Since at least 1993, but possibly earlier, Warren Buffett has only collected $100,000 annually to serve as CEO of Berkshire Hathaway. There are good reasons for this, as it bolsters his social and political capital (i.e. he has more perceived moral authority to lecture corporate America on restraining their animal impulses when he’s collecting $100k rather than $100m annually as compensation). There are also economic reasons for this arrangement, as Buffett has owned between 17% and 36% of Berkshire Hathaway stock during this time, and there would be a certain inefficiency in paying himself from an asset where he owns a sizable stake (of course, he would still be more absolutely richer if he had taken such compensation).
Even though there are important reasons why Buffett behaved the way he has regarding his personal compensation, it also remains true that he could have fairly demanded annual compensation of $100 million per year (analogous to what Larry Ellison has earned throughout his tenure at Oracle).
You look at a company like Oracle, and the cost of paying Ellison has been a substantial expense for shareholders. The company has 4 billion shares in existence, and 750 million of them exist due to Ellison’s vested stock options. Ellison’s approach to compensation negotiations could be summed up as: “Hey, someone has to be the most highly compensated CEO in America, so it might as well be me.”
What would life look like for Oracle shareholders of Ellison had behaved like Buffett and only received $100,000 per year in compensation? Well, the company’s $13 billion in profits would be spread out amongst 3.25 billion shares instead of 4.00 billion shares. The earnings per share would be around $3.97 per share instead of $3.25 per share. Based on current valuation multiples, Oracle stock would trade at $79 per share right now instead of $53 had Ellison been compensated in the same manner as Buffett.
Conversely, if Buffett had demanded to be compensated like Ellison, he would have received received a total compensation of about $2.8 billion that would have risen in price over the past 25 years to just under $8 billion. He could have gotten his hands on 26,578 Berkshire Hathaway A shares that trade at $301,000 per share. In B shares, it would be about 40 million B shares that trade at $200 each. The dilution would have been about 1.6% of the overall ownership position, which does not sound like much, but we are talking about a half-a-trillion company’s overall ownership pie being diluted.
For comparison, Buffett paid $9 billion to add Lubrizol to Berkshire’s portfolio as a wholly-owned operating subsidiary. By the time Buffett is done running Berkshire, it will probably be fair to say that shareholders are enriched to the tune of a “Lubrizol acquisition” to the extent that Buffett voluntarily forewent collecting as much annual compensation as he could theoretically negotiate.
When recounting Warren Buffett’s history with Berkshire Hathaway, many reports will dutifully note that Buffett has been collecting a salary of $100,000 for more than a quarter-century. But it’s information that is usually presented to the reader as a charming anecdote rather than a source of an ongoing competitive advantage for Berkshire Hathaway as an ongoing investment. Berkshire Hathaway shareholders are like an NFL team with the best QB in the league on his rookie contract, having surplus capital that it can be allocated elsewhere because its star is not receiving the full compensation that would result in an arms-length transaction with both sides trying to maximize compensation. The added benefit for Berkshire Hathaway is that Buffett’s stewardship has gone on and on, and isn’t limited to a four-year window as is seen in the NFL.
I am going through one of those periods where I understand people who have an inordinate amount of their net worth tied up in shares of Berkshire Hathaway. There’s just so much real value there without the corresponding subtractions that you expect to find in an investment such as management compensation that puts shareholders in the unlikely position of earning substantial returns. And Munger collects the same salary. They both receive compensation in the form of air travel and personal security, but that’s inherent to their national profiles. It’s about $300,000+ in additional total compensation.
Most likely, I expect that the next CEO of Berkshire will also be underpaid, though not to the degree of Buffett and Munger. Ajit Jain and Greg Abel both around $15 million to $18 million in total compensation, so my expectation is that the next CEO of Berkshire Hathaway will earn around $25 million in cash, which will be well below the average of executive compensation for companies of Berkshire’s current size.
Having Warren Buffett run Berkshire Hathaway for only $100,000 per year has been on an ongoing source of surplus value for shareholders, and it is a substantial benefit that continues to this day but is often neglected when analyzing Berkshire’s many competitive advantages.