Buffett: Changes in Attitude?
Uploaded: May 1, 2014
The name 'Buffett' means a lot in the rarified realms of high finance and corporate policy (Warren, not so much Jimmy). In attaining his stature as the world's third-richest individual, the so-called Oracle of Omaha has resisted the kind of self-congratulation that nearly always accompanies grand material success. He maintains a clear eye, and has severely criticized our current systems of income and inheritance taxation. And he has 'walked the talk' in terms of his own wealth. Both he and Bill Gates have pledged the bulk of their fortunes to the good works of the Gates Foundation. He is everybody's favorite bazillionaire.
So it is that many people have sat-up and noticed Mr. Buffett's subtle objection to Coca-Cola's extravagant executive compensation plan, scheduled to take effect next year. His Berkshire-Hathaway company is Coke's largest shareholder, at just under 10%. Buffett abstained from voting his shares on the plan, which passed with an 83% of the actual votes. So deep is his influence that he didn't need to actively resist the Plan to get his point across ? withholding support was subtly sufficient. Coke execs have been sent scurrying to amend its provisions before they take effect.
The plan at-issue is a complicated mix of stock options and shares, to be bestowed on numerous senior execs who meet various performance targets. So the math is difficult, and will be prone to minimization by observers with vested interests in diverting attention. Conversely, its impact will almost certainly be less than the $34 Billion and 16% ownership dilution claimed by its most vigorous opponents. Suffice it to say that the Coke plan is remarkable, even in an environment of self-dealing that has characterized executive compensation over the past half-century.
To understand that transformation, I recommend John Cassidy's The Greed Cycle, a remarkable history lesson/article that is both long, and heavy-laden with insights (it's also twelve years old, but remains fiercely relevant). In the 1950s, CEOs were paid about 40 times the wage of their average workers (if that average was $25K, the CEO could be expected to make about a healthy $1 million). They viewed themselves as answerable to numerous 'stakeholders,' and their compensation was mostly salary ? unlinked to stock performance (shareholders were viewed as an important stakeholder, but far from the only, or primary, influence). Corporate financial performance tended to reflect that divided attention.
Along came two bright, young free market-oriented Chicago School economists, who advocated then-radical notions that executive pay ought to be tied to company performance, that the interests of shareholding owners of the company ought to rule the CEO's world, and the best measure of success is share price. All three of those ideas have merit, and all three can be vastly overstated, and manipulated.
And they have been. The model by itself assumes that all share price growth is mostly attributable to management's efforts, it ignores the eight kinds of shenanigans that can kite share value artificially, and it takes a woefully near-term focus that encourages just those kinds of manipulations ? that are usually antithetical to the long term corporate interest.
It has, however, served the CEOs as a group very well ? that $1 million on $25,000 is now nearly $9 million against the same $25K. Put another way, CEO comp has grown nearly ten times faster than the wages of average workers ? to fully 354 times the average.
A undeniably good idea in theory -- pay for performance -- has been so grotesquely transmogrified that it is a bit like printing money in the basement. In the Coke example, the primary critic charges that Coke stock could actually fall by 10%, and execs would still enjoy a $12 billion payout.
Which is not to say that execs don't work hard ? as a class they certainly do (and so do many others, of course, up and down the line). That said, their pay is out of all proportion to that of their workers, and American compensation is far, far richer than comp in other industrialized countries. In Germany, for example, CEOs earn 'only' 147 times the average. Management guru Peter Drucker in 2011 recommended much less ? a 20-25 to 1 ratio. At some point, an absolute 'value' judgment must be made ? how much is each person's contribution Really worth? In this country, that decision has been punted to the market. The market's self-reinforcing answer is "whatever I will bear." What's Your number?
But wait ? there's more. The Compensation sub-committees of corporate Boards of Directors tend to look sideways for guidance in setting new senior managers' pay. They seek market equity and personal continuity ? if the company falls behind the pay curve, they reason, top talent will be lured away. Thus, their processes tend to level-upwards promptly, and in a ratchet fashion that just never seems to self-correct. Is it good to be da King (may be NSFW)? Certainly, but it may be even better to be the corporate VP of Kingly Things. And all the while, the committee members can fall back on the trusty: "we don't set these prices -- the all-knowing free market sets these prices."
So that's the setting of the Coke Plan to which Mr. Buffett has registered his subtle (some would say tepid) objection. His own company's Annual Meeting comes up next week. It always features a Q-and-A period with various pronouncements of the Oracle ? this matter is certain to be raised, together with broader questions of executive pay policy. It will be interesting to hear what he says.
Will Mr. Buffett and his opinion make a dent in the richly rewarding, self-reinforcing CEO compensation system? That seems most unlikely, to the point of are-you-kidding? It's easy to observe a system out-of-whack; it is much more difficult to figure out what to replace it with. The rest of us will be left to shake our heads, and take our comfort humming the words of Mr. Buffett ? Jimmy this time:
"? if we couldn't laugh, we would all go insane."
Tom continues his rants against the rich.
What?s missing from Tom?s articles is any rational discussion as to why it?s bad that people are rich, or why he should be able to stick his nose into the financial affairs of others.
He complains about Coke?s executives earning too much money. Tom, if you don?t like it, don?t buy Coke stock. Don?t drink Coke either, it?s bad for you. How else does their pay harm you?
Tom loves to compare what workers made in the 1950?s with what they make today. He whines that average workers don?t get paid above-market wages, as if the world owes them a pay raise.
American workers make an obscene amount of money compared to the rest of the world. Median household income in the U.S. is $51,000. Half the world lives on $2 a day or less. You want to talk about obscene income disparity, Tom, look in the mirror.
I do not think we should get involved in compensation issues involving non-public entities.
However, as to public entities, than I think we have the absolute right as voters and citizens to pass legislation limiting compensation of public entity employees.
If the Coke CEO compensation committee wants to dole out huge salaries and stock options, so be it. If the shareholders have a problem with it, they can vote in new officers who share their opinions. But if you are not a shareholder, than you should not the ability to influence what a private entity wants to pay their leaders.
However, with public entities, citizens and voters have a vested interest in compensation issues. I am much more bothered that the head coach of Cal football team makes approximately 10 times more money than the Governor of the state.(I am not a huge Governor Brown fan, but he at least does not have the distinction of being the highest paid football coach per win, one win last year, in the nation, which belongs to the Cal coach) Should the town manager of Danville with less than 45,000 residents make more money than a U.S. Supreme Court Jurist?
I think most people are more bothered by inequalities in income paid public entity employees, than private business entities.
?Rant,? S-P? Half of us are ranting, but I can?t leave it to you to decide which half. Are you angry because you think I was writing about You in that self-congratulation sentence? (maybe so ?)
Generally speaking, I would think you?d be pleased to be on the same side as Warren Buffett ? or at least know what he?s thinking. How?d you like to have HIS tax lawyering account?
This is an interesting phenomenon that I?ve witnessed over the course of a career that began in the 1970s, back when Fortune 50 CEOs were paupers ? barely eking-out a million bucks in a good year. Don?t you think it?s interesting that their pay has grown so fast since then, in both absolute and relative terms? Don?t you want to know why? It wasn?t an accident, nor the way it?s always been. The Cassidy article does a pretty good job of explaining that, and I thought inquiring minds might be curious.
This wasn?t a rant, or an opus ? I didn?t even give you My number, in terms of average worker multiple (what?s yours, btw?). Nor did I propose a better system ? like American, there?s a big part of me that thinks that shareholders get the management they deserve. Should they pay attention ? sure ? but if they want their ownership diluted, it?s not for me to complain ? I?m not hurt, and I don?t even drink much Coke, much less own it last time I checked.
Buffett?s a pretty smart shareholding fellow, and if he?s worried enough to pay attention and abstain his votes, that?s worthy of note, methinks. And howsabout Drucker ? Mr. Multiple of 20, not 354 ? are you upset at him for ranting against rich people?
What this particular blog entry is, in fact, is a news clipping that caught my eye and made me curious.
So, I followed it up and developed it a bit. Some rant.
S-P, you spend all your time attacking me, here and in most of your other comments ? so much so that you forget to tell us where You stand. Well, that?s not quite true. You DO seem to think that American workers make ?obscene? amounts of money (albeit that 354 x obscene is pretty much okay). Howsabout spending some time in your own yard, telling us what you think, other than that I suck?
I told you Tom, I?m a troll. It?s what I do.
I write for my pleasure alone.
And because 300 mg of Wellbutrin a day wasn?t doing jack squat.
Being a troll seems to help.
Posted by Chico, a resident of Amberwood/Wood Meadows,
Well, here we go again.
Cushing: CEO's make too much.
Spct: CEO's don't make too much; American workers make too much.
Cushing: Do not.
Spct: Do too.
Cushing: Stop saying I suck.
Spct: Your pieces are better than my prescription sedatives. Besides, you may not like me, but the content and quality of your blogs invites guys like me. It's not my fault if I'm the only one you can sucker into a back-and-forth. Now, back to what we talk about every week.... You suck.
Almost, Chico. Wellbutrin is not a sedative -- it's an anti-depressant. So the message seems to be that trolling my blogs can be therapeutic. Maybe I'm the stimulus I seek?
How 'bout you -- do you feel better, too?
Posted by BF, a resident of San Ramon,
Hey Tom, why don't you talk about yourself in terms of how much money lawyers make per hour? Hmm? The average rate to hire an overpaid-representative is about $350 per hour here in the bay area. But let's not stop there because some of the overpaid-reps in the south bay make $650 an hour. The "Racket," better known as the Law, is quite the money maker for your so-called profession.
Attorney Larry Sonsini, another overpaid representative who makes his living in the south bay, was ranked #7 on the Midas list at one time. That mouth piece has ties to all the biggest names in technology. Your so-called profession, Mr. Cushing, is filled with extremely wealthy individuals who call themselves lawyers. You don't have to look much farther when talking about the cycle of greed when it comes to the so-called practice of law.
Aw Biff, as much as I'd love to give it a cursory, lopsided harangue (some might even say that's a specialty, although it isn't) -- you've once again stolen all my thunder.
Carry on!
Yeah... I know... Truth hurts. Sorry.
Actually, I will probably regret engaging here, but I think your numbers could've been made to look worse -- you might want to consult with ol' S-P(cwt) about how that's done. And I guess you've had a bad experience -- which is a shame, but it happens in an adversarial system. Furthermore, I'm pretty sure I've posted this graphic before, which should be right up your alley: Web Link .
All that said, with California positively overRun with a plague of lawyers (because New Jersey got first choice, lol), they must be delivering value to be able to charge such rates, whatever they are. After all, you can go to court without 'em. Isn't this an example of the free market finding a supply-demand equilibrium? Many people dislike lawyers as a group ... until they really need one.
You can't go to court with out ' em because your silly little boys club made rules too difficult for the average man to understand. Duh Tom, isn't that why you go to law school; to learn and write in a language that can only be questioned by the elite in your so-called profession. LOL, what a joke.
And no, I haven't had a bad experience with the court system. In fact, I think small claims court is about as fair as you can get. I do believe however that when you add lawyers to the mix in the civil process, things only get more confusing because your profession, uh I mean racket, allow ethics to be tossed right in the toilet. Hmm, and to think ethics in law school is such a noble requirement to grasp. Huh, lawyers and ethics... Now, there is an oxymoron.
Posted by john, a resident of Another Pleasanton neighborhood,
I wonder how you guys feel about derivatives speculators at AIG making as much as they do/did. Didn't they play a major role in causing the global financial panic in 2008, whose effects we are still feeling? In past financial crises (crash of 1929, S&L crisis in the late eighties) the banks and companies were liquidated. They paid the price for the recklessness. Why not this time? Why do they continue to make seven figure compensation after we bailed them out?
Posted by Tom Cushing, a resident of another community,
Hi John: right on cue, here's a long article from the Sunday NYT that does a pretty good job of laying out what's happened at DOJ that has led to large fines but only one, relatively minor figure in the recent crisis, doing relatively easy hard time. Web Link
One level of explanation is that the Dept is heavily led by attorneys from one of the finest, ultimate insider-est corporate defense firms in the world. That's too facile, of course (kind of like calling the whole legal profession a racket). The courts also forbade the use of some effective tools against individuals (some, but not all of which I agree with as unfair).
It's also true that these cases were complex enough to have fooled the regulators, so they may be difficult to explain to juries. I think that's wrong -- the means may have been complicated, but the criminal motivations were not.
And then there's the Holder "too big to indict" memo, wherein he advocates that prosecutors take account of possible consequences to the economy from their prosecutions. I think it should be noted that it should apply more against institutions than individuals, and may really be a reason to go after More individuals, who can be replaced by others who might take a lesson. But instead, it has resulted in a relatively timid crop of prosecutors, overrun with members of the chicken- club, as the article points out.
Posted by Dave, a resident of Danville,
on May 12, 2014 at 12:05 am
Why such over-sized compensation for corporate executives -- whether compared with the average worker, or with their respective contribution to economic productivity? Well, it cannot be explained by simple supply and demand (the usual refuge for executive compensation apologists). I believe that it is primarily a matter of raw power by economic elites, facilitated by the incestuous relationships among those who advise on, those who decide on, and those who receive executive compensation. Stated otherwise, they get it because they can. Not because it is fair. And not because it reflects their true contribution to the productivity of their companies.