Collection: Warren Buffett - #189 'Executive Compensation'


Video Link: https://youtu.be/mk167ODz-58


In this episode, Warren Buffett was asked regarding on Doug Ivester’s severance package in Coca-Cola Company and what justifies it, considering he had a very short tenure as CEO and that he took the reins from some very strong performance from Goizueta?


In this episode, you’ll learn:

  • How to determine executive compensation?

  • What is Warren Buffett thoughts on Doug Ivester's severance package?

  • Warren Buffett and Charlie Munger comments on executive compensation in corporate America.

To check out all Collection: Warren Buffett <click here>

[Transcript]

(Source: https://buffett.cnbc.com/2000-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:08

Good afternoon, Mr. Buffett and Mr. Munger. My name is Bob Odem (PH) from Seattle, Washington.


I’d like to say, first of all, how nice it is to come out to Omaha, and how I am made to feel comfortable by its people. I hope you both are as enthusiastic about the meeting as you seem to be in years to come. Mr. Munger, by the way, I am looking forward to your book coming out.


My question has to do with Doug Ivester’s severance package and what justifies it, considering he had a very short tenure as CEO and that he took the reins from some very strong performance from Goizueta and to be relieved of his dismal performance by Doug Daft.


My brother, still in the bottling and distribution business of Coke, cut this article from Bottlers’ World Magazine concerning the severance package. He said he also would retire, if he were offered this — (laughter) — 97.4 million in stock, 3 million per year for 2000 to 2002, 2 million per year, 2002 to 2007, 1.4 million per year from 2007 for the rest of his life.


Anyway, I don’t see how — or here, car and cell phone, he gets that. That’s a Mercury Grand Marquis and mobile telephones, laptop computer, and the like. I don’t know why he’d need that.


Anyway, I have been wondering how you voted on this, whether you supported it or not, or what degree, considering executive pay at Berkshire hasn’t risen except, perhaps, for the CFO who last got a raise, I believe, in 1997.


WARREN BUFFETT 01:58

You asked — no, CFO’s gotten a raise every year.


But the — you asked whether I supported it. Yeah, I can tell you, I supported it. Because with my 35 percent interest in 8 percent of Coca-Cola, I paid almost 3 percent of it myself, personally.


I probably paid more severance pay than any man in the history of the world, personally. (Laughter)


I was not on the comp committee. But I will say this. Doug Ivester did all kinds of really wonderful things for the Coca-Cola Company, over time.


He was — for many, many years, when Roberto was running things, Doug — working with Don Keough, too, and I had this first hand from both of them. I wasn’t in Atlanta. But there was no question that he was a huge, huge asset and conceived and carried out many of the things that other people may have gotten even more credit for.


Most of what you described, not the little things at the end, but most of what you described was contractually in place at the time that he left. I mean, those were deals that were made, restricted stock and all of that, that really occurred, in significant part, when Roberto was the chief executive officer and at Roberto’s recommendation.


Doug’s devotion to Coke, his knowledge of Coke, I mean, he lived and ate and breathed Coke. But in my opinion, Doug Daft was the man for the job. And a change was made.


But it was not because of any lack of attention by Doug Ivester. It was not because he hadn’t done great things as CFO of the company.


But I think he was not the right man at the time he took over as CEO. He took over, as you know, when Roberto died quite suddenly. And there wasn’t any real option in terms of the —


He was Roberto’s hand-picked successor. It’s almost inconceivable that somebody else would’ve been chosen at that time.


And we made a decision, within a couple of years, that the company would move faster and better with Doug Daft in charge. And we made a deal in severance which was about 80 percent, or some very high percentage, embedded.


And like I say, I paid more of it than anybody else. So it isn’t like it was all academic.


And I think, considering some other factors, which maybe I’ll put in a book sometime, that entered into it, it was definitely the right decision for the Coca-Cola Company.


Whether the computer should’ve been included or the car or anything, I can’t — I would not want to defend small item by small item. But I can — I think the Coca-Cola shareholders are going to be many billions of dollars ahead over time by what was done then. And it wasn’t easy to do.


We’ll go to 5 — Charlie, do you have anything to add on that? You paid a fair amount, too. (Buffett laughs)


CHARLIE MUNGER 05:09

Generally speaking, I think it’s a mistake for corporate America to create as much hostility as it does, which is based on the way it compensates principal officers of corporations.


It is simply maddening to add a little clause that the corporation will scratch the guy’s back for just tiny, little bits of stuff that looks terrible. To me, that is extremely stupid.


And I see it where the corporation helps him prepare his tax return for 10 years after he leaves and so forth.


I think that makes a terrible impression on shareholders, generally. And I think corporate America’s crazy to do it. They get sold this stuff by these damn consultants. (Laughter)


WARREN BUFFETT 06:02

I agree with Charlie. And what — it is true — (applause) — what Charlie says.


We don’t have a contract, at least that I can think of, at Berkshire. It’s perfectly easy to run a company without them.


We’ve got wonderful managers. You know, we’ve got things that might be called contracts. I mean, we’ve got deals with them, in terms of we work out compensation arrangements and all that.


But I can’t remember a case of anybody that’s been with us that ever has called in a lawyer or anything of the sort, or where we even had to reduce things to writing, basically. And it works fine.


And it is a little maddening, as Charlie says, to have a CEO, you know, show up with a lawyer with a 20-page contract. It’s become standard operating procedure.


And once you get a big, public company with committees, consultants to the committees, consultants who, usually, are picked by the officers of the company, they look around at what everybody else is doing and say, “Well, that’s the way the other guy does it. So I’ll do it.”


I think you can — I think the proxy statements of the last 20 years, what that’s induced in the way of behavior by people at somewhat comparable companies that look at the proxy statements of their competitors and then say to their lawyer, “Well, Joe Blow got this. Why shouldn’t I have it?”


It just escalates and escalates and escalates. And it ratchets. And it won’t stop. I have never seen a compensation consultant come into a public company and suggest a plan that, net, reduces the cost of compensation.


At — and I see all kinds of people leave companies with — who have made tremendous amounts of money. And nobody wants to hire them at half the price, or a quarter of the price, or a tenth of the price. I mean, it’s not a market system.


CEO compensation is not a market system. And it’s not subject to market tests. And I don’t know what you do about that, particularly. But I — it doesn’t seem to bother shareholders very much. The ones that could change it —


CHARLIE MUNGER 08:07

Oh, I think it bothers them a lot, Warren. It’s just they feel powerless.


WARREN BUFFETT 08:11

Yeah, but institutional shareholders could change that. My guess is that the top 30 institutions, probably, control — what — two-thirds of the big companies in the country. And they don’t seem to care that much.


They — actually, they spend their time on what I regard as peripheral issues, usually. They talk about other things. They get involved in rituals of corporate governance that, frankly, don’t mean a damn in terms of how the company performs. And they seem to ignore these other issues.


But, you know, there’s — we’ve got enough to do running Berkshire. So we can’t reform the world on that.


We will run Berkshire in a rational manner. And we have yet to hire a compensation consultant. And we’ve yet to lose an important manager.


OK, we’ll go to number 5. (Applause)

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