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Collection: Warren Buffett - #93 Investing 'View on High Executive Compensation'



I’m Ralph Bedford (PH) from Phoenix, Arizona.

The question I’m going to ask does not pertain to Berkshire Hathaway, but I would appreciate it if you gentlemen, if you can, explain the justification and rationalization for the exorbitant salaries, bonuses, perks, directors’ fees, and other benefits that most public corporations are paying. (Applause) WARREN BUFFETT 00:48

I would say this. In my own view, the most exorbitant are not necessarily the biggest numbers. What really bothers me is when companies pay a lot of money for mediocrity, and that happens all too often.

But we have no quarrel in our subsidiaries, for example, for paying a lot of money for outstanding performance. I mean, we get it back 10 or 20 or 50-for-1. And similarly in public companies, we think that there have been managers — in our managers — who have taken companies to many, many, many billions of market value more than would’ve happened with virtually anyone else. And they sometimes take a lot of money for that. Sometimes, as in the case of Tom Murphy at Cap Cities, you know, it just didn’t make a difference to him. I mean, he performed in a way that would justify — would have justified huge sums, but it wasn’t — he would tell you that he had all the money he needed and he just didn’t care to take what the market might bear. But I am bothered by irrational pay systems. And I’m particularly bothered when average managers take really large sums. I’m bothered when they design, or have designed for them, systems that are very costly to the company — maybe partly to make themselves look good because they want huge options themselves, so they feel if they give options widely throughout the company — so they design a system that is illogical company-wide because they want one that’s illogical for them personally. But large sums, per se, don’t bother me. I’m not saying, you know, whether any individual should — might want to take them or not. But I do not mind paying a lot of money for performance. It’s done in athletics, it’s done in entertainment, but in business the people who are the .200 hitters and the people who would not attract a crowd as an entertainer have worked it out so that — I mean, the system has evolved in such a way that — many of them take huge sums.

And I think that’s obscene, but I can tell you, there isn’t much you can do about. The system feeds on itself. And companies do look at other companies’ proxy statements, every CEO does. And they say, “Well, if Joe Smith is worth X I have to be worth more.” And they tell the directors that, “Certainly you wouldn’t be hiring anybody that was below average, so how can you pay me below average?” And the consultants come in and ratchet up the rewards. And it’s not anything that’s going to go away.

It’s like we were talking about campaign finance reform earlier. The people who have their hands on the switch are the beneficiaries of the system. And it’s very hard to change the system when the guy whose hand is on the switch is benefitting enormously, and perhaps disproportionately, from that system. Charlie? CHARLIE MUNGER 03:59

Well yeah, I’d like to report that the original Vanderbilt behaved even better than the people at Berkshire Hathaway. He didn’t take any salary at all. He thought it was beneath him as a significant shareholder to take a salary. That ideal, I’m afraid, died with him. (Laughter) WARREN BUFFETT 04:19

Yeah, Charlie and I — our directors are paid $900 a year, but I tell them on an hourly basis they’re making a fortune because we don’t work them that hard. (Laughter) But Charlie and I did not think through, when we established that $900 a year, is that they set our salaries, too, so — (Laughter) We have not followed the standard procedure, which is to load it on the directors, and the directors shall load it on you. CHARLIE MUNGER 04:43

I do think it will have pernicious effects for the country in its entirety as this thing keeps escalating, because I think you’re getting a widespread perception that at the very top, corporate salaries in America are too high. And that is not a good thing for a civilization, when the leaders are regarded as not dealing fairly with the institutions that they head. WARREN BUFFETT 05:11

Yeah. If — (Applause) CHARLIE MUNGER 05:17

And as for the corporation consultants who advise on salaries, all I can say is that prostitution would be a step up for them. (Laughter) WARREN BUFFETT 05:38

Put him down as undecided. (Laughter) Zone two, please.


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