Charlie Munger, vice-chairman of Berkshire Hathaway and CEO of Wesco Financial recently spoke with the Los Angeles Times on the issue of executive compensation. As always, the 83 year old Munger provided colorful commentary.
Munger derided compensation consultants, declaring that “I have always said that prostitution would be a step up for these people.” Munger pointed out that the problem was not that CEOs were evil, but that “… envy-driven compensation mania … brings out the abosulte worst in good people.”
Munger points out that legislation is unlikely to fix the problem, citing a 1993 law that aimed to curb compensation above $1 million. He concedes that some CEOs are worth huge packages, but that companies with less talented CEOs are forced to match high pay packages or admit “that the company down the street has a remarkable CEO, but we have a mediocre klutz.”
What should be done to solve this problem? Munger is not afraid to conclude that it my be unsolvable:
Just because something is a serious problem doesn’t mean that you can fix it. There’s an element of tragedy in this because some very good people are acting in some very bad ways. But things are seldom so bad that you couldn’t make them worse by a dumb intervention.
Munger goes on to say that the events of the last several years have gone some way in eliminating “the garden variety of corporate fraud,” but concludes “In my opinion, not enough executives have gone to jail.”
great article, I blogged about it on my site
We put a link to your article at our site on socially responsible investing. (thepanelist.com) though it’s only in test for now.
Obviously Munger knows a lot more about the business than I do but regulating corporate compensation packages seems like tricky business to me. CEO’s clearly have a tremendous affect on a company’s growth and overall health and therefore should be rewarded. Due to the riskiness of the business they get guaranteed money and as such even the not so great ones get rewarded as well. A lot more can be said on this topic.
Connected – I can’t help but see a similar situation with contracts in baseball. 252 million for A-rod? 150 million contracts being tossed around this offseason. Mo Vaughn earned 17.5million a year towards the end of his career while playing in 0 games!! Maybe the good CEO’s are like the A-Rods, the producers (although I know Yankee fans would disagree) but at the same time bums get rewarded as well because the price for all players go up. I guess I agree with Munger that there really might not be a solution to the problem. Although one area that is clearly being addressed is wiser choices of the board of directors – having a ‘buddy buddy’ group is clearly not the way to go.