Executive Pay with Equity Awards: It Takes a Buffett to Push This Agenda

buffett_and_cokeI recently pointed out the absurdity of certain executive pay packages which result from stock or stock option awards. Rather than matching “pay to performance” as proponents claim, the equity awards to executives often create absurd payouts for bad performance, or substitute lucky timing for skill. If the stock goes up during an executive’s tenure, or even ordinary compound growth occurs coincidental with generous stock option awards, the benefits turn into windfalls for executives.

Equity or stock option awards involve disguised generosity, since they do not drain the cash in the bank account of a corporation, as would a non-equity bonus.  Instead, the awards dilute existing shareholders, who barely notice the dilution. Compensation is compensation, and is taxed as such, but it probably seems less expensive.

Warren Buffett made the paper today for opposing certain awards like this at Coca Cola, of which Berkshire Hathaway owns 9%.

This seems like a victimless crime, in that only shareholders suffer, and they can theoretically protest at an annual meeting (they never do) or ‘vote with their feet’ by selling shares if they disagree with board-approved compensation or executive recruitment/incentive packages.

The reality is that shareholders have virtually no power when it comes to executive compensation. Corporate boards and compensation consultants – the decision makers in this scenario – have a perverse set of self-interested incentives on this issue. Executive cross-sit on each others’ board, so nobody wants to be the turd in the punchbowl when it comes to doling out generous packages. Compensation consultants, for their part, want to be invited to do work for subsequent compensation committees, so they always aim high with what ‘seems fair’ as a recruitment or compensation package.

Buffett, who sits on a number of corporate boards, has written in the past about how he’s (curiously!) never been invited to sit on the compensation committee of corporate boards, for this very reason: his well-known opposition to overpaying CEOs via stock-option awards

Buffett has a long and honorable track record when it comes to opposing executive pay through equity awards, having written and spoken in the past on the issue. He also has an ironic “Nixon Goes to China” credibility on the issue.  Almost nobody on the planet has earned more from their own equity ownership in a large corporate enterprise, so he deeply understands the extraordinary compounding magic that comes from being an equity owner of a profitable enterprise. I suspect he would be the first to slyly wink and admit that it’s better to be lucky than good when it comes to getting wealthy as the executive of a public company with a large ownership stake.

See Related Post: Absurd Executive Pay: The Latest Example from Yahoo

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