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."
