Berkshire Hathaway 2018 Annual Meeting Audience Question # 58

There’s no precise formula on how to create a good compensation system

Warren Buffett:

Let’s… we’ll do one more. Station 11.

Audience Member:

Hi Warren, Charlie. My name is Adam Mead, Mead Capital Management from Derry, New Hampshire.

In the past you have touched on certain compensation arrangements with key executives.

Could you please provide some specific examples of compensation arrangements within Berkshire that speak to incentivizing good behavior while not penalizing the manager for size or the relative ease or difficulty of the business or industry? Thank you.

Warren Buffett:

Well, that is a very, very good question, and a very, very tough question. Because some of our…

Charlie Munger:

He really doesn’t want to answer.

Warren Buffett:

Well, some of our managers…

No, some of our managers are in businesses that are just much easier. I mean, we bought into a variety of businesses. People are obviously influenced by what pay arrangements are elsewhere. They wouldn’t be human if they weren’t.

And trying to come to the right answer when you have different degrees of capital intensity, different degree… very different degrees… of basic profitability, and how much you scale up based on size, because there is an incentive to grow businesses. Usually if businesses get much larger, everybody from the CEO down expects to earn more money for something that… where they really bring the same amount of intensity and work and (the sound in this part of the video is inaudible) to it.

It is really a tough question. I think that if you engage compensation consultants at public companies, which they all do, they’re going to recommend things that cause them to have CEOs recommend them to other companies.

It’s just, you’re working against human nature when you have an arrangement like that.

I would say that we have obviously kept a very, very, very high percentage of the managers that we hoped to have stay with us. In fact, just about a hundred percent. It’s…

And I think people do like… they do like to make their own decisions. They do like recognition.

You know, they… most people respond… they like doing a good job, and they like the fact that we understand it. And compensation’s part of that. But it’s not the whole thing.

And I wish I could give you some precise formulas, but there aren’t any…

Charlie Munger:

No, you really don’t, Warren.

Warren Buffett:

What?

Charlie Munger:

It’s an advantage at Berkshire to keep our individual deals private. There would be no advantage to just publishing them all.

Warren Buffett:

No, we’re not going to do that.

Charlie Munger:

No, of course not. So what we’re saying, he makes all those decisions personally. He’s got every formula in the book. And he keeps them all private. That’s our system.

Warren Buffett:

Well, we do…

We publish what the directors are paid.

Charlie Munger:

We publish what we have to, yes.

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