One big difference between West Coast and East Coast oligarchs is that a lot fewer people lionize the Eastern ones. Even though the media and sadly too many regulators treat the likes of Lloyd Blankfein with far too much deference, the broader public has wised up. Even MBAs, who normally side with the rich and powerful, have asked me, “When is Jamie Dimon going to jail?”
But Silicon Valley’s royalty occupy a class of their own, the toast of TED talks and the model for aspiring entrepreneurs the world over. And the admiration is particularly strong among the rank and file workers in the San Francisco area. So it’s more than a bit ironic to see that these titans of technology engaged in a formal arrangement to suppress pay to the tune of $9 billion across Apple, Google, Intel, Adobe, Intuit, and Pixar.
Here you thought it was only those poor Foxconn workers making iPhones in China who were being exploited. Silly you.
It’s surprising to see the Obama Administration, which has not even done a good job of faking interest in pursuing criminal charges against major financial firms or their top executives for nearly destroying the global economy, make a frontal assault on some of Silicon Valley’s biggest names. But the conduct in question, namely price fixing, is slam-dunk criminal if the charges prove out. For instance, an early 1990s price rigging investigation involving lysine and citric acid at ADM led to $100 million in fines and jail time for top executives, including the vice chairman, who was also the heir apparent, and criminal fines from other corporate co-conspirators. That success also led to other successful price fixing prosecutions, yielding billions in fines. This victory led to other successful cartel-busting prosecutions.
The government’s case, as summarized by Mark Ames at Pando, is chock full of damning e-mails among top executives, which reveal Steve Jobs to have been the lead actor and main enforcer of the pay-containment pact, which dates to 2005. But its real mastermind was George Lucas, who had a similar scheme in place in the 1980s and enlisted Jobs when he sold the computer animation division of Lucasfilm to Pixar. As Ames explains:
One of the more telling elements to this lawsuit is the role played by “Star Wars” creator George Lucas, who emerges as the Obi-Wan Kenobi of the wage-theft scheme. It’s almost too perfectly symbolic that Lucas — the symbiosis of Baby Boomer New Age mysticism, Left Coast power, political infantilism, and dreary 19th century labor exploitation — should be responsible for dreaming up the wage theft scheme back in the mid-1980s, when Lucas sold the computer animation division of Lucasfilm, Pixar, to Steve Jobs.
As Pixar went independent in 1986, Lucas explained his philosophy about how competition for computer engineers violated his sense of normalcy — and profit margins. According to court documents:
George Lucas believed that companies should not compete against each other for employees, because ‘[i]t’s not normal industrial competitive situation.’ As George Lucas explained, ‘I always — the rule we had, or the rule that I put down for everybody,’ was that ‘we cannot get into a bidding war with other companies because we don’t have the margins for that sort of thing.’
Translated, Lucas’ wage-reduction agreement meant that Lucasfilm and Pixar agreed to a) never cold call each other’s employees; b) notify each other if making an offer to an employee of the other company, even if that employee applied for the job on his or her own without being recruited; c) any offer made would be “final” so as to avoid a costly bidding war that would drive up not just the employee’s salary, but also drive up the pay scale of every other employee in the firm.
Jobs held to this agreement, and used it as the basis two decades later to suppress employee costs just as fierce competition was driving up tech engineers’ wages.
Fast forward, and here is the guts of the government’s allegations:
Between approximately 2005 and 2009, Defendants Adobe, Apple, Google, Intel, Intuit, Lucasfilm, and Pixar allegedly engaged in an “overarching conspiracy” to eliminate competition among Defendants for skilled labor. The conspiracy consisted of an interconnected web of express bilateral agreements among Defendants to abstain from actively soliciting each other’s employees. Plaintiffs allege that each agreement involved a company under the control of Steve Jobs (Co-Founder, Former Chairman, and Former CEO of Apple) and/or a company that shared at least one director with Apple’s Board of Directors. Defendants memorialized these nearly identical agreements in CEO-to-CEO emails and other documents, including “Do Not Call” lists, thereby putting each Defendant’s employees off-limits to other Defendants. Each bilateral agreement applied to all employees of a given pair of Defendants. These agreements were not limited by geography, job function, product group, or time period. Nor were they related to any specific business or other collaboration between Defendants.
One of the critical elements of this alleged conspiracy is that the way these tech giants would ordinarily have gone about recruiting would be to try to poach each other’s best employees by cold-calling them. This of course would have the effect of bidding up their prices and would likely over time drag up pay levels of some of the next-tier workers. Instead, the companies in this scheme shared their wage data with each other so they could coordinate and reduce compensation. As Intel’s senior HR executive put it:
While we pay lip service to meritocracy, we really believe more in treating everyone the same within broad bands.
And the companies had other devices for coordination and pay suppression. Again per Ames:
The evidence includes software tools used by the companies to keep tabs on pay scales to ensure that within job “families” or titles, pay remained equitable within a margin of variation, and that as competition and recruitment boiled over in 2005, emails between executives and human resources departments complained about the pressure on wages caused by recruiters cold calling their employees, and bidding wars for key engineers.
Google, like the others, used a “salary algorithm” to ensure salaries remained within a tight band across like jobs. Although tech companies like to claim that talent and hard work are rewarded, in private, Google’s “People Ops” department kept overall compensation essentially equitable by making sure that lower-paid employees who performed well got higher salary increases than higher-paid employees who also performed well.
What is stunning is all the exchanges among top executives. The filing quotes numerous e-mails among Jobs, Sergey Brin, Adobe CEO Bruce Chizen, and other Silicon Valley heavy-hitters that talk openly about the agreement and various threats when a member to an agreement falls out of line. By contrast, in the ADM case above, the parties to the lysine cartel were very careful to hold meetings where they’d discuss price fixing overseas, where that action was not criminal. The brazenness is remarkable.
A jury trial in San Jose is scheduled to start May 27. This should be great fun. I’ve included the filing below.