Transcription
Good morning, gentlemen. My name is Matt Sour and I'm from Durham, North Carolina.
Regarding compensation, you have commented along the lines of people willing to bet big on their abilities usually have a lot to bet on. A Mid-American regulatory filing indicated some attractive prospective compensation possibilities for its senior executive team, subject, of course, to meeting profitability milestones. Perhaps you might provide some details on the thought process that went into crafting that compensation structure and in doing so use this specific example as a reminder about Bergkshire's compensation philosophy related to pay for performance versus the more popular approaches. If it's easier to figure out in a manner better for owners and can still attract talented people, why don't more companies adopt such practices?
Yeah, we you can make a lot of money working for Berkshire. Not if you're chairman or vice chairman, but there's a chance to make a lot of money. But it will relate to performance. No one is going to make lots of money at Berkshire for average performance.
And you mentioned the Mid-American situation. We've got some extraordinary management at Mid-American and it's in terms of how that compensation arrangement was worked out. I was thinking one day about what would be appropriate for the two individuals who are key to the success of Mid-American and I took a yellow pad and I spent about three minutes sketching out a proposal and I went to Walter Scott, who was our partner in the business and actually heads the comp committee. And I said, "Walter, this is an idea I have. What do you think of it?" And he looked at it and he said, "It looks fine to me." And we talked to the two managers about it. And actually, as we presented it, we had it so that something over 50% went to the CEO, Dave Soal, and something under 50% went to the number two man, Greg Abel, who's enormously well-named. And when we gave it to David, he said, "Let's just make it 50/50." That's the extent of it.
As you have commented, that's wildly different than the approach at companies. I mean, most companies go through a very elaborate procedure in working out executive compensation. I don't think that Charlie and I have spent over maybe five minutes on any. We have an arrangement with See's Candies with Chuck Huggins. We worked it out in 1972. It's still in force now. John Holland took over Fruit of the Loom a couple of years ago. I met with him for a couple of minutes, suggested something, takes up a paragraph or two, and that's what we'll have with John the rest of his life. It's not highly complex. You have to understand the businesses. There is no one formula we could use at Berkshire that would fit across our businesses. That's asinine. You don't want them complicated. We don't have anything that goes on for pages and pages. It's not needed. It establishes a relationship between us and the manager that's not good. So all of our stuff is very, very simple.
At GEICO, we have two variables and they're what count. So we make from Tony Nicely on down. We have everybody participating based on that. We worked that out whenever we took over at GEICO and it's worked fine since and it'll keep working. But we do not bring in compensation consultants. We don't have a human relations department. We don't have a legal department. We don't have a public relations department. We don't have an investor relations department. We don't have those things because they make life way more complicated and everybody gets a vested interest in going to conferences and calling in other consultants and it takes on a life of its own.
In the typical large corporation, there's a comp committee. And as I pointed out in the past, they don't put Dobermans on the comp committees. Usually, they look for Chihuahuas that have been sedated. And I've been on 19 boards. They put me on one committee once and I was chairman and I got outvoted. Do you remember that, Charlie?
>> I certainly do.
>> Yeah. They, uh, it.
>> By two very fine guys.
>> Yeah. Terrific guys, actually. And they, you know, the nature of it is that now, particularly with Sarbanes-Oxley, there's lots of committee meetings. The director's meetings are filled up with process and you have on one side of the table some people that are usually spending an hour or two and getting presented with a bunch of material by the human relations department and some outside consultants. And I've never seen the head of the human relations department or a consultant come in and say, "This bozo you've got is only worth about half what you've been paying." I mean, this just isn't going to happen. So it's a situation where the intensity of interest on both sides is seldom equal. The directors are often dealing with something my friend Tom Murphy in the past has called play money, and the CEO is dealing with something very dear to his heart. So you've got to expect a situation like that to get gained over time. Not over time, promptly, actually.
And there's some change in that that's taking place, but it's not being, in large part, it's not being led by CEOs and it's difficult for directors to do to get a lot done. They get handed a sheet of paper that shows them comparables elsewhere and everybody thinks their CEO is in the top 25% or something. And so there's a ratcheting effect that takes place. And now stock options are kind of out of favor. So restricted stock comes in. But the idea is to keep the pie very large for CEOs. And if I needed the money, I'd probably be doing the same thing.
>> Well, I would rather throw a viper down my shirt front than hire a compensation consultant.
Tell me which kind of consultants you actually like, Charlie. He's not going to answer that. We'll go to number five.