JPMorgan pays CEO Jamie Dimon $20 million, and it's instantly the subject of widespread angst—online, in newspapers, and all over cable news. Then, this week, Google announces a $106 million payday for Chairman Eric Schmidt, and the reaction is relatively mute.
This was the subject of a Steven Davidoff's column (that notably left out the word "bailout.") People have every reason to be mad at JPMorgan and Dimon, given the way the last seven years have gone, not just for the bailout but also for all the lawbreaking that has characterized Dimon's watch (nepotism in China, LIBOR, money laundering, and the list goes on.). While there are reasons to be mad at Google, they don't involve blowing up the world economy, consuming billions of dollars of taxpayer money, and then whining about being treated unfairly.
That's why people are upset about Dimon's paltry $20 million rather than Schmidt's princely $106 million. But it doesn't make Silicon Valley's huge payouts right.
Eric Schmidt's 2013 year-end bonus comes out of Google shareholders' pockets every bit as much as Dimon's compensation comes out of JPMorgan's. Both stories are examples of boards of directors bending over backwards to accommodate one of their one. The same goes for the $78 million that Larry Ellison got Oracle's board to pay him in 2013.
The most common defense of the Valley versus the Street—the former builds real things; the latter just makes money—only goes so far. In the case of Dimon versus Schmidt, we're not talking about huge rewards that founders get when the companies they build become successful (see Brian Acton and Jan Koum of WhatsApp, for example). That happens because they owned stock from day 1, when it was virtually worthless, and that stock grew in value over time. It's not clear that founders deserve those fabulous riches in any kind of profound moral sense, but no one handed them huge piles of shareholders' money, either.
With Schmidt, Dimon, and Ellison, we're talking about people who are already ludicrously rich being handed tens of millions of dollars in new compensation by the boards of large, public companies. That's on top of the money they made because the stock they already held went up in value over the past year—an accomplishment they can't claim is entirely their own, since the entire S&P 500 had a massive year of growth.
At this scale, the usual defenses for generous compensation don't really apply. It's hard to see how any other company would give Eric Schmidt $106 million or Larry Ellison $78 million. You could argue that money is a powerful incentive, and it is, but (a) both men are already heavily invested in their companies, so their incentive to add value is established; and (b) at some level, motivating with money must have diminishing returns. It's hard to see how $106 million sends a message that, say, $10 million fails to impart.
Contrary to Davidoff, I think there is a real difference between Silicon Valley and Wall Street. Davidoff falls back on the usual defense of finance—"it is finance that produces the money for tech start-ups," etc.—but that's not convincing.
First of all, the risky venture capital that funds most Silicon Valley startups has little to do with Wall Street banks. It comes from VC firms in Menlo Park, and their limited partners are institutional investors. Yes, you need an investment bank to underwrite your IPO someday, but by that point the value has been created and the bankers contribute to that value about as much as the lawyers and accountants: They are critical, highly-skilled professionals, and that's it. And as an aside, the financial products involved in financing a technology startup—limited partnerships, convertible preferred stock, and common stock—are pretty close to plain vanilla, and have little to do with the financial innovation that has made Wall Street so rich in recent decades.
Second, as Simon Johnson and I have argued over the years, there is such a thing as too much finance—too much financial intermediation, causing capital to flow to value-destroying activities—especially when financial firms benefit from subsidies for, say, being too big to fail. Obviously we couldn't live without finance, but the fact that we have enormous, complex megabanks whose profits are fueled by their trading desks isn't proof that we need them or that they are doing much good for society.
But that's no excuse for Palace of Versailles-style payouts to people for whom money is just a scorecard. I worked at one Silicon Valley company and co-founded another, so I am well aware of the self-aggrandizing "We Are Changing the World" attitude that is all too common in those parts. Sure, you may be changing the world. You might even be changing it for the better. But once you take funding, you're doing it with other people's money. And stuffing it into your own pocket is no better than when a hedge fund manager writes himself a huge check for his two-and-twenty.
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