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Wednesday, March 30, 2011

On the Exaggerated Value of Executive Compensation in American Society: The Case of Bill Gates and Paul Allen at Microsoft

Paul Allen claims in his book that Bill Gates tried on more than one occasion to reduce Allen’s relative ownership interest in Microsoft. Of course, the veracity of Allen’s explanation can be questioned even if the factual changes in percentage terms are a matter of public record. In focusing on whether Allen’s explanation is credible, The Wall Street Journal overlooks more fundamental category mistake in reckoning ownership as a species of compensation. Such an error may reflect a hypertrophy involving the value of money in American society—an exaggeration to which the journal may be susceptible as the foremost mouthpiece of American business.

The Wall Street Journal reports that Paul Allen has some critical things to say about his co-founder of Microsoft, Bill Gates. In general, Allen asserts that Gates tried more than once to reduce Allen’s relative financial ownership in the company. Whereas the journal focuses on the veracity of Allen’s claims—ultimately questioning the man’s credibility—I find in the story a case study on the difference between ownership and compensation for labor and on corporate leadership. I contend that the difference may often be minimized in business as well as by society, while particular CEOs are unduly projected onto the societal stage essentially as societal leaders.

Allen also claims in his book that in the mid-1970s, when he and Bill Gates were two college dropouts were based in New Mexico, Gates asked for 60% of their partnership because of his greater contributions to the creation of software for running the BASIC programming language on an early PC, the MITS Altair 8800. Allen says he had assumed that their partnership was evenly split, but he agreed Gates' request anyway. Several years later when Gates and Allen established Microsoft as a formal partnership, Gates asked to change their respective shares in the business to a 64-36 split, a demand to which Allen again agreed. Furthermore, in the early 1980s, Gates rebuffed Allen after the latter asked for an increase in his own Microsoft shares after his work on a successful Microsoft product called SoftCard, Allen writes that he was deeply disappointed in Gates’ response; he had known Gates since they were students at a prestigious private school in Seattle. "In that moment, something died for me," Allen writes. "I'd thought that our partnership was based on fairness, but now I saw that Bill's self-interest overrode all other considerations. My partner was out to grab as much of the pie as possible and hold on to it, and that was something I could not accept." Allen recounts that he sucked it up and thought, "OK…but one day I'm out of here." 
                                    Bill Gates and Paul Allen, co-founders of Microsoft
                                       By Doug Wilson/Corbis, printed in The Wall Street Journal 

Furthermore, Allen asserts that in 1982 he eavesdropped on a discussion in the Microsoft offices in Bellevue, Wash., between Bill Gates and Steve Ballmer, who went on to become the company's CEO. Allen claims that he heard the two men talking about his recent lack of productivity and how they might dilute his equity in the company by issuing options to themselves and other shareholders. Allen said he burst into the room and confronted the two men, both of whom later apologized to him and backed down from their plan. "I had helped start the company and was still an active member of management, though limited by my illness, and now my partner and my colleague were scheming to rip me off. . . . It was mercenary opportunism, plain and simple." If so, then the vaunted veneer of societal leadership that Bill Gates has attained by virtue of his achievements in software, sheer wealth, and philanthropy may be a projection of something more than the man, and thus a reflection of societal values.

Of course, there are two sides to squabbles, and this case is no exception. Gates's attempts to lower Mr. Allen's stake in the company reflected concerns that Allen wasn't working hard enough and wasn't commitment to the company, say people familiar with the relationship according to the journal. That was one reason, these people say, why Gates put a provision in their first partnership agreement that would allow him to buy out Allen if he thought there were "irreconcilable differences" between the two men. Allen refers to the provision but does not include a reason for it, which is telling. Furthermore, third parties with knowledge of meeting to which Allen refers claim that Allen puts himself in meetings that he did not in fact attend. If true, Allen’s claims regarding Gates could also be doubted, though there is factual support for the changes in ownership percentages even if not for the reasons.

If Gates was putting more effort into the business, an argument based on that could be made that he should receive a higher percentage of the ownership so he would receive more dividends. However, it could also be argued that ownership, unlike compensation, is based on having founded a business (or having purchased the rights to such a basis by buying stock-ownership). Gates may have conflated compensation with ownership in demanding a greater percentage of stock, essentially regarding the latter as compensation in treating dividends as a form of salary. Such a conflation may distort property ownership in a way that minimizes the fundamental difference between an owner and an employee. Of course, an owner can work as an employee of his own business, but the two roles are distinct. Gates’ mistaken notion of ownership may have been formed out of a society that over-values executive compensation, and more generally money. Consider, for example, the much higher compensation packages that American managers receive relative to their European colleagues. Relatedly, the ratio of executive to “lower level” employee compensation in the U.S. is much higher than in the E.U.  Such differences point to differences in societal values, and such values can, if exaggerated, lead to category mistakes. So Allen’s complaint against his boyhood friend and business partner may actually be a critique of a much larger problem in American society.

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