Buffett Declares Stock Options Should Only Go to New CEO

Warren Buffett mentioned that his eventual successor as CEO of Berkshire Hathaway should be the sole manager of the company receiving compensation in the form of stock options.

The next chief executive officer should be “the only one who would receive options because he would be the only one who is responsible for the overall success of the operation,” he told Fortune magazine in an interview about writing this in a memo to the company’s Board of Directors.

As the third richest man in the world and an icon in investing, Warren Buffett came under fire just last week when he mentioned that he was in a disagreement with a controversial Coca-Cola management equity compensation package, but he chose to abstain from voting. Last week, he mentioned to CNBC that he “didn’t want to express any disapproval of the management but we did disapprove of the plan.” Since then, he has drawn strong criticism by choosing not to vote against the plan, which happens to have passed.

Buffett mentioned a long time ago and continues to believe that using stock options as a way to pay often costs too much for shareholders. It’s also counterproductive as a tool for motivation.

Back in 1997, he put together a plan at his auto insurance unit Geico that based incentivized compensation on customer account growth and policy profitability that were on the books for over a year. He said that his system rewards the desired behavior more accurately than stock options, which allow the holder to purchase a certain number of shares for a certain price at a specific period of time.

“We shun ‘lottery ticket’ arrangements, such as options on Berkshire shares, whose ultimate value — which could range from zero to huge — is totally out of the control of the person whose behavior we would like to affect,” he wrote in a shareholder letter that year. “A system that produces quixotic payoffs will not only be wasteful for owners but may actually discourage the focused behavior we value in managers.” But Buffett still said that the executive compensation is in line with pay rates for the rest of the country.

“If you run a multibillion-dollar company the difference between a 10 and an eight is huge in terms of value,” said Warren Buffett. “Still, almost on a voluntary basis, I think it should be somewhat restrained in some cases.” He did not offer any other details about who would be the next Berkshire Hathaway chief executive officer, which is a source of serious speculation as investors often wonder how much longer Buffett will continue in this role. For over 25 years, Buffett has only drawn a salary of $100,000 as his compensation.

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