Warren Buffett’s Frustration Over CEO Pay Practices

Editor’s Note: This post is by Broc Romanek of TheCorporateCounsel.net.

Always a fascinating read, here is Warren Buffett’s 23-page 2007 letter to shareholders.  Warren always has something to say about executive compensation practices, and this year’s letter is no exception.  On page 19, he notes that he has served as a director on 19 boards and he has been the “Typhoid Mary” of compensation committees:

“At only one company was I assigned to comp committee duty, and then I was promptly outvoted on the most crucial decision that we faced.  My ostracism has been peculiar, considering that I certainly haven’t lacked experience in setting CEO pay. At Berkshire, after all, I am a one-man compensation committee who determines the salaries and incentives for the CEOs of around 40 significant operating businesses.”

Warren goes on to wax about a pack mentality regarding executive compensation, which culminates with the following:

“CEO perks at one company are quickly copied elsewhere. ‘All the other kids have one’ may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees. 

“Irrational and excessive comp practices will not be materially changed by disclosure or by ‘independent’ comp committee members.  Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent.  Compensation reform will only occur if the largest institutional shareholders–it would only take a few–demand a fresh look at the whole system.  The consultants’ present drill of deftly selecting ‘peer’ companies to compare with their clients will only perpetuate present excesses.”

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  1. By Black Swan vs Typhoid Mary « The Reputation Economy on Thursday, February 12, 2009 at 1:25 pm

    […] The Harvard Law School Corporate Governance Blog » Warren Buffett … – Warren Buffett’s Frustration Over CEO Pay Practices. Posted by Broc Romanek, TheCorporateCounsel.net, on Monday March 5, 2007 at 7:07 pm. Always a fascinating read, here is Warren Buffett’s 23-page 2007 letter to shareholders. … […]