1999: How should a business divide profits between owners and employees?

AUDIENCE MEMBER: Hello. I’m Martin Wiegand from Chevy Chase, Maryland. I want to thank you for the hospitality this weekend and the wisdom you share with us each year in your annual reports.

As a small businessman, one of trickiest jobs I have is dividing up the profits of our business between the employees who generate them.

Would you comment and share your thoughts on how you divide up the profits of the Berkshire Hathaway subsidiaries with the employees who generate them.

And the follow-up is, Mr. Munger, do you have any suggested reading on that subject?

WARREN BUFFETT: Yeah, we’re glad to have you here, Martin. I went to high school and to the first couple years of college with Martin’s father, who’s also here today. And so, if you get a chance to meet Marty, Janie, and younger Martin, say hello to them.

In terms of the arrangements we have with compensation, they vary to an extraordinary degree among the various subsidiaries we have.

Because we have bought existing businesses. And we have tampered as little as possible with their cultures after we buy them. And some of those cultures are very different than others.

I mean, you know, you saw [Nebraska Furniture Mart’s] Mrs. B earlier. You know, as you can imagine, she would leave a very strong imprint on any business with which she was involved.

And we have a number of very talented managers who have worked out the systems that they believe to be best for their companies.

Now, it is true that if we — if there’s a stock option plan at a company, we will substitute a plan that is performance-based, which ties much more clearly to the performance of the business than any option plan could.

And we will have a — we will design one that has an expectable cost that’s equal to the expectable cost of the option plan. So, we try to equate the cost.

And we try to make it even more — much more sensible from both the owner’s standpoint and the employees’ standpoint, in terms of the way it pays off based on how that business performs.

You probably read in our annual report how we put an across the board plan at GEICO that ties with our objectives. But basically, that was [CEO] Tony Nicely’s work in terms of developing that plan.

I mean, he and I thought alike about what counted. And he developed a compensation grid that applied to everybody in the whole place, based on achieving the objectives that he felt were important and that we felt were important.

You will find — if you go to any Berkshire subsidiary — you will probably find that they have a compensation plan that’s quite similar, with exception of options, to the plan that they had before we bought the operation. They have successful businesses.

And people get there different ways. Some people bat left-handed. Some people bat right-handed. You know, some people stand deep in the batter’s box. Some crowd the plate. They all have different styles.

And the styles of our managers have proven successful in their own businesses. We keep the same managers. So, we don’t try to superimpose any system from above, with the exception of what I’ve mentioned.

We do like the idea of paying for performance. I mean, that is kind of a fundamental tenant. Everybody says they like that. But then they design systems that payoff no matter what happens, in many cases. And we’ve been reluctant to do that.

Charlie?

CHARLIE MUNGER: Yeah, I think it’s important for the shareholders to realize that we are probably more decentralized, in terms of personnel practices, than any company of our size, or bigger, in America. We don’t have a headquarters culture that’s forced on the operating businesses.

The operating businesses have their own cultures. And I think in every case I can think of, it’s a wonderful culture. And we just leave them alone. It’s — comes naturally to me. (Laughter)

WARREN BUFFETT: Charlie says we don’t have a headquarters culture. Sometimes people think we don’t have a headquarters. (Laughter)

We have no human relations department at Berkshire. We have no legal department. We have no investor relations. We have no public relations. We don’t have any of that sort of thing.

We’ve got a bunch of all-stars, as we’ve put on the screen, out there running businesses. We ask them to mail the money to Omaha, but — (Laughter)

We’ll even give them a stamp if they request it. (Laughter)

But beyond that, we don’t really go. It would be foolish.

And what is interesting to me is how — I had a lot of preconceived ideas of what motivates people when I started out in business — but you can find certain organizations that resist paying stars on an individual basis. They like to think of themselves as a team and they’d rather have a team concept of payment.

And you can see others where they’re much more individually oriented. Actually, Charlie can probably tell you that in terms of law firms. I mean, some law firms have a culture that is much more star-oriented than others. And, you know, you’ve seen successes in both places, haven’t you, Charlie?

CHARLIE MUNGER: Absolutely.

WARREN BUFFETT: OK. (Laughter)

CHARLIE MUNGER: I can’t remember a case when anybody has transferred from one operating Berkshire subsidiary to another. It’s very rare.

WARREN BUFFETT: Yeah, we don’t try and cross-fertilize. We just — we think we’ve got a good thing going in, you know, in every plot of ground and we just assume they’ll do best if left to their own initiative.