I’ve been saying this stuff for years. These are from me:
We spent a fair amount of time in b-school talking about aligning manager interests with shareholder interests. It seems like the simplest way to do that is to have the managers be owners.
I wonder how many executives would choose to stay in their jobs if their salaries were dropped to $100,000 and the Board of Directors told them if they want to make money, then they should invest their own funds in the business and they will make money when shareholders make money.
Now, I realize executive pay is a free market and a good manager is worth a good salary and much of CEO pay is really the cost cover the legal risk of being an executive, but still, I think it’s an interesting thought experiment.
It’s a thought experiment modeled after Warren Buffet, who takes a salary of $100,000 for running Berkshire Hathaway, but has become a billionaire by owning a fair size chunk of that company.
If this became the norm in executive pay, I would guess that we would see a different group of people occupying the executive suites. Speaking of executive suites, I’d bet those suites would not be as well-appointed if the managers were owners.
Now, some folks might argue that executives often do have significant portions of their pay and bonuses tied to the stock performance. On the surface, that seems like a logical way to align the interests. But, experience has proven otherwise and the explanations are simple.
For example, managers with stock options, stock grants and stocks bought with non-recourse loans from the company help align executive interests with shareholders on the upside, but not the down side. Managers personally lose nothing, except potential profits, for taking big risks to try to move the stock price up.
Not only that, but executives often have severance agreements that reward them relatively handsomely for getting fired. So, the only downside to taking big risks is the executive’s ego.
So, what happens under such pay schemes? Executives take big risks.
Warren Buffett makes another plea for government to take more from him and his net worth peers.
First, I’ll point Buffett to my advice for those who would like to raise taxes. Thankfully, many others are calling for Buffett to lead by example and voluntarily cut a check as well. Maybe Buffett will hear that message and respond.
I’ve also addressed Buffett’s analytical hypocrisy on this matter before. That didn’t seem to work.
I’ll try another approach.
Carefully read Buffett’s words from this paragraph of his editorial:
They’ve [Twelve members of Congress] been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness.
He never mentions spending — only deficit. Buffett seems unwilling to hold our elected representatives accountable for spending way beyond our means.
I believe that’s partly due to an incentive effect. If it were Buffett’s own pocketbook that representatives spent from he might think otherwise.
Buffett’s business, Berkshire Hathaway, is a holding company that owns lots of other companies. He grew wealthy by buying good businesses run by good managers, keeping those managers and letting them do what they do best, run their businesses.
What do you think Warren would do if a business manager began spending much more than he was bringing in with no hope of closing that gap?
Do you think he would beg that manager to take even more of Buffett’s money so the manager could continue his spending spree?
I don’t think so either. I think he would fire him swiftly and find a replacement.
In my opinion, Buffett and his net worth peers, do much better for the economy by continuing to invest their wealth in productive ventures that make products and services that we value as consumers and provide jobs for millions of people, than by handing it over to politicians to help sustain the bureaucratic, rent-seeking behemoth we know as government.
I also think Buffett and his net worth peers could do much better by explaining this to folks and encouraging us to support and vote for politicians who would like to reduce the bureaucratic drain on society and double down on productivity.
I agree with Stephen Moore’s Op piece in today’s Wall Street Journal. I hope I may have helped inspire it.
I wrote about a stark inconsistency in the way Buffett values businesses owned by Berkshire Hathaway, the successful holding company he runs, and how he views the taxes paid by these companies here. In my opinion, the inconsistency is so stark that he deserves the title of hypocrite.
Stephen Moore makes the same point by including the taxes paid on Buffett’s behalf by the company he owns a great deal of, Berkshire Hathaway, something Buffett does not do.
Perhaps I inspired Moore’s view on this. I wrote to Stephen Moore shortly after Buffett’s 2003 Washington Post article (the text from that email appears below the fold).
So how does Mr. Buffett arrive at such a low personal tax rate? He may have been referring to a 2010 IRS study of the 400 richest American taxpayers, a list he’s probably on. It showed those people paid an effective federal income tax of 18.1% in 2008.
Yet that study crucially omits the corporate income tax, which is mostly borne by the owners of companies.
Mr. Buffett owns about one-quarter of his investment company Berkshire Hathaway, and his shares are worth about $38 billion. This wealth is mostly stored in what are technically called “unrealized capital gains.” Eventually when those gains are converted into income, he will pay a capital gains tax. Even so, in 2008 Berkshire paid $3 billion in corporate taxes. And since Mr. Buffett is the principal owner, he shoulders a big share of that tax.
Moore goes further to point out that Buffett is wrong on the rates too, higher income folks paid a rate nearly twice as high as middle class families.
According to the Congressional Budget Office (CBO), middle-class families in 2007 (earning between $34,000 and $50,000) paid an effective 14.3% of their income in all federal taxes. The top 5% of income earners paid 27.9% and the top 1% paid 29.5%. And what about the highest earners? Americans with annual incomes above $2 million paid an average 32% of their income in federal taxes in 2005 (the most recent year for which data are available).
Moore also points out that Buffett has been a critic of one aspect of Obama’s tax proposals.
To his credit, Mr. Buffett has criticized President Obama’s near-obsessive calls for higher taxes on corporate jets. As Mr. Buffet correctly noted, the writeoffs companies take for capital expenditures such as jets are legitimate business expenses.
Buffett’s view here is not surprising. Berkshire Hathaway owns NetJets, a major provider of corporate jet services. Hmmm…
One of Warren Buffett’s cardinal investing rules is to not invest in things he doesn’t know much about. This is understandable. He has learned through experience that this can be costly. Apparently, it’s not nearly as costly for him to talk about things he doesn’t know much about.
My 2003 email to Stephen Moore appears below: