Most smart employers want to pay enough to get the workers they need, but not more.
Yet Rented.com, an Atlanta company with technology that fuels Airbnb, has raised the minimum pay for all employees to $50,000 and the company’s chief executive says the firm will save money in the long run by paying more.
True, said CEO Andrew McConnell, although he took some convincing.
The idea came to him along with an executive he hired from Portland, Ore. A guy who wanted the company to mimic Gravity Payments, a Seattle company that made news in 2015 by lifting the pay of everyone on the payroll to at least $70,000.
The new executive’s suggestion drew a jaundiced response.
“I said, I’d like to be morally good, but I also have to run a business and look at the economics,” said McConnell.
But the new executive had been friends with Dan Price, the CEO of Gravity Payments. He believed in the idea and he was persistent.
Rented.com was founded in Atlanta in 2013 with the financial backing of Jackson Square Ventures. The company makes arrangements with management companies and owners that guarantees them an income when their property is listed on Airbnb.
“We have a network of about 1,200 management companies,” McConnell said. “Instead of taking a percent of what you get…We will tell you exactly what you will make. We take the financial risk.”
It’s not a huge company. Fewer than 20 employees, although they’re hiring at least a half-dozen more: a business manager, a couple data analysts, an engineer, some sales people.
Many people – especially techies and executives – make more than $50,000 a year. But large numbers of office personnel and maintenance workers do not. And of course, the pay is typically lower in retail, warehouses and many healthcare jobs.
Yet if Gravity Payments is the model, why not lift everyone’s pay to $70,000?
Raising the floor to $50,000 still lifts Rented.com above most companies.
The per capita personal income in metro Atlanta is $47,348, according to the most recent data from the St. Louis Federal Reserve Bank. By comparison, Seattle’s is 36 percent higher — $64,553.
The median household income in Atlanta – which would include two-paycheck families – is about $62,000.
McConnell said he read about Gravity Payments and started thinking more deeply about pay: How could higher pay make the jobs different?
“So I started running the numbers,” he said. “We found that doing this could actually save us money.”
If the pay is higher, the job needs to be more valuable to the company. That means giving the employee greater responsibility and finding ways to automate more menial tasks.
“We create such good jobs that you can raise the minimum and they will end up delivering more than $50,000 of value to the company,” he said. “And on the back-end, you raise the pay and you create a better talent pool of people coming here.”
It’s the right thing to do, but it is not philanthropy, he said. “It’s benevolent self-interest.”
So the pay went up.
Average wage growth in Atlanta during the past year was 1.8 percent, according to jobs data site Glassdoor. In contrast, some people at Rented.com got raises of 40 percent. The whole payroll increased 20 to 25 percent.
“We did it all at once on April 1,” McConnell said. “We warned people so they didn’t think it was some kind of April Fool’s.”
Naturally, profit margins are taking a hit.
“I think it’s penny foolish and pound wise,” he said. “We are playing a much longer game than playing for one quarter or for a year. If this moves us to be more productive, then it is an investment well worth making.”
If it’s sensible, why isn’t it a trend? After Gravity Payments made its big splash, there were few mimics.
The labor market is tightening as metro Atlanta employers hire and the pool of unemployed slowly shrinks.
“We have seen some acceleration of wage growth in the data, although not as much as you would expect from such a low unemployment rate,” Kolko said.
Considering typical corporate pay in Atlanta, Rented.com is paying more than they have to.
There is, he said, a famous precedent for that, Kolko said. “The best-known historical example of that is Henry Ford who famously raised the pay of his auto workers to $5 a day.”
Higher-than-market pay makes the most sense when it’s hard to find good workers or when worker mistakes are especially damaging.
And, while it won’t always work, in the right situation higher pay can boost productivity, Kolko said. “It gives an extra incentive for people to perform really well.”
Perhaps the best financial reason to raise pay is to keep good performers from quitting, because it is often very expensive for companies to find, hire and replace workers, he said. “So higher pay reduces that churn, which is especially important if you are in an industry where it is hard to find workers.”
Gravity Payments was derided by many critics for being PR hungry or corporate hippies who would run themselves out of business.
Three years later, Price says the move was worth it, but not without a certain cost. In a recent op-ed piece in Inc. magazine, he said the company has prospered, growing by more than one-third. But the company had accidentally re-branded itself.
“This brand misalignment has had a negative impact on our company by confusing prospective clients and obscuring our commitment to independent business advocacy,” he wrote. “We have become ‘the $70K company.’”
Per capita personal income, by metro:
New York: $65,846
Los Angeles: $55,624
Source: Federal Reserve Bank of St. Louis