12 August 2015

The sad fate of the $70k minimum “happiness” salary

By Max Borders

Experiments in social engineering don’t usually go well. And a lot of people gave Gravity CEO Dan Price a hard time for trying to change the normal salary structure inside his firm so that everyone would have the “happiness salary,” which researchers told us is around $70,000 a year.

The law of unintended consequences kicked in, as it will, and three months on, things aren’t going so well.

As Mark J. Perry and Michael Salzman report,

The salary divide between less-experienced employees and more-veteran staff is where the story gets interesting. The Times reported that two of the company’s best employees quit after Price’s raise heard round the world, chafed by a policy that would “double the pay of some new hires” while leaving the paychecks of more-senior employees mostly untouched.

The company’s former financial manager explained it this way: “(Price) gave raises to the 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.”

Critics were right to point out that this is, more or less, corporate socialism.

Similarly, a former Web developer for Gravity Payments was upset at a pay policy that “shackles high performers to less-motivated team members.”

This negative response from more experienced employees to a dramatic pay hike isn’t limited to Gravity Payments and the tech sector. In the same city that Price’s company calls home, a recently enacted minimum wage increase to $15 an hour has some veteran restaurant employees seeing red.

A number of commenters saw this coming, even as Utopians on the progressive left hailed it as the future of American corporate remuneration.

But there was something important about human nature that Price’s cheerleaders were forgetting. Not only would it be hard for the company to afford to pay everyone that much (turns out it was), top performers would feel undervalued due to what moral psychologist Jonathan Haidt calls “fairness as proportionality.”

As Haidt explains,

Distributive fairness … refers to how we distribute stuff — benefits as well as burdens. Is everyone getting his fair share and doing her fair share?

But there are two subtypes of distributive fairness — equality (everyone gets the same) and proportionality (all receive rewards in proportion to their inputs; this is sometimes called equity). This simple distinction can help us understand many of today’s most vexing controversies.

Everyone endorses proportionality, but the left simultaneously endorses equality, even when it is in tension with proportionality. The right has no interest in equality for its own sake. Conservatives prefer proportionality, even when it leads to massive inequalities of outcome.

Inside a firm, fairness as proportionality is vital to the corporate order. High performers not only should feel rewarded for their contribution relative to lower performers, such an ethos aligns incentives for upward mobility and higher performance by everyone over time.

Equalizing salaries not only suggests that people’s skills and labor don’t have a labor market value outside the firm, but that everyone’s contribution is essentially the same. The reality is very different of course.

CEO Price’s theory (no pun) had been taken from social scientists with bubble sheets. They had determined the happiest people make around $70,000 per year. Price thought he’d have happy workers if he paid them all the same salary. Happy workers are normally good workers. So it was an experiment worth trying.

But this is so often the problem with social scientists with bubble sheets: their research both lobotomizes and strips away context — or what F. A. Hayek called the circumstances of time and place (and also, in this case, evolutionary wiring).

The $70,000 meme was derived by asking a whole bunch of people if they’re happy. The ones that were making around $70,000 were pretty happy, but each additional dollar in pay didn’t help them become that much happier. So as social scientists will, they lobotomized each person by turning him or her into a plot point which could be aggregated.

Such could then be picked up by every journalist in the world looking to advocate for the social engineering of salaries and wages. But in the process of aggregating people’s opinions, you remove all of the contexts in which they live, work and regard themselves as part of a real and functioning social order that has real, functioning market prices — even for labor.

So people familiar with evolutionary psychology or the work of Hayek would have found Price’s warmed over theory of maximizing “gross domestic happiness” (GDH) silly from the start. But Price formed his idea based on the work of some highly respected academics.

And like many successful people, Price probably felt it was time to signal to the world that he’s not an evil capitalist, but rather a good person. He probably also thought it would work, and that he’d be a trailblazer.

But this leads us to the second vital lesson about free people operating in relatively free markets: It was his experiment to make. The failure, thank goodness, was localized.

As Cord Blomquist is quoted as writing on social media:

This is exactly the kind of experimentation that we should praise, not belittle and label as “socialist.” Dan Price did what he thought was right with his own business. He turned out to be wrong, it seems, but that’s how most experiments in the market work. The majority of businesses fail and the majority of business decisions are flawed.

And to be fair to Mr. Price, we live in an era of flat org charts, 20% time, remote work, Zappos-style customer service, and all sorts of other novel schemes. He was emboldened by these things and thought his radically high pay hikes would result in a company with happier and more productive employees.

Are there flaws with that thinking? For sure, but you can see how he might have thought he was on to something revolutionary.

Regardless, Price did this privately, forcing it on no one.

So here’s to capitalism, a system that allows us to learn from the failure of others without having to pay for it.

It’s not just capitalism that can work this way, but politics.

Just think of the many wonderful-sounding ideas politicians and social planners cook up for us all the time. Thank goodness most of them aren’t implemented.

The difference between them and CEO Price is that failure is system wide. That’s why it’s more important than ever, at the very least, to keep a system of decentralized federalism in place. Big ideas can make for big failures. Think Obamacare. Or imagine a $15 an hour (or a $70,000 a year) national minimum wage.

In Switzerland, for example, federal power is highly decentralized. Canton-level experiments in social planning can be avoided or adopted by the other cantons, but they can rarely if ever become national policy. And thanks in part to that tradition, Switzerland avoided joining the European Union superstate. And lucky for them — unlike Germany, they’re not currently on the hook for Greece’s experiments in credit card welfare statism.

The lessons? First, experimentation is good. The next great innovation will come out of experimenters like CEO Price. And he should be free to experiment with the rules of the firm he runs.

Second, experiments should start local. Great ideas often emerge from a lot of trial and error, and rules — especially new rules — should have to compete with other sets of ideas. Social and economic experiments are also best if they start locally.

Though it might be tempting to hurl I-told-you-sos at Dan Price, he is to be commended for his attempt to criticize by creating — using his own resources. That’s more than we can say for politicians who want to experiment with other people’s lives.

This article was originally published by the Foundation for Economic Education. It can be found here.

Max Borders is the editor of the Freeman and director of content for FEE. He is also cofounder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.