86: Should Berkshire Pay Warren Buffett's Successor Nothing?
86: Should Berkshire Pay Warren Buffett's Successor Nothing?
Thought's on Greg Abel's compensation when he takes over for Buffett
You’re reading the weekly free version of Watchlist Investing. If you’re not already subscribed, click here to join 1,600 others.
Want more in-depth and focused analysis on good businesses? Check out some sample issues of Watchlist Investing Deep Dives.
For less than $17/month, you can join corporate executives, professional money managers, and students of value investing receiving 10-12 issues per year. In addition, you’ll gain access to the archives, now 18 issues and growing!
How Much Should Greg Be Paid?
(Or how to motivate a billionaire)
Berkshire Hathaway Vice Chairman, Greg Abel, was back in the news after spending some of his $870 million proceeds from the sale of his 1% stake in Berkshire Hathaway Energy on open-market purchases of BRK-A shares.
I retweeted Rational Walk and said I’d love it if Greg would take a dollar less than the $100,000 salary Buffett has taken for 40 years (my math is wrong in the tweet). Some of the responses to the tweet suggested I thought Greg should be short-changed. Let me clear up my thoughts on the matter.
How Much To Pay Buffett’s Replacement
Greg Abel is one of the world's best executives. Don’t take my word for it — both Warren Buffett and Charlie Munger have said as much. Right now Buffett pays Abel and fellow Vice Chairman, Ajit Jain, a $16 million salary plus a $3 million bonus. Clearly, this level of cash compensation combined with the job itself (more on that later) has kept Greg at Berkshire. But what happens when Greg takes over the CEO spot? How much more is that worth?
Buffett has suggested that for his successor an option program could be appropriate since he would have responsibility for the entirety of Berkshire. This is unlike any other manager who rightfully is responsible for his/her own operating unit and is paid in cash, not options that incorporate other units not under the control of the manager. It seems to me the question is not necessarily the form of compensation but the amount. So … how much should Greg be paid?
Greg currently makes $19 million for managing half-ish of Berkshire (he doesn’t oversee insurance or investments). Is double that appropriate? $40 million wouldn’t be out of the realm of possibility for managing one of the largest Fortune 500 companies with global renown. And it’s certainly consistent with the pay package of other large company CEOs. I’ll state right now that I’d be happy to pay Greg $40 million or $50 million. He’s worth it. But that’s only half the equation.
Intrinsic Motivation
What level of compensation would motivate a man worth a cool $1 billion? This is the main reason why I suggested that Greg not take a salary. Or effectively not take a salary by offering to work for $1 less than Buffett. I don’t know the man personally, but it seems to me that work is the more important thing for him. After amassing a billion-dollar fortune through Cal Energy > Mid American > Berkshire Hathaway Energy > Berkshire, what utility does money have for him anymore?
It seems to me that Greg is the type of man who wants to paint his own painting, to borrow a phrase from Buffett. Working with complete autonomy is a huge motivating force at Berkshire Hathaway. The working relationship between the BRK board of directors and the post-Buffett CEO will likely be a bit closer. But I’d expect to see the trust Greg has earned over the years enable him to confidently agree to deals worth billions of dollars and have the board support his moves.
An Example From Copart
Taking a salary of $1 isn’t new — lots of CEOs do it. Here’s an example from Copart (from last year’s proxy):
“Nearly three decades of strong stock price performance by Copart and more than thirty years as a senior executive of Copart have enabled Mr. Adair to build substantial personal wealth. Copart stock remains the most significant portion of his wealth, totaling $1.17 billion as of October 11, 2021 based on the value of outstanding shares held by him. Our compensation committee does not believe that a “median” or even “above median” compensation program would create sufficient incentives for an individual with Mr. Adair’s personal wealth to maximize stockholder value”.
To be clear, Adair has been paid a significant amount of options, which is the source of his wealth. But the basic fact that it’s hard to motivate a rich guy with more money stands, I think.
Navigating The Post-Buffett Era
This brings us to why, if I were Greg, I’d forego a salary. After Buffett is gone there are going to be loud calls to “do something” at Berkshire. Break it up, divest certain units, and get more involved in the day-to-day. His main challenge is going to be steering Berkshire in a proven way while fending off calls to change course. Greg is going to need the support not only of the BRK board but shareholders too. An easy way to do that? Forgo a salary.
Again, I’m not suggesting Greg isn’t worth being offered a salary or some large comp package. Only that refusing it is a tool in his arsenal to endear himself to shareholders. Greg’s legacy will be how he managed Buffett’s creation after the great man departed. It’s not going to be easy.
A Different Form Of Compensation
Assuming Greg puts the bulk of his BRK Energy spoils into BRK stock, he’ll be making, via his look-though earnings of Berkshire, multiple tens of millions of dollars a year. Working for “nothing” — no direct compensation — will allow him to escape the comp critics, endear himself to shareholders, and focus on putting his creative energies into Berkshire on his terms.
As a Berkshire shareholder, I’m fully in support of whatever the board and Greg decides is best. All I offer is an idea — perhaps too nostalgically.
That’s why I think BRK should pay Greg nothing — not because he doesn’t deserve a huge compensation package but because he requests less.
Post Script: But What About The Next Guy?
The question of who succeeds Greg in the CEO spot is a long way off, hopefully, two decades or more. But it’s worth asking what the next guy or gal should be paid. Should they have to be rich to take the CEO job at Berkshire? I don’t know. Perhaps.
But if you’re in a position to take over the top job my guess is you’re not getting plucked from a $15 job — you’re already making eight figures. Unless you’re a spendthrift (such a person probably wouldn’t be attracted to the BRK culture anyway) you’ve probably invested along the way and done very well for yourself. My guess is that Buffett’s successor’s successor will be worth a few hundred million dollars or more anyway and have the same dynamic of earning a lot in look-through earnings to not need a salary.
What do you think?
Stay rational! —Adam
Interesting topic! I agree. Warren and Charlie have set an incredibly selfless pro- shareholder precedent for 40 years and agree it would look terrific in the eyes of long-term shareholders, but I do agree he is worth every pence of his large salary. Since he will be soon managing a $600B complicated conglomerate with dozens of managers, $20M is only 0.04% of $ 50B of annual normalized earnings- seems quite reasonable imo. Fortunately, money will never be a real issue for Greg and Ajit. No doubt, they both will deliver their best efforts regardless of comp.