Mediocrity Pays

The following, from the latest Berkshire-Hathaway proxy statement (DEF 14A), is so stunningly rare, so antithetical to the corporate culture found in 99% of public companies, that it just leaps out at you:

Compensation Discussion and Analysis

Berkshire’s program regarding compensation of its executive officers is different from most public company programs [understatement of the year]. Mr. Buffett’s compensation is reviewed annually by the Governance, Compensation and Nominating Committee (“Committee”) of the Corporation’s Board of Directors. Due to Mr. Buffett’s desire that his compensation remain unchanged, the Committee has not proposed an increase in Mr. Buffett’s compensation since the Committee was created in 2004. Prior to that time Mr. Buffett recommended to the Board of Directors the amount of his compensation. Mr. Buffett’s annual compensation has been $100,000 for over the last 25 years and he would not expect or desire it to increase in the future.

The Committee has established a policy that: (i) neither the profitability of Berkshire Hathaway nor the market value of its stock are to be considered in the compensation of any executive officer [i.e. no rigging the quarterly numbers to meet analysts expectations]; and (ii) all compensation paid to executive officers of Berkshire Hathaway be deductible under Internal Revenue Code Section 162 (m). Under the Committee’s compensation policy, Berkshire does not grant stock options to executive officers [because options are legalized theft from the shareholders]. The Committee has delegated to Mr. Buffett the responsibility for setting the compensation of Berkshire’s two other executive officers.

Like Mr. Buffett, Mr. Munger has been paid an annual salary of $100,000 for over the last 25 years. Mr. Buffett does not anticipate that Mr. Munger’s compensation will be increased in the future. Both Mr. Buffett and Mr. Munger will on occasion utilize Berkshire personnel and/or have Berkshire pay for minor items such as postage or phone calls that are personal. Mr. Buffett and Mr. Munger reimburse Berkshire for these costs by making an annual payment to Berkshire in an amount that is equal to or greater than the costs that Berkshire has incurred on their behalf. During 2006, Mr. Buffett reimbursed Berkshire $50,000 and Mr. Munger reimbursed Berkshire $5,500. Mr. Buffett and Mr. Munger do not use Company cars or belong to clubs to which the Company pays dues. It should also be noted that neither Mr. Buffett nor Mr. Munger utilizes corporate-owned aircraft for personal use. Each of them is personally a fractional NetJets owner, paying standard rates, and they use Berkshire owned aircraft for business purposes only.

Factors considered by Mr. Buffett in setting Mr. Hamburg’s salary are typically subjective, such as his perception of Mr. Hamburg’s performance and any changes in functional responsibility. Mr. Buffett also sets the compensation for each of the CEO’s of Berkshire’s significant operating businesses. He utilizes several different incentive arrangements, with their terms dependent on such elements as the economic potential or capital intensity of the business. The incentives can be large and are always tied to the operating results for which a CEO has authority. These incentives are never related to measures over which the CEO has no control.

Mr. Hamburg, VP & CFO, had a salary of $662,500 in 2006 and $11,000 in other compensation. Not a lot at a $168 billion market-cap company. In total the top 3 at Berkshire made less than a million dollars in total compensation! Combined!

Contrast the above with the following...

The CEO of Occidental Petroleum (OXY), Ray R. Irani, received compensation last year valued at $416.3 million. This is apparently third best in history for a public company exec, behind Larry Ellison's 2001 $706 million payday and Michael Eisner's paltry $570 million "earnings" in 1998. OXY stock gained about 13.5% in 2006. Berkshire's stock gained about 23% in 2006. What's wrong with this picture?

The new Ford CEO received $39.1 million for his four months work in 2006. No wonder the company is in trouble. Anybody seen a long-term chart of Ford since 1999? It's only down about 75%. Only 25% more to go!

I've already mentioned Bob Nardelli of Home Depot infamy.

Goldman Sachs gave its CEO a $53.4 million holiday bonus.

Forbes five worst CEO's includes such luminaries as

Steven Appleton, Micron Technology...

"That's right- this man [Appleton] averaged $7.8 million dollars in compensation - all for the miraculous accomplishment of losing 21.7% annualized over the past six years. It's hard to believe that boards, which are supposed to protect the interests of the company - especially shareholders, allow folks like Appleton to keep their jobs.

Anyone with a "Dilbert like" corporate life knows all about company performance reviews. So what happened to this guy's "goals and objectives?" What were his measurement criteria? What was his performance rating? And how in hell did that ever translate into $7.8 million???"

Why big shareholders of Micron like Goldman Sachs and Legg Mason don't put a stop to this nonsense is...oh, wait...the CEO of Legg Mason pulls in over $20 mil a year, and we already know Goldman grows money on trees. Never mind.

Scott McNealy of Sun Microsystems, earned a measly $13.3 million in average compensation over the last six years. Lawrence Montgomery of Kohl's only averaged $12.5 million in six-year average compensation while posting a six-year annualized average return of a whopping .1% (point-one percent). At least Kohl's stock was up last year.

These companies should take a page from Circuit City's playbook and fire their overpaid CEOs, then offer to rehire them at minimum wage. With leadership resulting in a return of .1% or
-21.7% per year for six years, they would still be overpaid even at that level.