NEW YORK - Everyone knows Warren Buffett's legend as a value investor. But investors in Berkshire Hathaway are getting perhaps the best value of all: Buffett himself.
By paying himself just $100,000 per year in salary--and no stock options or bonuses--Buffett is the best value among chief executives by a wide margin. Despite an awful 1999, Berkshire (nyse: BRK.A - news - people) had a total five-year growth rate of 26.1%, compared to an average of 17.8% for companies on the Forbes.com's First Annual CEO Survey.
While Berkshire's growth rate was solid, it was not outstanding. What is off the charts, in that it barely registers, is Buffett's salary. As a result, one percentage point of Berkshire's total growth cost shareholders just $19,187, about one one-hundredth of what it cost investors in the average company on our CEO list.
Foregoing salary, bonus and even options, Buffett, 70, one of the richest men in the world but almost insanely homespun, makes his money the same way his investors do--as an owner. He and they have done quite well. Despite the fact that Berkshire shares are trading at about the same level as they did in mid-1998, the share price has doubled over five years.
Buffett has long been the lowest-paid CEO and has criticized high CEO pay and especially the use of stock options by other companies, noting they seem almost cost-free but are a potential time bomb on the corporation's books. In 1999, in his annual letter to shareholders, Buffett called the accounting for stock options "Alice-in-Wonderland" stuff:
Berkshire Hathaway's Warren Buffett
"In effect, accounting principles offer management a choice: Pay employees in one form and count the cost, or pay them in another form and ignore the cost. Small wonder then that the use of options has mushroomed," Buffett said.
Options, he added, have their place "if properly structured," but more often, they are "wildly capricious in their distribution of rewards, inefficient as motivators, and inordinately expensive for shareholders," he continued. They also place too much emphasis on driving up share price, rather than on truer measures of performance such as sales and earnings growth.
Options are accounted for differently from straight salary or bonuses, which makes issuing them even more enticing. "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?" Buffett asked. Of course, since then, both CEO pay and the use of options to boost that pay has grown even further.
Buffett has reaped massive rewards in his own way, but he has done so at the peak of efficiency.
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