2011: What compensation structure does Buffett expect for his successors?

BECKY QUICK: This question comes from a shareholder from central Iowa who asks, “Berkshire Hathaway does well, in part, because its managers want to be there for nonpecuniary reasons. But it seems likely that the next operations CEO will be best be filled by someone who insists on a salary of more than $100,000.

“What kind of compensation structure do you expect for the next generation of Berkshire leadership?”

WARREN BUFFETT: Well, I think the next CEO will make a lot of money and should make a lot of money.

I mean, the responsibility for running a company with a couple hundred billion dollars of market value should pay well.

I think that whatever the level the board decides then, in terms of a base salary, should be supplemented by, probably, an option system that incorporates a couple things that are perhaps unusual.

I don’t think the option price — the original strike price — should be less than if the company were for sale, the assets would bring.

So the idea of giving somebody an option during some depressed part of the stock market at the market price, I think, is crazy because you wouldn’t sell your business at that price and why sell part of it on that basis.

So I think the base price should be what the business is worth at the time you start, and then I think if, because of the compounding feature of leaving money there — you know, no management at all would produce some gain in value over time — so I think there should be an increase in the base price annually at some rate, and then minus the dividend that’s being paid.

So, if you assume a 3 percent dividend was paid, and you wanted to have a hurdle rate of increasing at 7 or 8 percent a year, then you would have the option price accelerate, maybe, at 4 or 5 percent.

But with that kind of a structure, I think you can give a very large option because you — if somebody is creating excess value above a given rate on a very large sum, I think they deserve something quite significant in terms of that excess earned.

Now, they — the present compensation system has no relevance at all to what my successor should earn. The main thing is getting the right person with the right values who interacts well with the managers and who knows how to allocate capital.

And as you just heard a little earlier, our managers who accomplish a lot, if they — and if they’re working with big operations so that it turns into a lot of dollars — they can make a lot of money with Berkshire.

They — nothing is worked off the eccentricities of Charlie and me at the top level.

So, you know, people make well into eight figures, sometimes, at Berkshire. But they earn it, and they don’t get it because of any phony targets or anything of that sort. They get it because they really deliver incredible, in some cases, excess value to Berkshire.

Charlie?

CHARLIE MUNGER: Well, I hope it will be a long time in the future, and I don’t regard it as absolutely inconceivable that Warren’s spot will someday be occupied by a very rich man who has adopted Warren’s system of pay.

I think somebody in America has to be the exemplar for not grabbing all that you can. I think it’s a very important part of the whole scheme. (Applause)

WARREN BUFFETT: I don’t think you better run an ad, though, after I go, that says CEO wanted, $100,000 pay plus pleasant surroundings. (Laughs)