities and not places where the cost of living is cheaper, he said.

The number should be revisited from time to time to adjust for inflation, he said. And the link between money and happiness should probably be interpreted as having less money leading to misery rather than more money bringing joy.

Kahneman also said he really can’t comment on Price’s grand experiment which calls for everyone in the 120 person credit card payment company to earn a minimum of $70,000 by December, 2017. However, he doubted the CEO’s gesture will catch on in a big way.

“It’s not viable for every company,” he said “There is not a general lesson to be learned from this case.”

Comments