2000: Does GenRe have a rational incentive compensation plan?

AUDIENCE MEMBER: Hello, I’m Martin Wiegand from Chevy Chase, Maryland.

And, though you’ve given yourself a D in capital allocation, on behalf of the shareholders, we would like to give you an A-plus in honesty and accounting, temperament for a long-term investing view, and hosting an annual meeting.

WARREN BUFFETT: Thanks. (Applause)

I went to school with Martin’s father. Good to see you here.

AUDIENCE MEMBER: Thank you. Now my question. Do General Re’s competitors pay their employees with a rational incentive plan aimed at growing float and reducing its cost, or do they use something similar to General Re’s old plan, and is this a new, sustainable, competitive advantage for General Re?

WARREN BUFFETT: Well, I think a rational compensation plan — and I think we have rational compensation plans — we certainly aim at that, and we don’t care what convention is.

Over time, we’ll select for people who are rational themselves, who have confidence in their abilities to deliver under a rational plan, and who really appreciate operating in that kind of an environment.

Now, who wouldn’t want a lottery ticket, you know? I mean, if anybody here wants to buy a few lottery tickets at the lunch break and come up and present them to me, I’ll be glad to take them.

I don’t think it will have anything to do with, you know, my performance at Berkshire Hathaway or anything in the future.

And so, we try to make plans that are very rational. And incidentally, we’ve never had any real problems at all in working with managements to do just that.

The two operations that I’ve just recently agreed to buy, we will have rational compensation plans at those places. And they’ll be somewhat different, perhaps, than the ones they’ve had in the past, although not much different, as I think about it.

I think it’s been a huge advantage at GEICO to have a plan that is far more rational than the one that preceded it. And I think that advantage will do nothing but grow stronger over time because, in effect, compensation is our way of speaking to employees, generally.

And with a place as large as GEICO, you can’t speak to them all directly. But it speaks to them all the time. It says what we think the rational measurement of productivity and performance in the business is.

And over time, that gets absorbed by thousands and thousands of people. And it’s the best way to get them to buy into their goals.

Whereas, if you use as your test what the stock market is going to do, people, I think, inherently know they got a lottery ticket. I mean, you’ve seen that in a lot of tech stocks in the last three or four months.

You will find all kinds of options being repriced, or issued in great abundance at lower prices without repricing them because they don’t want to have the accounting consequences. Those people know they’re getting lottery tickets, basically.

And, you know, the market’s attitude toward tech stocks is what’s going to determine results far more than their own individual results.

So, it’s silly to think of somebody working very hard at some very small job at Berkshire, with our aggregate market value of 90 billion, thinking that their efforts are going to move the stock.

But their efforts may very well move the number of policy holders we gain or the satisfaction of policy holders. And if we can find ways to pay them based on that, we are far more in sync with what they can do. And they know it makes more sense.

So, I hope our competitors do all kinds of crazy things on comp and everything else. I mean, the more dumb things they do, the better life is for us. And I think that —

Well, we’ve had incredible success at keeping managers. I don’t think there’s probably any company in the United States of size that has had better luck on that than Berkshire.

And partly, it’s because we appreciate, in terms of the comp plan, and partly because we just appreciate, generally, managers that do a terrific job for us. And we’ve got the best group in the world.

Charlie?

CHARLIE MUNGER: Yeah, here again, we’re very much out of step with the conventions of the world.

When I read annual reports, and I read a lot of them, I’m very frequently irritated by the presence of things that are totally absent from the Berkshire Hathaway annual report.

I think promising people free medical care forever, between age 60 and the grave, and maybe for a younger spouse after the grave, but the first one, regardless of what’s invented and regardless of what it cost, I don’t see how anybody who cared about the shareholders would be making promises like that.

There’s a lot of insanity in conventional corporate conduct on the pay front. And — but if convention determined what was sane and what was insane, we’re the oddballs. I mean, we’re the unusual example.

WARREN BUFFETT: I think per — and I think it’s very subconscious, but I think, sometimes, that the desires of the top person to get an outrageous amount gets pyramided through the organization.

Because if they’re going to have some scheme that rewards them based on a lottery ticket, they feel they have to give lottery tickets to everybody else, although on a much-reduced scale.

And they really do. I mean, it’s just — it becomes accepted in the course. And then you hire consultants who come around and say, “Well, you’re getting more lottery tickets at someplace else. And we’ve got some added new schemes.” It becomes very, very reinforcing.

But what has happened at the top level is really unbelievable. I mean, it — if an executive said to his company, “I want an option on 300 — just for working here — I want an option on $300 million worth of S&P futures for the next 10 years,” you know, people would regard that as outrageous. They’d say, “What have you got to do with that?”

But in effect, if they get one on their own stock and it goes up based on the fact the S&P appreciates over 10 years, they think that that’s perfectly acceptable to have that kind of a ride.

So I would say that, you know, there’s been a lot of talk about the huge gap between, you know — that exists in pay. But it seems to me that the primary gap that is eating at American CEOs is the gap between the rich and the super-rich. That seems to be motivating the adoption of many plans.

It’s really — it’s gotten out of hand, but it isn’t going to change. The CEO has his hand on the switch as a practical matter. I know people, and I’ve been on them myself, but on comp committees. And as a practical matter, you don’t stand a chance.

CHARLIE MUNGER: Yeah, a lot of the corporate compensation plans of the modern era worked just about the way things would work for a farmer or if you put a rat colony in the grainery. It — (Laughter)

WARREN BUFFETT: Put him down as undecided. (Laughter)

Good to see you, Martin.