Warren Buffet on Stock Options and Executive Compensation - some things never change

DW - This is from an interview with Warren Buffet in May 2000.  You can read the entire interview here:

http://everythingwarrenbuffett.blogspot.com/2009/02/foolcom-buffett-and-munger-answer.html

On Compensation:

WEB: Our compensation plans vary,
but they're all rational. It's been a huge advantage at GEICO to have
an improved compensation plan. Its says what we think a rational
measure of productivity over time is.

[WEB then likened stock options issued to executives/employees as lottery tickets.]

There's
a lot of repricing of options going on. When you're compensating with
options, the stock market determines an employee's value, not their own
efforts and work. I hope our competitors do all kinds of crazy things
with compensation.

CM: We're out of step with the conventions of the world.

WEB: If
an executive said that to work for a company he'd want options on
S&P 500 futures, that would be crazy. But if he gets options on his
company stock and it goes up due largely to the S&P 500 going up,
that's okay?

[later]

WEB: Options are calculated
based on what they're worth on the market. That's the opportunity cost
for the company. I think you'll see a lot of repricing going on.
Companies say they won't do it -- until they do it. I doubt companies
will choose to bankrupt their managers. Giving options changes the
value of the property. It's like selling a house but keeping 10% of it.
Options reduce the value of a company as soon as they're issued.

[later]

[A shareholder asked what they thought about CEOs who get enormous severance packages.]

CM:
Generally, I think it's a mistake for corporate America to have created
so much hostility toward management. Stupid little details [in
executive contracts] make a terrible impression on people. They're
advised to [go for these stupid little details] by these damn
consultants.

WEB: I agree. We've done very well without
consultants. It's maddening when CEOs show up with lawyers and 20 page
contracts. People look around and see what others are doing and do the
same. It's escalating and won't stop. It doesn't seem to bother
shareholders.

CM: It does madden them, but what can they do?

WEB: Well, institutional shareholders could do something. We've yet to hire a consultant and we've never lost a key executive.

[later]

WEB:
We look for a great castle and a great knight to protect it. How much
does the knight get paid? We try to pay fairly. No one wants to be in
the lower half, so the median rises. Compensation committees meet once
a year or more often. It's a fact of life and will continue… I don't
think it's the money as much as the ego -- they don't want someone else
making more.

I've been on 19 boards besides Berkshire
subsidiaries. But I've only been on one compensation committee -- at
Salomon. You can only belch so many times at the dinner table and get
invited back.

CM: I think we can confidently be sure that
[this trend toward sky-high executive compensation] will get worse and
that it's bad for Berkshire. But with our culture being so different,
we do attract some of these wonderful old-fashioned businesses.