Rodent Regatta

Statistics suggest that a CEO in the 80’s might have earned something like 17 times the average wage earner in his company. Today that number is north of 500 times the average wage earner’s income. Think about those numbers for a moment. In the 80’s a wage earner making $12,000 was governed by a CEO making $200,000 or so. Today, a wage earner making $20,000 is likely governed by someone making $10 million or more.

Sure, these are sweeping generalities for large public companies. Yet, these are the very companies where CEO compensation is so terribly out of step with real performance.

On page 16 of his annual letter to shareholders, Warren Buffett begins an excellent discussion of corporate governance. A few quotes are in order:

Accountability and stewardship withered in the last decade, becoming qualities deemed of little importance by those caught up in the Great Bubble. As stock prices went up, the behavioral norms of managers went down. By the late 90s, as a result, CEOs who traveled the high road did not encounter heavy traffic.

In theory, corporate boards should have prevented this deterioration of conduct.

These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities: obtaining the best possible investment manager and negotiating with that manager for the lowest possible fee.

Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners.

Theres nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, its time for directors to shout Less!

Quotes from Warren Buffett
Annual Letter to Shareholders 2002
[Note: This is a pdf file.]

By now the message should be clear. We need a free market system that seeks the best talent for the job. Note that in Buffett’s remarks, he mentions serving on 19 public boards over a 40 year period, and that put him in contact with around 250 other directors. That’s not very many. When you draw from a sample that small, you risk missing a really valuable look at the rest of the population. Even with lots of country club memberships, that group of directors wasn’t likely to find the guy willing to do the job for half the present package!

There’s also a message here for job seekers, headhunters and career placement professionals. We’re entering an era of ”job placement by bid.” Given a group of otherwise-qualified individuals, what would each one bid to do a job? A crass way to ask the question is, ”For how much would you perform the job currently being done by the incumbent who is making $750,000 or $150,000 or $75,000?” You get the idea.