A CEO gets a lesson in economics

The BBC recently carried a story about Calvin Benton, founder of a psychotherapy company named Spill:

One of the big decisions that Calvin made when he founded Spill was to pay himself and his colleagues an equal salary.

“There were five people, and everyone was pretty much contributing the same,” he says. “So we tried this experiment where we paid each of us an equal amount of money – regardless of experience, regardless of role. We wanted to challenge the traditional model of pay. We decided on £36,000 a year for everyone. We calculated that was a decent living wage for London.”

Initially, the measure worked well and fostered a lot of goodwill within the team.

“Let’s say we were going out for drinks,” says Calvin. “There wasn’t a problem of who pays, or whether this person doesn’t get paid as much as this person so maybe the manager has to pay. Everyone got paid the same, so it was much easier in those social situations.”

As Spill took off, Calvin recruited new staff such as a software developer, a salesperson and clerical workers – and decided to offer them all the same £36,000 salary. This is when the problems started.

“Software developers are typically very in demand, and they usually take a higher salary than £36,000,” says Calvin. “Salespeople are typically paid on commission. So it was not a model which particularly suited either of those two industries.

“We really struggled to attract senior talent for the software role. And it got to about three months in when the salesperson started asking to be paid according to sales targets they’d achieved, saying the fixed salary wasn’t working for them.”

At the same time, Calvin was getting overwhelmed with applications for the £36,000-a-year clerical jobs he was advertising.

“We were offering a lot more than other clerical jobs paid and a lot of people were applying to the roles because they really wanted this high salary, rather than wanting to work at Spill because they believed in the mission behind the company.”

Among the newly expanded workforce, the equal pay system was starting to cause grumbling.

“When we grew the team, we started to have some people who contributed more than others. You had some people who worked longer hours than others. The question started to arise: should this person be paid the same amount as me?

“That caused a conflict in the team and a conversation in the team about whether this experiment was right to continue.”

After a year, Calvin bowed to the pressure from his staff and scrapped the equal pay system, replacing it with a traditional structure of pay grades based on seniority in the company and technical expertise.

“I think it was a disappointment when the experiment failed. We wanted to do something which was democratic and egalitarian. But sometimes traditional practices are there for a reason. Sometimes you don’t have to reinvent the mould on everything.”

Different people have different skills. Different skills produce different output. Different output is valued at different prices. So, different people generate different revenues and are paid different amounts.

All of this is fairly straightforward but it is important to restate it in the context of debates around the ludicrous push to hike the federal minimum wage to $15 an hour and cap earnings using high marginal tax rates.  Wages are driven by the market valuation of what you produce. They are not driven by politician’s commands anymore than they were driven by Mr. Benton’s.

John Phelan is an economist at the Center of the American Experiment.