Investing Guidelines: Management Tenets 103using methods that hid their actions. To their shame, these business lead-
ers view shareholders as patsies, not partners....There is no shortage of
egregious conduct in corporate America.”^24
The accounting scandals set off alarm bells across the United States,
especially for anyone who held stock in a company 401( k) plan. Share-
holders started asking questions and wondering if their companies were
managing their affairs honestly and transparently. We all became in-
creasingly aware that there were major problems in the system: CEOs
were getting huge paychecks while using company money for private
jets and ostentatious parties, and directors were often rubber-stamping
whatever decisions management decided to take. It seemed as if not one
CEO could resist the temptation to get in on the enormous salaries and
extravagant lifestyles enjoyed by others. That is the institutional imper-
ative at its most destructive.
Things have not improved much, according to Buffett. In his 2003
letter to shareholders, he lambasted the seemingly unabated “epidemic of
greed.” He wrote, “Overreaching by CEOs greatly accelerated in the
1990s as compensation packages gained by the most avaricious—a title
for which there was vigorous competition—were promptly replicated
elsewhere. In judging whether Corporate America is serious about re-
forming itself, CEO pay remains the acid test. To date, the results aren’t
encouraging.”^25 This from a man who has no stock options and still pays
himself $100,000 a year.
Stock Options
In addition to these lofty salaries, executives of publicly traded com-
panies are customarily rewarded with f ixed-price stock options, often
tied to corporate earnings but very seldom tied to the executive’s actual
job performance.
This goes against the grain for Buffett. When stock options are
passed out indiscriminately, he says, managers with below-average per-
formance are rewarded just as generously as the managers who have had
excellent performance. In Buffett’s mind, even if your team wins the
pennant, you don’t pay a .350 hitter the same as a .150 hitter.
At Berkshire, Buffett uses a compensation system that rewards man-
agers for performance. The reward is not tied to the size of the enter-
prise, the individual’s age, or Berkshire’s overall prof its. Buffett believes