Last week, the NY Times did a piece on Dan Price, CEO of Gravity Payments, who announced in April that each of his employees should make at least $70,000 a year.  You might think that this announcement would make him a very popular figure, but I guess you would be wrong.  Polarizing, maybe.  Story here.  You can read the details, but Price, who was raised in a very religious home, believed very strongly in creating an atmosphere in which employees would not need to worry about basic human needs and therefore be more productive and creative and happy.  Where would the new money come from?  Well, from his own salary, leveling the pay chart.  But not everyone is happy.

Here is probably an incomplete list of the haters:  (1) clients who feared their bills would be increased to cover the shortfall; (2) other employers who compete in the labor market; (3) other employers who don't compete for the same labor but who don't want to look bad; (4) Gravity Payments employees who feel that some employees don't deserve $70,000; and (5) Dan's brother and co-founder Lucas Price who feels that as a shareholder, he is being denied a return on his investment.  That last number (5) reminds us corporate law geeks a little of Dodge v. Ford.  I'm also interested in number (4), having written before on the hatred of so-called "windfalls." 

Price v. Price.  Here is the complaint.  It is brief, and the answer is more brief.  The brothers started the company as a 50/50 LLC in 2004.  After disagreements, the brothers reorganized as a corporation in 2008, with Daniel having a majority share.  This would seem to be a definitive moment for Lucas and possibly his downfall.  The complaint does not give any hints as to why Lucas would agree to this, but there must be more to the story -- My brother was trying to grab control of the company, so we reorganized and gave him control to solve the problem?  As part of the reorganization, the brothers entered into a Shareholders Agreement, which is not attached.  The causes of action are breach of fiduciary duty, not breach of the agreement.  The complaint states that Daniel used his majority control to grant himself "excessive compensation and to deprive Lucas of the benefits of ownership in Gravity Payments.  Daniel's actions have been burdensome, harsh, and wrongful, and have shown a lack of fair dealing toward Lucas."  The complaint does not give examples of the wrongful actions.  The complaint was filed shortly after the minimum wage announcement, but had been in the works before.  Further litigation may flesh out whether this complaint has a future, but shareholder oppression is a hard case to make out.  Most notably, and possibly good news for Lucas, Gravity Payments is a Washington corporation, not a Delaware corporation.  Lucas wants, among other things, either dissolution or to be bought out without a minority/marketability discount.  Corporations aren't partnerships, Lucas.  Dissolution seems a stretch.  How does this affect Daniel's minimum wage plan?  Well, he wasn't counting on having high litigation expenses when he changed the salary structure.

Employee Envy.  According to the article, several employees have left Gravity Payments because they suddenly felt undervalued when junior employees and recent hires received raises, even though they themselves did also.  When I wrote The Windfall Myth, I researched the use of the term "windfall" in the NYT and WSJ in a 12-month period.  I was astounded at the depth of bitterness people have against other people's "windfalls," even when the windfall does not affect the observer at all.  Hundreds or thousands of experiments have tried to capture why subjects will give up money if they believe under that regime others will get more (the Ultimatum Game).  Here, GP employees were given raises, but others were given larger ones, and some small raise receivers left for jobs that paid less.

This story is a great case study in how to tackle wealth inequality in the U.S., where a fidelity to pure meritocracy is heavily ingrained.  Even when the founder and CEO is willing to reduce the salary disparity at his company, some of his employees were not.  Fascinating.   

Corporate Governance, Corporate Law, Fiduciary Law | Bookmark