Warren Buffett's Warning on Executive Compensation

Summary

The speaker critiques corporate compensation systems, arguing that executive pay often lacks true market-driven negotiation. Unlike baseball players, whose salaries are determined by owners spending their own money, corporate compensation committees frequently negotiate without personal stakes, leading to inflated executive pay. The speaker also highlights the role of compensation consultants, who rarely suggest salary reductions or firing underperformers. The result is a growing disparity between executive compensation and company performance, urging shareholders to push for reform in corporate pay practices.

Takeaways

• 💼 Compensation isn't a true market system, despite claims by PR teams.
• ⚾ Comparing executive compensation to sports salaries isn't valid, as the dynamics are different.
• 🤑 The person negotiating compensation on the corporate side often has a vested interest in higher pay.
• 🐕 Compensation committees aren't typically filled with aggressive negotiators for lower pay.
• 💸 Many corporate negotiations lack a real balance of concerns between the parties, especially at the top.
• 🏗 Labor union negotiations tend to be more balanced, with clear opposing interests.
• 💼 In many companies, executive compensation hasn't been a genuine negotiation process.
• 📊 Compensation consultants usually recommend higher pay and avoid suggesting salary cuts or firing executives.
• 🧑‍💼 CEOs are more concerned about their pay than about issues like board diversity.
• 📈 There's been a growing disparity between top executive pay and the pay of workers over the last 20 years.

Q & A

What does the speaker mean by saying 'compensation is not a market system'?

The speaker is emphasizing that executive compensation in many companies does not follow a true market system, as it's not driven by normal supply and demand forces. Instead, it involves factors that do not resemble typical market negotiations, such as the influence of compensation committees and consultants.

How does the speaker compare executive compensation to a baseball player's salary?

The speaker contrasts the negotiation for a baseball player’s salary, where the team owner is directly spending their own money, with executive compensation, where compensation committees often lack personal financial stakes in the outcome. This leads to less scrutiny and less balanced negotiations for executives.

What is the role of compensation committees according to the speaker?

The speaker suggests that compensation committees in large corporations often don't function as tough negotiators. They are not typically composed of individuals with strong incentives to minimize executive pay, leading to inflated compensation packages.

Why does the speaker criticize compensation consultants?

The speaker criticizes compensation consultants for consistently recommending increases in executive pay. He points out that they never suggest reducing pay or firing underperforming executives, likely due to fear of not getting future assignments.

What is the speaker’s view on 'parity of concern' in compensation negotiations?

The speaker believes that in many compensation negotiations, particularly at the top levels of corporations, there is no 'parity of concern.' Executives have a strong interest in maximizing their pay, while those negotiating on behalf of the company often do not have a comparable interest in limiting that pay.

How does the speaker compare labor union negotiations with executive compensation negotiations?

The speaker contrasts labor union negotiations, where there is a balance of power and real negotiation over wages, with executive compensation negotiations, where there is often little pushback against high salaries and stock awards for executives.

What does the speaker identify as the 'acid test of corporate reform'?

The speaker identifies compensation as the 'acid test of corporate reform,' meaning that genuine corporate reform would be measured by how effectively executive pay is addressed and made more equitable.

What does the speaker say about the priorities of CEOs regarding corporate reform?

The speaker suggests that many CEOs are not particularly concerned about issues like board diversity. Their main focus is on their own compensation, and unless shareholders push back, CEOs will continue to prioritize personal financial gain.

What problem does the speaker see with the relationship between executive pay and company performance?

The speaker points out that there is often a disconnect between the large compensation packages executives receive and the actual performance of the company. Executives may be paid handsomely even when shareholders see poor returns.

What does the speaker suggest shareholders should do about executive compensation?

The speaker urges shareholders, especially large shareholders, to act as a countervailing force to prevent excessive executive compensation. Without shareholder intervention, the disparity between executive pay and average worker pay will continue to grow.