Warren Buffett on CEO Pay

Editor’s Note: This post is by Steven Kaplan of the University of Chicago.

I thought I’d mention two items on Warren Buffett’s views on executive pay.  (Broc Romanek posted here on Buffett’s 2007 letter to shareholders.  In that letter Buffett described current pay practices as “[i]rrational and excessive.”)

First, Berkshire Hathaway does not disclose what it pays its operating executives.  I would be curious to know how much Buffett pays them.  Second, Buffett was a strong supporter of Jim Kilts at Gillette.  Kilts was paid highly for performance, created some $20 billion in value, yet was criticized in some circles for being overpaid because he received over $150 million.  I happen to agree with Buffett that Kilts should have been congratulated rather than criticized.

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  1. Arthur Mboue
    Posted Tuesday, March 13, 2007 at 10:52 am | Permalink

    The board of director through its compensation committee grants stock options to CEOs for numerous purposes; for recruitment and retention, for a reward for meeting target balance score, as a way of attracting CEOs who are performance oriented, relatively less risk averse, and willing to trade present compensation for share in the firm. The value for shareholders is that stock options align the interest of managers and shareholders because managerial wealth increase with the stock price. As manager’s pay percentage tied to stock rise, manager concern about the stock price health increases. Since stock option pay off increases only when a company reaches a pre-set performance balance score unlike stock itself, does not penalize on negative departure but for the CEO it is a penalty based on opportunity earning theory. It might appear that achieving financial results through aggressive accounting would be irrational because the company’s true condition will be revealed, the market value of the company will suffer and presently held CEO options may become worthless. Having said that, I believe that a CEO perfromance oriented compensation package will be limited by the market.
    Arthur Mboue, 93 BA, 96 MBA, 99 JD, active researcher and Associate Prof candidate.

  2. Peter Klein
    Posted Wednesday, March 14, 2007 at 5:50 pm | Permalink

    Even though I am a former Gillette executive (and may appear biased, but “let the facts prevail!”), I totally agree with Mr. Kaplan’s above commentary; especially as it realtes to Jim Kilts and his performance at GILLETTE.

    Kilts (hired by the Board of course, who negotiated his comp upfront) arrived from the outside in 2/01 (1st outside CEO in about 70 years!) after 5 consecutive years of big-time under-performance across marketplace, business, financial and S/V key metrics (i.e., stock was down about 55-60% over that time and Gillette had missed 14-15 consecutive Quarters against their own Wall St guidance #’s!).

    This was a classical big-time (and, importantly, sustainable)turnaround (as measured by anyone’s scorecard)…
    and the only person globally who questioned the economics of the eventual sale to P&G was Massachusetts Sec of State Galvin (who to this day, since 1st QTR 2005 when his investigation began, has never issued a Report, and lost 2 of 2 cases in Boston federal court!).

    Kilts’ compensation when he exited Gillette (and P&G, since he stayed on thru 9/30/06, one year after control change) was mostly driven by the Gillette Board’s comp package for him when he arrived and based on successfully meeting all the Board’s financial targets starting in 2002, not from the sale per se to P&G. And most of his comp was in OPTIONS because he publicly stated (paraphrase): “…if Gillette does well I will do well… if not, we both suffer”.

    The real upside of the P&G deal was getting the P&G stock! Gillette was selling for about $42-43/share when the deal was announced in late 1/05 and the conversion price then was just under $55, BUT the ‘real conversion price’ was at control change after regulatory clearance (10/1/05) and that was just under $58. Most Gillette S/H’s kept their stock and converted it at .975 (I believe that was the exchange ratio) into P&G stock… now at about $62!).

    Warren Buffet (Berkshire owned about 9.9% of Gillette) announced publicly when he left the Gillette Board that he had no plans to sell any of his stock in the near term (and he didn’t… I believe he converted it all to P&G stock and even purchased a little more!) and was leaving the Board because he ‘now’ had confidence in the Gillette CEO (Kilts) and his management team.

    It’s ALL ABOUT creating, enhancing shareholder value on a discounted EP basis…
    and that was done big-time at Gillette…
    and the integration into P&G (2 very strong companies at the time) has gone well and has opened up major growth opportunities for P&G as well as for Gillette employees.

  3. Lance Knobel
    Posted Thursday, March 15, 2007 at 3:45 pm | Permalink

    According to today’s Wall Street Journal, Warren Buffet received total pay valued at $214,250 in 2006. He has received a $100,000 salary for the past 25 years. In addition to the salary, the $114,250 was “other compensation, representing directors’ fees or deferred phantom equity interests from companies in which Berkshire has significant investments”.

    His total pay in 2005 was $309,000.

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