Go West again?
The physical attractions of the Bay area can't be denied, nor can the important role played by Stanford. But there has to be more to the story than that. In the mid-'Sixties, when I joined Teradyne, the Boston area was home to some of the most dynamic and promising semiconductor companies in the world. Only Texas Instruments sold more semiconductors than did Boston's Transitron. Sylvania, Sprague, Clevite, ITT, CBS Electronics, Raytheon, Microwave Associates and a number of other companies were berthed in eastern Massachusetts, employing thousands of engineers designing, making, and selling semiconductor transistors and diodes, and the semiconductor operations of GE and IBM were not that far away.
Within an astonishingly short time, the key talent of most of these companies deserted the East Coast for California. How could that have happened? Notwithstanding the factors mentioned, New England people grow deep roots and are notoriously unwilling to relocate. Yet they packed up and went; enough of them left to sink Route 128 as a semiconductor hub. Something beyond the right to wear T-shirts to work had to be involved. And it couldn't have been the extra sunshine; if it were, they would have gone to Los Angeles or Phoenix, not the Bay Area.
Overlooked Factor: Stock Options
My own experience suggests another, overlooked factor: stock options.
Stock options were not unknown in Boston in the 1960s, but they were not the key part of a broad-based incentive system that they were to become. Transitron's owners did not offer its employees options until it was too late; nor did most of the other Route 128 chipmakers. Those options given out were usually reserved for top managers and a handful of the companies' stars. Meanwhile, the Bay Area start-ups were romancing East Coast talent with the opportunity to strike it rich through options. In Boston, striking it rich was a vulgar concept: Wealth was a reward for many years of service at the law firm or bank or accountancy, with a partnership at the end of the rainbow.
Some risk-taking was encouraged in Boston. American Research & Development, a Boston company, provided seed money for many start-ups, including Digital Equipment and Teradyne, two companies that used stock options effectively to attract and retain the best and brightest. But the boys in California were playing this game at the major-league level, easily out-optioning the more conservative east-coasters. Result: Hordes of engineers left the Boston area in search of the big payoff out west. In a great many cases, they found it.
In time high-tech companies throughout the country would catch on to the Silicon Valley secret: Stock options were a low-cost way to draw talent away from mature companies and into start-ups. In return for assuming higher risk, the options-givers offered the recruit the chance for high rewards through equity ownership and a piece of the action. Best of all, the cost didn't hit the P&L--an important point, since there usually were little or no profits in the early years of a start-up.
By the time everybody wised up to the game, Silicon Valley had cornered the semiconductor industry. But other industries learned the lesson well, using options to drive new companies and to inject excitement into older ones.
These days option grants are seen as a conduit through which obscenely high compensation flows to top executives, and there are certainly instances where this is true. But most successful high-tech companies distribute stock options widely, often covering just about the entire organization. In Teradyne's case, our core product is a highly complex test system costing over $1 million apiece, and designed, made, sold and supported by thousands of talented engineers and technicians all over the world. To attract, retain, and motivate this army of professionals, we give virtually all of them stock options, and options have been a key factor in our ability to grow over most of our 42-year history.
Much is made of the fact that options have value, and many insist that this value should be counted as an operating expense. Leaving aside the difficulty of assigning a value to an option that may in fact wind up worthless, the fact is that the present system works beautifully, and tampering with a winning system is usually a bad idea. The stockholders do suffer some slight dilution (in Teradyne's case, about 4% a year, on average), but most of them probably consider that a very small price to pay for superior performance.
Anything that works this well becomes an inviting target for those who are instinctively hostile to the creation of individual wealth. These days it is easy to stoke the fires of resentment. A lot of investors lost out in the recent stock-market collapse. The bursting of the market bubble has absolutely nothing to do with stock options, but the urge to lash out in response will not be denied. If investors lose $4 trillion, someone must pay.
Several people, including former Fed Chairman Paul Volcker, have suggested that it may be time to do away with options altogether. Volcker's complaint is that options are tied to stock-market performance, not company performance. The thought that some undeserving people may make money from options is apparently too much to bear. But life is never 100% fair, and the key issue should not be the windfalls received by a few, but whether the options program in general has succeeded in its primary mission to help attract, retain, and motivate the talent needed to translate ideas into wealth and to compete effectively in world markets.
Migration to Asia?
While options are under attack in the U.S., elsewhere the stock option as a recruiting tool is on the rise. Asian engineers educated at MIT and Stanford and CalTech are returning to their native Korea or Hong Kong or Taiwan, not just out of patriotic zeal, but in search of the kind of Big Payoff that is now suspect in the U.S. Taiwan in particular has become a magnet for talent, and no one can tour the chip plants just outside Taipei without the same sense of amazement one used to feel on his or her first visit to Silicon Valley.
Is the next cycle of "Go West, Young Man" about to begin? Yes. The prospect of native U.S. engineers migrating to Asia may seem like a stretch. All I can tell you is that in 1960 more than one proper Bostonian scoffed at the very idea that any self-respecting new Englander could leave the land of the Boston Symphony and Marblehead and Harvard and the Red Sox and Nantucket for culturally deprived California. Today, many semiconductor engineers are finding out that the divide between Asia and California is not much greater than the divide between the Back Bay and the Bay Area. Finally, it is worth noting that when the math and science prizes are handed out in our high schools and colleges, students of Asian origin are often at the top of the list.
I doubt that the SEC or FASB or the IRS would be so foolish as to burden the stock-option system with enough regulations and taxes to destroy it. To do so would be to ignore the incredible economic benefits options have showered on this country over the past 40 years, and to invite the entrepreneurs of the Far East to do to all of America what California once did to Massachusetts. But government has been known to do foolish things, and the lights of capitalism have begun to burn bright on the other side of the Pacific.
George Chamillard is chairman and CEO of Teradyne, a Boston, Massachusetts-based maker of automatic test equipment for the electronics industry. His article appeared originally in Barron's, July 21, 2003, p. 36. Reprinted with permission of Barron's [C] 2003 Dow Jones & Company, Inc. All Rights Reserved Worldwide.
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|Title Annotation:||One Point Of View; George Chamillard|
|Date:||Nov 1, 2003|
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