Allowing everyone in a company to know what the top executives are earning is an appealing concept. But, according to Warren Buffett, disclosing compensation has very real drawbacks.
"It's very seldom that publishing compensation accomplishes much for the shareholders," the Berkshire Hathaway chairman and CEO told Andrew Ross Sorkin at the 2014 annual meeting, adding: "American shareholders are paying a significant price for the fact that they get to look at that proxy statement each year and see how much those top five officers are earning."
That's why, on its annual proxy statement to the SEC, Berkshire Hathaway only lists three executives and their pay: Buffett, his business partner Charlie Munger and CFO Marc Hamburg.
As Ross Sorkin noted, that's an anomaly: "I always see a number of proxy statements each year. In all except Berkshire, the summary compensation table has the compensation listed for at least five or more of the highest paid executives."
Buffett recalled the time he ran Salomon Brothers: "At Salomon, virtually everybody was dissatisfied with what they were getting paid, and they were getting paid enormous amounts of money. They were disappointed, not because of the absolute amount — they were disappointed because they looked at somebody else in the place and it drove them crazy."
More transparency can create an arms race, which produces astronomical compensation for CEOs. "I would put it this way," said Buffett, who has been making the same salary of $100,000 for decades. "Corporate CEOs, as a group, would be being paid a lot less money if proxy statements hadn't revealed how much other people were getting paid."
After all, "it is only human to look at a bunch of proxy statements and say, 'Well, I'm worth more than that guy.' … No CEO looks at other proxy statements and comes away thinking, 'I should get paid less.'"
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