Berkshire Hathaway 1994 Annual Meeting Audience Question # 57

What Warren thinks of Salomon’s compensation model

Warren Buffett:

Zone 3?

Audience Member:

Byron Ransdell from Raleigh, North Carolina. Thanks for your hospitality to this weekend.

Warren Buffett:

Well, we thank you for coming, too.

Audience Member:

My question concerns Salomon, Inc., and more specifically, Salomon Brothers. I know that you were on the board of directors, I think, from ’87 to the current time.

Very much interested in compensation there, and maybe on the compensation committee.

Between 1987 and 1992, Salomon’s financial results were quite dismal in a very lumpy way, but overall, quite dismal.

In your opinion, if the compensation had been rational during this time, would Salomon have shown results that would make it a quite decent business?

Warren Buffett:

Would Salomon… if the compensation…

Charlie Munger:

If the past compensation…

Warren Buffett:

…had been more rational…

Charlie Munger:

…decisions had been more rational, ’87 to the current time, would Salomon have done better? Yeah, was that it?

Audience Member:

Yes, sir.

Warren Buffett:

Well, I would… yeah, I would say that, if the present people and the present compensation philosophy… which allows for very large payments for very large results — I think the company would have done better, yeah.

It… you’re going to see very big numbers paid in Wall Street. That’s the nature of it. The trick is to pay them only when you’re getting very big results for the owners. I mean, it… there’s no way you’re going to pay numbers that look like numbers in other industries, and get great results for owners.

But if you pay these big numbers, I think you should be getting very good results for owners.

And there… the old system was not… I mean, it wasn’t totally off the mark on that. But it was far from an ideal system, in my view.

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