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2/4/2014
11:50 AM
Rob Preston
Rob Preston
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Silicon Valley's 1%: Stinginess Is Not The Problem

Are the people who drive Silicon Valley a bunch of self-centered elitists? Let's debate business diversity -- not make gross generalizations about "the wealthy."

When in public discourse did arguments start losing their grounding in facts? When did stereotypes start ruling the day?

The current issue evoking such vacuous partisanship is whether the "wealthy" -- and more specifically, the venture capitalists, entrepreneurs, and executives who drive Silicon Valley -- are a bunch of self-centered, stingy, even sexist and ageist elitists.

The center of this tempest is a letter to the editor published by The Wall Street Journal on Jan. 24 in which Tom Perkins, founder of Silicon Valley VC firm Kleiner Perkins Caufield & Byers, compares the "demonization" of the wealthy in the US to Nazi Germany's "war on its 'one percent,' namely its Jews." Perkins concludes: "This is a very dangerous drift in our American thinking. Kristallnacht was unthinkable in 1930; is its descendant 'progressive' radicalism unthinkable now?"

Now, I'm no fan of the anti-capitalist class warfare of the far left, as I wrote in a column titled War On Business And Innovation back in 2010, near the bottom of the recession. But comparing just about any movement to Nazi Germany is clear evidence that your position is intellectually bankrupt. Quacks on the far left and right have been making such comparisons for decades. The founder of one of Silicon Valley's most successful VC firms should know better, and he should comport himself better.

The anti-wealth examples that Perkins cites -- the Occupy Wall Street protests nationwide, a Bay Area backlash against the luxury buses that take Google employees to work, concerns that tech millionaires are pushing up Bay Area real estate prices and pushing out long-time residents -- are hardly the stuff of the Third Reich and the Kristallnacht rampage. (Perkins, to his credit, later apologized.)

But there's another extreme at play. In a New York Times column published on Jan. 27 headlined "Paranoia of the Plutocrats," Nobel Prize economics laureate Paul Krugman writes that "Mr. Perkins isn't that much of an outlier" but is part of "a class of people who are alarmingly detached from reality."

"Every group finds itself facing criticism, and ends up on the losing side of policy disputes, somewhere along the way; that's democracy," Krugman writes. "The question is what happens next. Normal people take it in stride; even if they're angry and bitter over political setbacks, they don't cry persecution, compare their critics to Nazis and insist that the world revolves around their hurt feelings." OK, so far so good, until he adds: "But the rich are different from you and me."

Krugman presents Perkins as the poster boy for the hated "1%," an abnormal collective predisposed to hoarding their wealth, crying persecution, and comparing their critics to Nazis. (Evidently the non-rich are all upstanding citizens.) This from a wealthy former Enron adviser who's now a columnist for the elitist New York Times. Perhaps Krugman doesn't see the irony.

If we want to debate whether Silicon Valley or Wall Street or Washington or any other "class" of people tends to be insular or doesn't do enough social good with their riches or influence, let's debate those issues, presenting facts rather than gross generalizations. Tech blogger and academic Vivek Wadhwa (for one) has been making this broad case against Silicon Valley in a series of recent pieces in the Washington Post.

In his most recent post, titled "Enough is enough, Silicon Valley must end its elitism and arrogance," Wadhwa argues persuasively that Silicon Valley's workforce isn't nearly as diverse as it should be, pointing to Twitter's male-dominated board (and the CEO's defense of it), a sexual harassment scandal at Kleiner Perkins, and past statements from the principals of Facebook, Y Combinator, and other Silicon Valley firms about their inclination to back and hire young (rather than older) people. Despite some progress on the diversity front over the past several years, there's a body of evidence to support the notion that the tech industry remains the province of white men -- and to some extent, young men, especially among web companies. Even the CEO of old school SAP doesn't hide the company's ambition to attract younger talent, though he isn't just looking for white males.

In the end, tech companies will do what's in their own commercial interests, and diversity is becoming a business imperative, not just a social one. As Tom Georgens, CEO of No. 2 storage company NetApp (No. 33 on Fortune's 2014 "100 Best Companies To Work For" list), says: "If we're going to create an environment that's not attractive to certain categories of people, then we need to get a disproportionate amount of smart people from all the other categories. And I don't think that's a worthwhile thing. So whether it be race, gender, geographical location, sexual identity -- we want the best people in the world to work for us and we want to create an environment where they want to live and grow."

Rob Preston currently serves as VP and editor in chief of InformationWeek, where he oversees the editorial content and direction of its various website, digital magazine, Webcast, live and virtual event, and other products. Rob has 25 years of experience in high-tech ... View Full Bio

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RobPreston
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RobPreston,
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2/4/2014 | 2:57:39 PM
Just scratching the surface
None of what I wrote above, of course, factors in the wider-spread wealth and job creation (and thus inherent good) that comes from building growing, thriving technology businesses. 
Lorna Garey
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Lorna Garey,
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2/4/2014 | 4:45:03 PM
Re: Just scratching the surface
Ginning up "class warfare" seems to be a growth industry. No doubt there's a problem around income inequality; it's a disturbing stat that 85 individuals own more wealth than half the world's population. However, I think there are much bigger villians than tech executives -- so why is it they get so much heat? Just visibility versus Wall Street, fossil fuel and military/industrial complex CEOs? Or perhaps they're seen as less likely to retailiate!
Thomas Claburn
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Thomas Claburn,
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2/4/2014 | 4:48:22 PM
Re: Just scratching the surface
As much as diversity is an important issue to address, Silicon Valley and Wall Street need to mind the gap between executive and employee pay. According to the Institute for Policy Studies, the average pay gap between CEOS and workers grew from 195-to-1 in 1993 to 354-to-1 in 2012. That's an average pay increase of 82% over a decade.

No single person deserves to be paid 354x what the average worker at a company makes (in terms of salary...when it comes to equity, I think that company founders deserve rewards for the risk they take, but that's a different issue). And that's an average. At some companies, the CEO makes over 1,000 times more than the average worker. 

Meanwhile, the median American household income has fallen from $54,932 in 1999 to $50,054 in 2012. And for the first time since the Great Depression, more than half the total income in the US went to the top 10% of Americans (The Second Machine Age, p.129).

This is not the way to run a sustainable, stable society. It's the road to strife. 
RobPreston
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RobPreston,
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2/4/2014 | 5:16:49 PM
Re: Just scratching the surface
I know this isn't a popular sentiment, but do we really think that spreading a CEO's pay around to the rank and file will make for better-run companies or happier employees? "No single person deserves to be paid 354x what the average worker at a company makes." So what's the right multiple? 100? 77? 10? 7? The law of supply and demand determines executive salaries, not some pretermined pay schedule of what's fair. I may not think a certain CEO is worth getting paid 354x what his/her average employee is paid (and I don't think most CEOs are worth the multiple), but not every CEO brings the same value...and what I think is fair doesn't matter in a capitalist economy.

If a CEO isn't earning his keep, bounce him--without the parachute. If employees don't like that the big boss is making a ton more money than they are, go work elsewhere. The disparity multiple isn't a number that can or should be managed to, unless we're going to institute arbitrary caps on executive pay. Are we then going to put caps on wealth as well?
 
The median American household income has fallen. The answer isn't to redistribute the pay of top execs. The math won't work. The answer is to get the economy booming again so that we create more opportunities and more competition for more people. 
 
Thomas Claburn
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Thomas Claburn,
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2/4/2014 | 6:50:21 PM
Re: Just scratching the surface
But does the law of supply and demand really apply to the way boards appoint CEOs? The process is closed and secretive. The selection criteria are biased in that the qualifications are subjective. (I suspect I could have run Yahoo into the ground at least as effectively as the ineffective executives who preceded Marissa Mayer, at a much lower cost, but the Yahoo board never called.) And accountability is limited through the corporate governance structure. Shareholders have to move mountains to get their motions acted on. What's more, such high pay tends not to be tied to performance. 

If CEO selection and salary determination were done through some public process with accountability and transparency, I would not have an issue with huge pay ratios. It would truly be up to the market. To flip the question around, is there a salary multiple that's unconscionable? 

There's an interesting Washington Post article from last year discussing this issue. In it, Peter Drucker suggests 20-to-1 is the right CEO/employee salary ratio to prevent resentment and low morale.

Meanwhile, we just saw Apple, Google, and other Silicon Valley companies conspiring to depress employee wages through non-competition agreements. We have a two-tiered system and management plays by a very different set of rules than employees.

I too hope a booming economy will raise all boats, but technology tends to create winner-take-all markets, making the problem worse rather than better.

Rather than wealth caps, we should be looking at where we have regulations that create exorbitant wealth for a few at the expense of the many. Take our intellectual property system, for example. Is there a point when the exclusive monopoly granted by a patent or copyright becomes anticompetitive and ends up blocking thousands of entrpreneurs in order to enrich one? That point varies by industry (biotech being more deserving of a long patent franchise than software, for example), but I do think it exists and should be given some serious thought.
RobPreston
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RobPreston,
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2/5/2014 | 8:30:00 AM
Re: Just scratching the surface
The law of supply and demand doesn't necessarily produce perfect decisions. Yahoo paid what it did for its previous CEOs because that was the pay the market was dictating. In retrospect, Yahoo overpaid its previous CEOs because they didn't produce -- so it fired them. If Yahoo's shareholders don't think the board is doing a good enough job of finding good CEOs or acting fast enough to rectify hiring mistakes or paying too much for the CEOs it brings in, then they can take their money out of Yahoo and invest it in some other company that they think is better run and has more transparent governance. I'm sure a lot of shareholders did just that before Marissa Mayer was hired--thus why Yahoo's stock price took a beating at that time.

If pay was about fairness or the importance of the job, nurses and teachers and power plant technicians would command among the highest salaries. But the market sets the rate -- there's a huge supply of teachers in my local area and not a lot of demand. Is it unfair that teachers make 1/354the of what a top investment banker might make? It's not a matter of fairness. 
David F. Carr
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David F. Carr,
User Rank: Author
2/5/2014 | 9:11:11 AM
Re: Just scratching the surface
Maybe more of silicon valley's charitable giving should flow toward boosting the salaries of teachers, nurses, and others do social good.
RobPreston
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RobPreston,
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2/5/2014 | 9:13:56 AM
Re: Just scratching the surface
...I'm also not arguing that a 300:1 salary ratio is healthy for a company. If corporate boards want to manage to the 20:1 ratio that Peter Drucker recommends, I'm all for that. But companies shouldn't be held to ratios by some outside regulatory body or other overseer.
RobPreston
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RobPreston,
User Rank: Author
2/7/2014 | 11:14:27 AM
Re: Just scratching the surface
At a recent HCM conference in Las Vegas, Ellison said a little about the work he's supporting on the Hawaiian island of Lanai, which he bought last year for $500 million. As my colleague Doug Henschen reports: Ellison spent more than five minutes detailing his plans for experiments in green energy, smart agriculture, and improved schools and public facilities on the island. "There are things we're doing as far as logistics, power generation, power distribution, irrigation, desalinization that can be a model for a next generation of technology," Ellison said.
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